Cray customers build amazing products, solve complex problems and make fantastic discoveries.
They comprise a wonderful community with a vast impact on everyday life. Our front cover this year
celebrates five of these amazing achievers.
From left: Dr. William Loging of Mt. Sinai Hospital is improving drug discovery success rates
through better understanding of precision therapies; University of Illinois at Urbana-Champaign researchers
Yan Liu and Wendy K. Tam Cho are analyzing the fairness of electoral district boundaries; Sverre
Brandsberg-Dahl and PGS are generating high-resolution 3-D seismic images that more accurately locate oil
and gas resources; Helen Roberts and the Met Office are safeguarding lives and livelihoods with advanced
weather forecasts; and Dr. Laura Boykin of the University of Western Australia and Dr. Titus Alicai of
Uganda‘s NaCRRI are fighting famine in East Africa.
Fellow Shareholders,
2016 was a solid year for Cray, highlighted by continued momentum in our high-end business and
completion of several of the largest, most complex supercomputing and storage systems we have ever built. We
refreshed our product line-up and delivered the second-highest annual revenue total in our history, as well as another
year of profitability. We delivered all of this despite our primary market experiencing a slowdown, which is
continuing today but which we believe will be temporary in nature as long-term growth prospects appear strong. As
you are likely aware, due to the nature of our high-end business, our revenue tends to be lumpy on a quarterly basis,
and at times even on an annual basis. However, if you step back and take a longer view, we have clearly been on a
strong revenue growth path over the past several years. In fact, our revenue has grown at more than 10% per year
on a compounded basis since 2009 – largely driven by the strength of our solutions serving a growing set of users
and markets.
We remain focused on three key markets: supercomputing, storage and analytics, each spanning our
traditional government and academic customer base as well as commercial markets including energy,
manufacturing, financial services and healthcare/life sciences. As digital data continues to expand at ever-increasing
rates, the need for high-performance solutions to compute, store and analyze this data also increases. Our position at
the high-end of each of these markets gives us unique perspective and focus. We are delivering solutions that enable
our customers to gain new insights into their information, leveraging large scale modeling and simulation combined
with data analytics and artificial intelligence, as these computing methods continue to converge over time. Several
trends are driving this convergence, including the sheer growth of data and the desire to streamline and enhance the
analysis process, as well as the potential for significant performance improvement through converged offerings
which will ultimately help customers make better decisions faster.
We take great pride that Cray systems are being used to improve life on our planet every day. Some
examples of this work are highlighted in the images on the front of this annual report, including Dr. William Loging
of Mt. Sinai Hospital, who is improving drug discovery success rates; University of Illinois at Urbana-Champaign
researchers Wendy K. Tam Cho and Yan Liu, who are analyzing the fairness of electoral district boundaries; Sverre
Brandsberg-Dahl and PGS, who are generating high-resolution three-dimensional seismic images that more
accurately locate oil and gas resources; Helen Roberts and the U.K. Met Office, who are safeguarding lives and
livelihoods with advanced weather forecasts; and Dr. Laura Boykin of the University of Western Australia and Dr.
Titus Alicai of Uganda’s NaCRRI, who are fighting famine in East Africa. We’re proud to partner with these
amazing people in their lifechanging work.
For the supercomputing market, we have two primary offerings: our XC-line of supercomputers and our
CS-line of highly flexible clusters. Our XC-line is the most powerful, highest-performance system we have ever
built, able to scale real-world scientific, engineering and data intensive applications to the highest levels in the
industry. The XC system harnesses the Cray Aries high-performance system interconnect as well as the latest Intel
Xeon processors, Intel Xeon Phi coprocessors and Nvidia Tesla GPU accelerators, along with a tightly-integrated,
highly productive software stack. Our CS-line of clusters delivers industry standards-based, highly customizable
systems expressly designed to handle the broadest range of medium- to large-scale workloads. We bring all of this
together in our Adaptive Supercomputing vision, which enables the configuration of different processors in a single,
hybrid supercomputer, ensuring users have the best system for a wide variety of workloads and applications.
We installed numerous Cray systems around the world during 2016, including several that now rank among
the fastest in the world. Among these were new petascale XC supercomputers at several U.S. Department of Energy
laboratories, including Argonne National Laboratory, Lawrence Berkley National Laboratory, and a joint project
between Los Alamos National Laboratory and Sandia National Laboratory.
We also have two unique storage offerings; the Sonexion scale-out Lustre storage system, and Data Warp,
a layer of non-volatile solid-state storage that sits between the compute memory and parallel file system to
dramatically improve application performance. Together these solutions drive improved performance, scalability
and total cost of ownership, as well as provide a clear path to future generations of new storage and memory
technologies.
We launched an entirely new analytics solution in 2016, the Urika-GX big data platform. The Urika-GX
fuses some of our most unique supercomputing technology with an open, standards-based software framework to
deliver the industry’s first agile analytics platform. Market reaction to the Urika-GX has been positive and we
installed new Urika solutions at several government institutions and national laboratories, as well as commercial
customers in life sciences, marketing and customer engagement, and a European automotive consortium. It is
exciting to see customers leveraging our supercomputing systems and technology in new ways as we expand into
this big and fast moving new market.
We remain focused on three primary strategic goals as a company: first, to grow revenue faster than the
markets in which we compete; second, to grow the percentage of our revenue that comes from the commercial
markets to more than one-third of our total revenue; and third, to expand our presence in the big data market to drive
more than one-third of our revenue over time. We aim to achieve these goals while also expanding our profitability
over time. While the slowdown in our target market is impacting our visibility for 2017, we expect it to rebound
over time as the market’s long-term growth drivers appear firmly intact. As such, we are continuing to make
investments in our products and services to expand our strong competitive position and our long-term opportunity to
drive growth.
Among these are targeted investments in big data analytics and artificial intelligence, and especially in deep
learning, which can benefit greatly from supercomputing technology. Deep learning has demonstrated tremendous
utility in creating predictive computer models from ever-growing volumes of data, and is being rapidly deployed
across many industries and markets. As data volumes and model complexity continue to grow, the deep learning
training problem requires increasingly powerful computing systems, scaling to large node counts with very strong
system interconnects and fast storage systems. Our CS and XC supercomputers are ideally suited for these
workloads.
An example of this is a partnership we have with Microsoft and the Swiss National Supercomputing Center
to scale Microsoft’s Cognitive Toolkit to an unprecedented 2,000 Nvidia Pascal P100 GPUs on a Cray XC50
system. This is a great proof point of how deep learning is part of the growing convergence of data analytics and
supercomputing, a focus of ours over the past several years. We have also increased our investments to enable our
systems to be leveraged in cloud computing environments. An exciting example of this is our partnership with
Deloitte’s Advisory Cyber Risk Services, which we launched in 2016 to deliver the first commercially available
high-speed threat analytics service, powered by a Cray supercomputer.
Finally, we recently added a new leader to our team, Stathis Papaefstathiou, who joined us as our senior
vice president of R&D, replacing Peg Williams who is retiring. With more than 30 years of high-tech experience,
Stathis brings a diverse technical background including network hardware, high performance computing, embedded
operating systems, cloud-enabled network management solutions, and big data analytics. We are pleased to
welcome him and all our new employees to the Cray team and wish Peg the best in retirement after many years of
strong contributions not only to Cray but the entire HPC industry.
On behalf of our board of directors and management, I would like to thank all 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:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(cid:133)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
For the Transition Period From to .
Commission File Number: 000-26820
CRAY INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington
(State or Other Jurisdiction of
Incorporation or Organization)
901 Fifth Avenue, Suite 1000
Seattle, Washington
(Address of Principal Executive Offices)
93-0962605
(I.R.S. Employer
Identification No.)
98164
(Zip Code)
Registrant’s telephone number, including area code:
(206) 701-2000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes (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)(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 that the registrant was required to submit and post such files). Yes (cid:59) No (cid:133)
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)
Accelerated filer (cid:133) Non-accelerated filer (cid:134)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:59)
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2016, was approximately
Smaller reporting company (cid:134)
$1,190,600,995 based upon the closing price of $29.92 per share reported on June 30, 2016, on the Nasdaq Global Market.
As of February 6, 2017, there were 40,736,378 shares of Common Stock issued and outstanding.
________________
DOCUMENTS INCORPORATED BY REFERENCE
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 13, 2017, are incorporated by reference into Part III.
CRAY INC.
FORM 10-K
For Fiscal Year Ended December 31, 2016
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
INDEX
PART I
PART II
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. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
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
Item 16. Form 10-K Summary
PART IV
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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. The CS and XC families of supercomputers, CS-Storm, DataWarp, Chapel and other Cray
technologies are all trademarks of Cray Inc. Other trademarks used in this report are the property of their respective owners.
_________________
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or if they prove incorrect, could cause our actual results to differ materially from those
expressed or implied by such forward-looking statements. Forward-looking statements are based on our management’s beliefs and
assumptions and on information currently available to them. In some cases you can identify forward-looking statements by terms
such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts”
and “potential” and similar expressions, but the absence of these words does not mean that a statement is not forward-looking. All
statements other than statements of historical fact are statements that could be deemed forward-looking statements, and examples of
forward-looking statements include any projections of earnings, revenue or other results of operations or financial results; any
statements of the plans, strategies, objectives and beliefs of our management; any statements concerning proposed new products,
technologies or services; any statements regarding potential new markets or applications for our products; any statements regarding
technological developments or trends; 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, or the
Securities Act, 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.
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 data analytics, artificial intelligence and storage
solutions leveraging more than four decades of delivering the world’s most advanced compute systems. We also provide software,
system maintenance and support services and engineering services related to supercomputer systems and our data analytics, artificial
intelligence and storage 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 markets. We provide customer-focused solutions based on three main 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) differentiated “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 solutions that
combine industry standard tools for large-scale analytics and artificial intelligence applications, as well as innovative graph analysis
tools, and specialized computing platforms. 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 and big data 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 data analytics and storage. 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 and innovative packaging to
address increased density, processor power requirements, upgradability, energy efficiency and reliability requirements. In addition,
we include 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 XC series supercomputers, comprising the XC40 and
XC50, are designed to provide significantly higher sustained performance on many important applications that require the highest
levels of scaling, with substantial performance improvements over competing solutions. Our CS series of supercomputer cluster
solutions (including CS400 and CS-Storm) emphasize flexibility, capacity and custom design and integration 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 a variety of additional benefits, including:
•
superior price-performance compared to other supercomputer systems as well as compared to enterprise computing
solutions and cloud computing solutions;
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•
•
•
•
•
•
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productivity, quality, reliability and resiliency at the highest scale;
the Aries Network proven to scale to the world’s fastest supercomputers for HPC and Data Science workloads;
support for open standards, including Linux-based operating systems, Linux containers, open file systems (e.g.,
Lustre®), open programming models (e.g., MPI, PGAS, Shared Memory, OpenMP and OpenACC) and popular
programming languages such as Python, Scala and R in addition to traditional HPC languages such as Fortran, C and
C++ and new languages such as Chapel;
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, as well as changing memory and storage
hierarchy to be advantageous trends for Cray as they 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 XC Series Supercomputer. The Cray XC series supercomputer is our highly integrated supercomputing system. The Cray
XC series system delivers on our commitment to our Adaptive Supercomputing architecture providing extreme scale and sustained
performance. The Cray XC series system provides the HPC user community the advantage of the computational resources of our
supercomputers powered by the Intel Corporation, or 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 Corporation, or NVIDIA, graphics processor units, or GPUs.
The Cray XC series supercomputer utilizes the Cray Linux Environment, which has been enhanced and hardened over more
than a decade on Cray supercomputing systems. Customers may buy a single Cray XC series supercomputer to run both a highly
scalable custom workload as well as an industry-standard, independent software vendor workload. The Cray XC series system
includes our powerful compiler, runtime and related software that allows users to transparently leverage the underlying hardware
components. The Cray XC series 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.
The Cray XC40-AC supercomputer, an air-cooled cabinet option, offers customers the full Cray XC series 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 Supercomputer. The Cray CS400 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
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 supports both Cray and third-party systems management
software solutions.
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 eight GPUs per compute node running at full power, with
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the same production software environment available on the CS400 products. Market segments such as finance, energy, government,
earth sciences 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. 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 huge 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 platform.
Cray Urika-GX Platform. Urika-GX is the first agile analytics platform architected for production-class big data analytics
workloads. Urika-GX’s turnkey architecture comes pre-integrated with Apache Hadoop® and Apache Spark™ frameworks as well
as Cray’s high-performance graph database called the Cray Graph Engine. Urika-GX is versatile and open to support additional
emerging tools in the big data ecosystem. Urika-GX 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-GX customers are able to optimize their analytics pipelines and data movement activities while reducing the
footprint of their analytics infrastructure. The Urika-GX platform delivers performance and reliability on a wide range of analytics
applications, thereby lowering total cost of ownership on production data analytics.
Urika-GX system features Intel® Xeon® E5 processors, up to 22 terabytes of DRAM memory, up to 176 terabytes of local
SSD storage capacity, and the high speed Aries network interconnect, which together provide leading in-memory compute and
network performance necessary to solve the most demanding big data problems. An exclusive feature of the Urika-GX system is the
Cray Graph Engine for fast, complex pattern matching and iterative discovery. With the Cray Graph Engine, customers are able to
tackle multi-terabyte datasets comprised of billions of objects to uncover hidden relationships in even the noisiest of data. The Cray
Graph Engine can run in conjunction with open analytics tools such as Hadoop and Spark, enabling customers to build complete
end-to-end analytics workflows and avoid unnecessary data movement.
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 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 I/O
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 XC and Cray CS series systems, as well as industry-standard
Linux clusters.
Cray DataWarp Applications Accelerator. Our DataWarp technology addresses a key problem experienced by supercomputing
customers: Disk based storage input/output, or I/O, has not kept up with Moore’s Law and delivering sustainable performance on a
spectrum of applications with varying I/O-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 XC series supercomputing resources. DataWarp
supports high application I/O requirements while reducing overall application computing time for I/O-intensive workloads.
Production customers have seen almost two terabytes per second of I/O capacity with DataWarp while having the ability to make
scientific discoveries faster.
Engineering and Customer Support
Custom Engineering. To address those users whose needs cannot be met through our standard product offerings, we provide
an alternative. Our custom engineering business leverages our amassed intellectual property and technology portfolio, deep domain
expertise and know-how to design and build solutions and services designed to match a customer’s specific needs. The need for a
unique solution often stems from special processing needs that are often performance, application or capacity related; special
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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 to 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 2016, maintenance and support revenue accounted for roughly $108 million of our total revenue. Our support arrangements
generally provide for support services on an annual basis, although several 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 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 individual customers, 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, marketing communications and segment marketing.
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.
Segment marketing 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, purpose-built big data analytics products and world class storage and data
management solutions.
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,
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cooling and packaging infrastructures, along with the low-level hardware system software required to manage key components. The
majority of our hardware research and development investments are in the following areas:
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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 system optimizations and scalable hardware control, monitoring and management, including power
control, monitoring of environmental data, and hardware diagnostics. Our integrated system software together provides Reliability,
Availability and Serviceability, or RAS, for Cray systems. The Cray programming environment includes 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 achieving the best possible application performance.
Additionally, we research innovative software for advanced analytics at scale, including industry leading graph analytics
and associated algorithms for discovering previously unknown insights 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.
When necessary, we purchase or license certain software and technologies from third parties 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 and Financial Statement Schedules in Part IV of this annual report on
Form 10-K.
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 and power supplies,
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 or custom components 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 and NVIDIA for our Cray XC and cluster systems. We have a license for
the Aries interconnect chip from Intel which we purchase through Broadcom Corporation (formerly Avago) that contracts with
Taiwan Semiconductor Manufacturing Company for the manufacture of 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
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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, design or persistent quality
issues and changes in direction by vendors. We have been adversely affected by delays in obtaining qualified competitive
components previously.
Our Markets
Our key target markets are (i) the supercomputing portion of the HPC market and (ii) the big data market, encompassing
analytics, storage and artificial intelligence markets. 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, analytics and
storage 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, analytics and storage 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
a competitive advantage 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
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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.
Emerging Markets. The rise of big data analytics, artificial intelligence and cyber analytics across industries has resulted in
growing interest in Cray supercomputers. Artificial intelligence is rapidly becoming the next major driver in the HPC market. Deep
learning and machine learning, both subsets of artificial intelligence, are specific use cases within the broader advanced analytics
space. Scientific computing is a natural area for both identifying and driving a broader set of deep learning-enabled applications.
Further, deep learning core computational motifs are rooted in linear algebra and mathematical optimization, which map well to
long-standing focus areas for systems research within the HPC community. Finally, several use cases in scientific data analysis
typically require large-scale pattern recognition on multi-dimensional image and time series datasets, and machine learning and deep
learning are emerging as valuable tools to handle these use cases. Deep learning applications run at scale on the Cray XC series and
Cray CS series supercomputers.
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 total revenue in 2016, 47% of our total revenue in 2015 and 48% of our total revenue in
2014. Significant customers with over 10% of our annual total revenue were the U.S. Government and a foreign weather center in
2016 and the U.S. Government in 2015 and 2014. International customers accounted for 46% of our total revenue in 2016, 36% of
our total revenue in 2015 and 42% of our total revenue in 2014.
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
and Financial Statement Schedules in Part IV of this annual report on Form 10-K.
Competition
The broad HPC market is very competitive. We compete with systems builders and resellers of systems that are constructed
from commodity components using processors manufactured by Intel, NVIDIA, AMD and others. IBM, NEC and Fujitsu also build
systems leveraging their own processors. In addition, certain Chinese companies are investing significantly in HPC and are
becoming more aggressive and \competitive in the HPC global arena. Our competitors include the previously named companies as
well as smaller companies that assemble systems from commercially available commodity products. 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 or at lower cost than the processors we use from Intel 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 (the Cray XC series) 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, require less 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, HPE, Dell, Atos
and Fujitsu, all of which 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 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-GX offering, which competes primarily on the basis of
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performance, scalability and integration, as well as total cost of ownership in the traditional Hadoop and Spark analytics marketplace
as well as for graph analytics. The artificial intelligence market is nascent outside of the large web companies but competition may
include systems and subsystems developed by processor vendors and several start-up companies in addition to our traditional system
competitors.
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, Dell/EMC and other storage
companies. The parallel storage and file system market is currently fragmented with a number of competing providers in the HPC
marketplace. We believe that our strong storage products, along with our extensive experience and excellent reputation as an HPC
systems vendor, and 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.
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. Judgments about contracts not yet signed and open opportunities are often more
important. 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, 2016, we had 1,312 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 - 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.
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Item 1A. Risk Factors
In addition to the other information contained in this annual report on Form 10-K, 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. Receiving less than anticipated customer orders
for delivery and acceptance of product for a particular period, delays in achieving customer acceptances of installed systems and
recognizing revenue from a product transaction or transactions due to development or product delivery delays, unexpected
manufacturing delays or defects, not receiving needed components on time or not receiving them with anticipated quality and
performance or the inability of a system to meet performance requirements or targets or other contractual obligations, among other
factors, could have a material adverse effect on our operating results in any specific quarter or year, such as by reducing or delaying
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 and could
experience a net loss in any future year in addition to quarterly losses. 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, we
anticipate incurring significant expenditures in connection with the expansion of our facilities and continued investments in research
and development. 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, if at
all. In addition, while we were profitable in 2016, our revenue and profitability declined year over year, driven in part by a slow-
down in the high-end of the supercomputing market. It is uncertain whether or when the high-end of the supercomputing market will
rebound and resume growing.
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;
our ability to successfully and timely design for, procure and integrate competitive processors for our Cray XC and
Cray CS systems and upgrades and successor systems;
our expense levels, including research and development expense net of government funding;
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 to meet necessary peak requirements and growth in our
business;
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;
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revenue delays or losses due to customers postponing purchases as a result of delays in available budgets or waiting
times related to the availability of future upgraded or new systems, including those containing new processors;
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, services and prices;
our ability to secure additional government funding for future development projects;
• maintaining and successfully completing our product development projects on schedule and within budgetary
limitations;
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our ability to resolve and the costs incurred in connection with any actual or alleged issues with our products,
including third-party components of such products, such as those that relate to product defects or intellectual property
rights;
the level and timing of maintenance contract renewals with existing customers; and
the terms and conditions of sale or lease for our products and services.
The receipt of orders and the timing of shipments and acceptances impacts our quarterly and annual results, including cash
flows, and is affected by events outside our control, such as:
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whether or when the high-end of the supercomputing market, which is currently experiencing a slow-down, rebounds
and resumes growing;
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 global economic
and fiscal uncertainties, increased governmental budgetary limitations and disruptions in the operations of the United
States and other governments;
competitor and supplier 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;
new tariffs or taxes imposed on components and products sourced or manufactured outside of the United States;
the introduction or announcement of competitive or key industry supplier products;
price fluctuations or product shortages 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 the availability of acceptable third-party components,
product development, receipt of orders, product acceptances, issues with third-party component performance or reliability,
reductions in outside funding for our research and development efforts, a reduction in the size of the high-end of the supercomputing
market, the level and timing of approved government fiscal budgets and achieving contractual development milestones have had a
substantial adverse effect on our past results and are expected to continue to have such an effect on our results in 2017 and in future
years.
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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
where we are dependent upon third-party suppliers to deliver according to expected plans. The development efforts 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 that may prove ultimately unsuccessful. 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, including those related to our dependence on third-party suppliers of components such as processors and accelerators,
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, inability to source acceptable third-party components such as processors and accelerators 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, tightly integrated systems to our customers in a variety of
markets;
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 revenue and 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 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;
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; and
whether potential customers delay purchases of our products because they decide to wait for successor systems or
upgrades that we or our suppliers have announced or they believe will be available in the future.
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 products targeting
the big data and commercial markets, are not successful, our ability to grow or even maintain our revenues and achieve and
sustain profitability will be adversely affected. Our ability to materially grow or even maintain 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, including if those market segments do not grow significantly. We are currently focusing on big
data analytics, artificial intelligence and storage and data management opportunities as well as the commercial market for all of our
products. 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
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experience targeting these markets. Big data analytics, artificial intelligence 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, and 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, 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 competitive 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 future
or to purchase products with the future processors from our competitors who are willing to take greater risk on
delivery;
if Cray systems at customer sites develop significant issues with third-party components, as has occurred, the cost to
Cray to repair or replace the components or otherwise address such issue may be material. If we are unable to
effectively address such problem or a problem causes customer disruption, our relationship with our customers may
also be harmed;
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 defects, 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
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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, as has occurred in the past 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 prices and order lead times for certain components, have
occurred in the past, and we are currently experiencing increased delivery timelines of memory and other 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 2014, 2015 and 2016, approximately 48%, 47% and 47%, respectively, of our total 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 and other
governments, including further sales pursuant to existing contracts, have been, and may continue to be, adversely affected by factors
outside our control, such as by:
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uncertainties relating to priorities of the new administration or adverse decisions by the new administration to reduce
or eliminate budgets for governmental agencies or departments that purchase or fund the purchase of our products and
services;
Congressional decisions in addressing budget concerns and current economic uncertainty;
disruptions in the operations of the U.S. government, including impacts of the new administration;
“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 its affect on government budgets;
the limits on federal borrowing capacity;
changes in procurement policies;
budgetary considerations, including Congressional delays in completing appropriation bills as has occurred in the past
and which is the case right now as Congress is operating under a Continuing Resolution at fiscal year 2016 levels until
April 28, 2017;
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 or the U.K. “Brexit” vote.
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If agencies and departments of the United States or other governments were to stop, reduce or delay their use and purchases
of supercomputers, our revenue and operating results would be adversely affected.
If our cluster systems are not successful, our operating results will be adversely affected. Our cluster products were first
introduced in late 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 sell these solutions with acceptable margins, our operating results
will be adversely affected.
We may infringe or be subject to claims that we infringe the intellectual property rights of others. We are and may in the
future be subject to patent infringement and other intellectual property claims and lawsuits in various jurisdictions, and we cannot be
certain that our products or activities do not violate the patents, trademarks, or other intellectual property rights of third-party
claimants. Companies in the technology industry and other patent, copyright, and trademark holders seeking to profit from royalties
in connection with grants of licenses own large numbers of patents, copyrights, trademarks, domain names, and trade secrets and
frequently commence litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or
other rights. As we face increasing competition and gain an increasingly high profile, the intellectual property rights claims against
us have grown and will likely continue to grow. For example, we are currently involved in litigation with Raytheon Company, or
Raytheon, which is described in Note 12 - Commitments and Contingencies in the Notes to Consolidated Financial Statements in
Item 15. Exhibits and Financial Statement Schedules in Part IV of this annual report on Form 10-K.
We intend to vigorously defend and prosecute these litigation matters and, based on our reviews to date, we believe we have
valid defenses with respect to each of these matters. However, litigation is inherently uncertain, and any judgment or injunctive
relief entered against us or any adverse settlement could materially and adversely impact our business, financial condition, operating
results, and prospects. As a result of these or other intellectual property infringement claims, we could be required or otherwise
decide that it is appropriate to:
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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; and/or
license technology from the third-party claiming infringement, which license may not be available on commercially
reasonable terms, or at all.
In addition, litigation can involve significant management time and attention and can be expensive, as it has been with
Raytheon, regardless of outcome. During the course of these litigation matters, there may be announcements of the results of
hearings and motions, and other interim developments related to the litigation matters. If securities analysts or investors regard these
announcements as negative, the market price of our common stock may decline.
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. 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 grants of stock options, restricted stock awards or restricted stock units. 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 have made in the past, and may make in the future, acquisitions 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:
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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;
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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:
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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 well known companies in the HPC market, including IBM, HPE, Lenovo, Dell, NEC, Hitachi, Fujitsu and Atos. Most of
these competitors have substantially greater research, engineering, manufacturing, marketing and financial resources than we do. In
addition, certain Chinese companies are investing significantly in HPC and are becoming more aggressive and more competitive in
the HPC global arena.
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, 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, artificial intelligence and storage and data management markets must also
compete successfully with many established companies and new entrants, many of whom have significantly greater resources and
brand recognition in these markets than we do.
Periodic announcements by our competitors of new HPC, storage or data analytics systems or plans for future systems and
price adjustments may reduce customer demand for our products. Many of our potential customers already own or lease high
performance computer, storage or data analytics systems. Some of our competitors have offered substantial discounts to potential
customers. We have in the past been 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
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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.
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 not be able to protect our proprietary information and rights adequately. We rely on a combination of patent,
copyright, trademark 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 are subject to market and financial risks due to our international operations that could adversely affect those
operations or our profitability and operating results. Our international operations include sales and service offices in Europe, the
Middle East, South America, Asia, Australia and Canada. Our operations in countries outside of the United States, which accounted
for approximately 46% of our total revenue for 2016, expose us to greater risks associated with international sales and operations.
Our profitability and international operations are, and will continue to be, subject to a number of risks and potential costs, including:
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supporting multiple languages;
recruiting sales and technical support personnel internationally with the skills to sell and support our products;
complying with governmental regulations, including obtaining required import or export approval for our
products;
increased complexity and costs of managing international operations;
increased exposure to foreign currency exchange rate fluctuations;
trade protection measures and business practices that favor local competition;
longer sales cycles and manufacturing lead times;
financial risks such as longer payment cycles and difficulties in collecting accounts receivable;
difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;
ineffective legal protection of intellectual property rights;
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additional taxes and penalties;
inadequate local infrastructure that could result in business disruptions;
global political and economic instability; and
other factors beyond our control such as natural disasters, terrorism, civil unrest, war and infectious disease.
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Our global operations are also subject to numerous U.S. and foreign laws and regulations, including those related to anti-
corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy and labor relations. These laws
and regulations are complex and may have differing, conflicting and evolving legal standards, making compliance difficult and
costly. If we or our employees, contractors or agents violate these laws and regulations, we could be subject to fines, penalties or
criminal sanctions and may be prohibited from conducting business in one or more countries. Any violations, individually or in the
aggregate, could have a material adverse effect on our operations and financial condition.
In addition, on June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European
Union, commonly referred to as “Brexit.” As a result of the referendum, it is expected that the British government will begin
negotiating the terms of the United Kingdom’s future relationship with the European Union. The negotiated measures could
potentially disrupt some of our target markets and jurisdictions in which we operate, including the United Kingdom and Germany,
such as by adversely affecting tax benefits or liabilities in these or other jurisdictions or by restricting the movement of employees
between the United Kingdom and other countries. Any such changes may adversely affect our operations and financial results.
Customers and other third parties may make statements speculating about or announcing the purchase, acceptance or
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, postings 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 2014, 2015 and 2016, approximately 48%, 47% and 47%, respectively, of our
total 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
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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. 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. Restrictions on the export of information needed to manufacture our products has in the past impacted
and could in the future impact our ability to have certain products and components made in certain lower cost jurisdictions
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, litigation activities, general economic conditions and conditions in our industry. From
January 1, 2016 through December 31, 2016, the closing sales price of our common stock on the NASDAQ Global Market ranged
from $18.40 to $43.06 per share, and had a low closing price of $16.35 per share during the period from January 1, 2017 through
February 9, 2017. Because our stock price has been volatile, investing in our common stock is risky.
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.
The “conflict minerals” rule of the Securities and Exchange Commission, or SEC, has caused us to incur additional
expenses, could limit the supply and increase the cost of certain metals used in manufacturing our products, and could make
us less competitive in our target markets. On August 22, 2012, the SEC adopted a rule requiring disclosure by public companies
of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or
production of products manufactured or contracted to be manufactured by us. The rule requires companies to obtain sourcing data
from suppliers, engage in supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD
covering the prior calendar year. Implementation of our conflict minerals policy could limit our ability to source at competitive
prices and to secure sufficient quantities of certain minerals used in the manufacture of our products, specifically tantalum, tin, gold
and tungsten, as the number of suppliers that provide conflict-free minerals may be limited. In addition, we have incurred, and may
continue to incur, material costs associated with complying with the conflict minerals rule, such as costs related to the determination
of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance
policies, processes and controls, and possible changes to products or sources of supply as a result of such activities. Within our
supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data
collection and due diligence procedures that we implement, which may harm our reputation. Furthermore, we may encounter
challenges in satisfying those customers that require that all of the components of our products be certified as conflict free, and if we
cannot satisfy these customers, they may choose a competitor’s products. We continue to investigate the presence of conflict
materials within our supply chain.
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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.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the
United States. Generally accepted accounting principles in the United States are subject to interpretation by the Financial
Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A
change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the
reporting of transactions completed before the announcement of a change.
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:
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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.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal properties are as follows:
Location of Property
Uses of Facility
Chippewa Falls, WI
Bloomington, MN(1)
St. Paul, MN(2)
Seattle, WA
San Jose, CA
Austin, TX
(1) Our lease commences on May 1, 2017.
(2) Our lease terminates on May 1, 2017.
Manufacturing, hardware development, central
service and warehouse
Software development, sales and marketing
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
87,500
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, in
international locations. We believe our facilities are adequate to meet our needs at least through 2017.
Item 3. Legal Proceedings
For a discussion of legal proceedings, see Note 12 — Commitments and Contingencies in the Notes to Consolidated Financial
Statements in Item 15. Exhibits and Financial Statement Schedules in Part IV of this annual report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
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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 6, 2017, we had
40,736,378 shares of common stock outstanding that were held by 436 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, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
43.79 $
43.40 $
32.30 $
23.68 $
35.58 $
32.62 $
29.64 $
35.93 $
28.25
27.39
20.60
16.77
27.80
27.44
18.00
19.35
$
$
$
$
$
$
$
$
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. Any determination to pay dividends in the future will be at the discretion of our Board of Directors
and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions. In
addition, the terms of our credit agreement with Wells Fargo Bank currently restrict our ability to pay dividends.
Equity Compensation Plan Information
The following table provides information as of December 31, 2016, 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)
1,956,013 $
33,124 $
1,989,137
17.19
5.09
3,600,599
—
3,600,599
(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, as amended and restated, 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 share units or stock bonus awards may be granted under
those plans. Pursuant to our 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 our 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, 2016,
21
under our 2013 equity incentive plan, an aggregate of 3,600,599 shares were available for grant as stock options or stock
appreciation rights and an aggregate of 2,322,967 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 our 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, our 2000 non-executive employee stock option plan is similar to the stock option plans described in footnote
(1) above. On March 30, 2010, our 2000 non-executive employee stock option plan was terminated, which ended future
grants but did not affect then outstanding options. As of December 31, 2016, under our 2000 non-executive employee stock
plan, we had options for 33,124 shares outstanding.
Unregistered Sales of Securities
We had no unregistered sales of our securities in 2016 not previously reported.
Issuer Repurchases
We did not repurchase any of our common stock in 2016, other than in connection with the forfeiture of common stock by
holders of restricted stock and restricted stock units 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 and restricted stock units.
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, 2011, 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, 2016
Cray Inc.
Nasdaq US Benchmark TR Index
ICB: 9572 Computer Hardware Index
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016
319.9
$
198.5
200.6
100.0 $
100.0
100.0
501.5 $
175.6
174.1
532.9 $
174.8
191.2
246.5 $
116.4
119.9
424.4 $
155.4
141.0
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:
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 ..............................
Operating expenses .........................................
Net gain on sale of interconnect hardware
development program ..........................................
Income from operations ...................................
Other income (expense), net ............................
Interest income, 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):
Years Ended December 31,
2016
2015
2014
2013
2012
(In thousands, except for per share data)
499,432 $
130,377
629,809
332,016
77,578
409,594
220,215
112,130
64,893
34,053
211,076
—
9,139
(1,365)
2,147
9,921
694
10,615 $
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 $
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 $
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 $
0.27 $
0.26 $
0.70 $
0.68 $
1.61 $
1.54 $
0.85 $
0.81 $
39,833
41,012
39,257
40,691
38,634
40,435
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
Operating activities ................................. $
Investing activities ..................................
Financing activities .................................
Depreciation and amortization ........................
Purchases of property and equipment ..............
(52,313) $
8,998
(540)
14,684
7,503
147,756 $
7,216
(1,373)
17,017
7,467
(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
Balance Sheet Data:
Cash, cash equivalents, restricted cash and
investments ............................................................ $
Working capital ......................................................
Total assets .............................................................
Shareholders’ equity ..............................................
224,617 $
392,145
714,572
525,476
284,891 $
415,187
694,175
492,510
145,796 $
361,614
651,434
453,854
220,449 $
334,928
603,366
375,587
323,205
283,352
510,314
340,546
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 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 annual report on Form 10-
K 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 HPC market, primarily categories of systems
commonly known as supercomputers and provide data analytics, artificial intelligence and storage solutions leveraging more than
four decades of delivering the world’s most advanced compute systems. We also provide software, system maintenance and support
services and engineering services related to supercomputer systems and our data analytics, artificial intelligence and storage
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 markets.
We provide customer-focused solutions based on three main 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 solutions that combine industry standard tools for
large-scale analytics and artificial intelligence applications, as well as innovative graph analysis tools, and specialized computing
platforms. 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, and big data described above, into unique solutions offerings that work in a
workflow-driven datacenter environment.
Summary of 2016 Results
Total revenue decreased by $94.9 million in 2016 compared to 2015, from $724.7 million to $629.8 million. Product revenue
decreased by $101.9 million and service revenue increased by $7.0 million over the same period. The year over year decrease in
product revenue was primarily driven by a slowdown in the HPC market that resulted in fewer opportunities in our traditional
markets. In addition, the year over year comparison was impacted by two large systems that were accepted in the first quarter of
2015, accounting for approximately $40.0 million in revenue, for which we had previously anticipated acceptance to occur in the
fourth quarter of 2014. The year over year increase in service revenue was primarily driven by increased maintenance revenue which
benefited from a larger installed system base as a result of product revenue growth in recent years.
Product gross profit margin increased from 29% in 2015 to 34% in 2016. The year over year increase in product gross margin
percentage was driven by lower memory costs, partially offset by concessions and penalties and an increase in write-offs for excess
and obsolete inventory. Gross profit margin from services decreased from 42% in 2015 to 40% in 2016 primarily due to $3.0 million
of costs incurred to replace a high-value third-party component in a customer system that is under a service contract, higher
headcount and compensation expense, and higher third-party costs. These amounts were partially offset by a decrease in incentive
compensation expense.
We recorded income from operations of $9.1 million in 2016 compared to income from operations of $41.0 million in 2015.
The decrease in income from operations was primarily attributable to lower revenue, mostly offset by an improved gross margin
percentage, and a $26.4 million increase in operating expenses resulting primarily from increased spending on research and
development.
Net income decreased from $27.5 million in 2015 to $10.6 million in 2016, primarily driven by the decrease in operating
income discussed above, partially offset by a $15.9 million decrease in income tax expense.
Net cash used in operations during 2016 was $52.3 million, as compared to net cash provided by operations of $147.8 million
in 2015. Net cash used in operations during 2016 was primarily driven by a $78.4 million increase in our accounts receivable
25
balance from December 31, 2015 to December 31, 2016. Cash receipts generally lag customer acceptances and we anticipate
significant cash receipts in the first quarter of 2017 for a number of large customer acceptances in the fourth quarter of 2016.
Working capital decreased by $23.0 million from $415.2 million at December 31, 2015 to $392.1 million at December 31, 2016.
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 I/O 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;
the rise of artificial intelligence along with machine learning and deep learning technologies which utilize HPC technologies
for performance and scale;
cloud computing as a solution for loosely-coupled HPC applications; and
significant variability in market demand from quarter-to-quarter and year-to-year.
Several of these trends have resulted in the expansion and acceptance of loosely-coupled cluster systems using processors
manufactured by Intel, AMD and others combined with commercially available, commodity networking and other components,
particularly in the middle and lower segments of the HPC market. These systems may offer higher theoretical peak performance for
equivalent cost, and “price/peak performance” is sometimes the dominant factor in HPC procurements. Vendors of such systems
often put pricing pressure on us, resulting in lower margins 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 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 by introducing complementary products and services to
new and existing customers, as demonstrated by our emphasis on strategic initiatives, such as “big data” analytics, artificial
intelligence and storage and data management.
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
26
drivers for many of our data analytics customers. We support open source technologies such as Hadoop and Spark to design large-
scale data analytics stacks that simplify analyses of scientific and commercial applications.
In storage, we are developing and delivering high value products for the high performance storage market. 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.
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. We have seen a decrease in the high-end of the
supercomputing market in 2016 as compared to the last few years. The 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
big data analytics, artificial intelligence and storage and data management. We have also been increasing the size of our sales force.
Service revenue related to our maintenance offerings is subject to less variations in the short term and may assist, 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 and compensation expense, 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, customer
acceptances and, in the long-term, 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,
2016
499,432
332,016
167,416
34%
130,377
77,578
52,799
40%
629,809
409,594
220,215
$
$
$
$
$
$
2015
601,294
426,821
174,473
29%
123,395
72,185
51,210
42%
724,689
499,006
225,683
$
$
$
$
$
$
2014
460,748
321,554
139,194
30%
100,858
55,638
45,220
45%
561,606
377,192
184,414
35%
31%
33%
Product revenue for 2016 decreased by $101.9 million, or 17%, over 2015, primarily driven by a slowdown in the HPC market
that resulted fewer contract opportunities in our traditional markets. In addition, the year over year comparison was impacted by two
large systems that were accepted in the first quarter of 2015, accounting for approximately $40.0 million in revenue, for which we
had previously anticipated acceptance to occur in the fourth quarter of 2014.
Product revenue for 2015 increased by $140.5 million, or 31%, over 2014 due to customer acceptances of large Cray systems
in Saudi Arabia, South Korea, and the United States, as well as several significant sales to commercial customers in 2015. In
addition, in the first quarter of 2015, we had customer acceptances of two large systems, accounting for approximately $40.0 million
in revenue, for which we had previously anticipated acceptance to occur in the fourth quarter of 2014.
Service Revenue
Service revenue for 2016 increased by $7.0 million from 2015, or 6%. The year over year increase in service revenue was
primarily driven by increased maintenance revenue which benefited from a larger installed system base as a result of product
revenue growth in recent years.
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, as a result of milestone completions on certain projects, and
maintenance revenue, which benefited from a larger installed system base as a result of product revenue growth in recent years.
Cost of Product Revenue and Product Gross Profit
Cost of product revenue for 2016 decreased by $94.8 million compared to 2015, driven primarily by lower product revenue
and an improved product gross margin percentage. Product gross profit percentage was 34% in 2016 and 29% in 2015. The year
over year increase in product gross margin percentage was driven by lower memory costs, partially offset by concessions and
penalties and an increase in write-offs for excess and obsolete inventory.
Cost of product revenue for 2015 increased by $105.3 million compared to 2014, driven by higher product revenue. Product
gross profit percentage was 29% in 2015 and 30% in 2014. The product gross profit margin for 2015 was lower than it has been in
recent years and was impacted by higher costs on a few large contracts that were not anticipated at the time of bidding, driven both
by economic factors and technical issues.
Cost of Service Revenue and Service Gross Profit
Cost of service revenue increased by $5.4 million in 2016 compared to 2015, driven by a larger installed base of systems
which also resulted in higher service revenue, and $3.0 million of costs incurred to replace a high-value third-party component in a
28
customer system that is under a service contract. Service gross profit margin decreased by two percentage points to 40% in 2016
compared to 2015. The service gross profit margin decreased primarily due to $3.0 million of costs incurred to replace a high-value
third-party component described previously, higher headcount and compensation expense, and higher third-party costs. These
amounts were partially offset by a decrease in incentive compensation expense.
Cost of service revenue increased by $16.5 million in 2015 compared to 2014, driven primarily by a larger installed base of
systems which also resulted in 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.
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,
2016
130,006
(12,621 )
2015
2014
$ 126,060
(16,515)
$ 104,797
(7,713)
(5,255 )
112,130 $
(12,982)
96,563
$
(3,036)
94,048
18 %
13%
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 third-party contractor engineering expenses.
In 2016, gross research and development expenses increased by $3.9 million from 2015 levels primarily due to increased
investments in the development of new products. Total compensation costs increased by $1.7 million compared to 2015, driven by
higher average headcount, partially offset by lower incentive compensation expense. Expenses for outside services increased by $1.3
million over the same period. Net research and development expenses increased by $15.6 million compared to 2015 as a result of the
increase in gross research and development expenses described above and a decrease in amounts included in cost of revenue and
reimbursed research and development. The decrease in reimbursements was primarily driven by lower funding in 2016 compared to
2015 and the timing of milestone and project completions.
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. Net research and development expenses increased by only $2.5 million in 2015 compared to 2014
despite such a large increase in gross research and development expenses. This was a result of an increase in amounts included in
cost of revenue and higher reimbursed research and development, driven by higher funding in 2015 compared to 2014 and the
timing of milestone and project completions.
29
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,
2016
64,893
10%
34,053
$
$
2015
60,150
8%
27,966
$
$
5%
4%
2014
57,785
10%
23,381
4%
Sales and Marketing. Sales and marketing expense increased by $4.7 million in 2016 compared to 2015. Total compensation
costs for 2016 increased by $3.6 million compared to 2015, driven by higher headcount, partially offset by lower incentive
compensation expense. Marketing program spending also increased by $0.8 million over the same period.
The $2.4 million increase in sales and marketing expense in 2015 compared to 2014 was primarily due to increased incentive
compensation expense.
General and Administrative. General and administrative expense increased by $6.1 million in 2016 compared to 2015
primarily due to a $6.0 million increase in litigation costs associated with our ongoing litigation with Raytheon, which is described
in Note 12 - Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 15. Exhibits and Financial
Statement Schedules in Part IV of this annual report on Form 10-K. We also incurred a $2.3 million lease termination fee for our St.
Paul facility. These amounts were partially offset by a $2.1 million decrease in incentive compensation expense. Due to our ongoing
litigation with Raytheon, we expect legal expenses to remain at above historical levels through at least the first quarter of 2017.
The $4.6 million increase in general and administrative expense in 2015 compared to 2014 was primarily due to increased
headcount, increased incentive compensation expense and increased outside services. Average headcount increased to support the
growth in the business and resulted in an increase in base salaries of $0.8 million. Incentive compensation expense increased by $1.5
million and outside services increased by $1.9 million compared to the prior year.
Other Income (Expense), Net
We recorded $1.4 million and $9,000 of net other expense for the years ended December 31, 2016 and 2014, respectively, and
$0.4 million of net other income for the year ended December 31, 2015. 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 indicated years ended December 31 were (in thousands):
Interest income .............................................................................................................. $
Interest expense .............................................................................................................
Net interest income ........................................................................................................ $
2,120 $
27
2,147 $
1,465 $
(57)
1,408 $
643
(137)
506
Interest income, net in 2016 increased as compared to 2015 due to amortization of unearned income on the sales-type lease
that we entered into with a customer in the first half of 2016. 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.
Year Ended December 31,
2016
2015
2014
30
Taxes
We recorded income tax benefit (expense) for the indicated years ended December 31 as follows (in thousands):
2016
9,921
Net income before income taxes .................................................................................... $
Tax benefit (expense) .....................................................................................................
694
Net income ..................................................................................................................... $ 10,615
Effective tax rate ............................................................................................................
(7)%
2015
42,777
(15,240)
27,537
$
2014
9,697
52,626
$ 62,323
$
$
36%
(543)%
Year Ended December 31,
The difference between the income tax benefit at the federal statutory rate of 35% and our income tax expense at the effective
rate of (7)% for the year ended December 31, 2016 was the result of research and development tax credits and additional tax
deductions from share-based payments, sometimes referred to as excess tax benefits, partially offset by state taxes, non-deductible
expenses and other permanent items. Excess tax benefits arise when tax deductions that we recognize with respect to share-based
compensation exceed the compensation cost attributable to share-based compensation that was recognized in our consolidated
financial statements. The difference between the income tax provision at the federal statutory rate of 35% and our income tax
expense at the effective income tax 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 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.
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.
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 Statements of Operations when that occurs.
As of December 31, 2016, we had U.S. federal net operating loss carryforwards of approximately $90.2 million and U.S.
federal research and development tax credit carryforwards of approximately $25.2 million. The federal net operating loss
carryforwards will expire between 2019 through 2036, and the research and development tax credits will expire from 2021 through
2036 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, or 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
31
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, or 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 impact of the adoption of ASU
2014-09. We will be required to make additional disclosures under the new guidance. However, at this time, we do not expect
adoption of ASU 2014-09 to have a material impact on our consolidated financial statements.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory: Topic 330,
or 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, or 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. We will adopt ASU 2015-11 as required in our 2017 interim
and annual reporting periods. We do not expect the 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, or 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 will adopt ASU 2015-
17 in our 2017 interim and annual reporting periods.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets
and Financial Liabilities: Topic 825, or 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. We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial
statements.
In February 2016, FASB issued Accounting Standards Update No. 2016-02, Leases: Topic 842, or ASU 2016-02, that replaces
existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to
record right-of-use assets and corresponding lease liabilities on the balance sheet. Under the new guidance, leases will continue to be
classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated
Statements of Operations. Lessor accounting is largely unchanged under ASU 2016-02. Adoption of ASU 2016-02 is required for
fiscal reporting periods beginning after December 15, 2018, including interim reporting periods within those fiscal years with early
adoption being permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting
period presented with various optional practical expedients. We are currently evaluating the potential impact of the pending adoption
of ASU 2016-02 on our consolidated financial statements.
In March 2016, FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. The updated guidance simplifies and changes how
companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows.
Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting
periods within those fiscal years with early adoption being permitted. We early-adopted ASU 2016-09 at the beginning of the first
quarter of 2016.
32
At the time of adoption of ASU 2016-09, we recognized $16.6 million in deferred tax assets for all excess tax benefits that had
not been previously recognized because the related tax deduction had not reduced taxes payable. This was accomplished through a
cumulative-effect adjustment to accumulated deficit. All excess tax benefits and all tax deficiencies generated in the current and
future periods will be recorded as income tax benefit or expense in our Consolidated Statements of Operations in the reporting
period in which they occur. This will result in increased volatility in our effective tax rate. We have determined that none of the other
provisions of ASU 2016-09 will have a significant impact on our consolidated financial statements.
In August 2016, FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments, or ASU 2016-15. The updated guidance clarifies how companies present and classify
certain cash receipts and cash payments in the statement of cash flows. Adoption of ASU 2016-15 is required for fiscal reporting
periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being
permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
In November 2016, FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted
Cash, or ASU 2016-18, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in
the statement of cash flows. The amended guidance requires that amounts that are deemed to be restricted cash and restricted cash
equivalents be included in the cash and cash-equivalent balances in the statement of cash flows. A reconciliation between the
statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes
more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. The guidance also requires that
changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted
cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. An entity with a
material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about
the nature of the restrictions. Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017,
including interim reporting periods within those fiscal years with early adoption being permitted. We do not expect the adoption of
ASU 2016-18 to have a material impact on our consolidated financial statements.
In January 2017, FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. ASU
2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative
assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to
perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU
2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early
adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. We do
not expect the adoption of ASU 2017-04 to have a material impact 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 the term of the lease, which expires in September
2020. 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 previously contemplated expanding our manufacturing capabilities in Chippewa Falls, Wisconsin in order to increase our
manufacturing capacity. This project, which we estimated would require total capital expenditures in the range of $25.0 million, is
currently suspended. The decision of when and whether to undertake this project in the future will be dependent on our expectations
of future needs.
Total cash and investments decreased from $284.9 million at December 31, 2015 to $224.6 million at December 31, 2016,
primarily driven by the timing of collections from customers. As of December 31, 2016, $14.3 million of our total cash and
investments balance was held by foreign subsidiaries. As of December 31, 2016, we had $1.7 million in restricted cash associated
with certain letters of credit outstanding to secure customer prepayments. As of December 31, 2016, we had working capital of
$392.1 million compared to $415.2 million as of December 31, 2015.
33
Cash flow information for the indicated years ended December 31 included the following (in thousands):
Cash provided by (used in): ..................................................................
Operating Activities ....................................................................... $
Investing Activities ........................................................................
Financing Activities .......................................................................
(52,313) $
8,998
(540)
147,756 $
7,216
(1,373 )
(58,109)
(22,755)
(70)
2016
2015
2014
Operating Activities. For the year ended December 31, 2016, cash used in operating activities was primarily driven by a
$78.4 million increase in our accounts receivable balance from December 31, 2015 to December 31, 2016. Cash receipts generally
lag customer acceptances and, because we had a number of large customer acceptances in the fourth quarter of 2016, we anticipate
significant cash receipts in the first quarter of 2017. 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.
Investing Activities. For the year ended December 31, 2016, cash provided by investing activities was principally due to sales
and maturities of debt securities of $31.0 million, partially offset by purchases of debt securities of $16.2 million and purchases of
property and equipment of $7.5 million. 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.
Financing Activities. Net cash used in financing activities in 2016, 2015 and 2014 resulted primarily from statutory tax
withholding amounts made in exchange for the forfeiture of common stock by holders of vesting restricted stock, partially 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. 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.
The following table summarizes our contractual cash obligations as of December 31, 2016 (in thousands):
Contractual Obligations
Development agreements ................................ $
Operating leases ..............................................
Total contractual cash obligations ................... $
Total
1 Year
Years 2-3
Years 4-5
Thereafter
18,588 $
58,455
77,043 $
16,002 $
6,585
22,587 $
2,571 $
13,383
15,954 $
15 $
11,767
11,782 $
—
26,720
26,720
Amounts Committed by Year
In the second quarter of 2016, we entered into a new operating lease for facilities in Bloomington, Minnesota that will
principally be staffed with teams from software development, sales and service. This new lease will replace our existing lease in St.
Paul, Minnesota. The new lease is for a minimum period of eight years beginning in May 2017. Minimum contractual obligations
under the new lease total $32.6 million. We paid an early termination fee of approximately $2.3 million to terminate our existing
lease in St. Paul, Minnesota which was recorded as an operating expense in 2016. We received a one-time lease incentive payment
of $2.3 million as part of our new lease agreement to cover the termination fee, which will be amortized over the term of the new
lease. We anticipate that 2017 spending on leasehold improvements for the new facilities will be approximately $5.5 million.
As of December 31, 2016, we had a $50.0 million revolving line of credit, or Credit Facility, with Wells Fargo Bank, National
Association, designed to be used for general corporate purposes, including working capital requirements and capital expenditures.
The Credit Facility also supports the issuance of letters of credit. The Credit Facility is secured by a first priority lien in all of our
accounts receivable and other rights to payment, general intangibles, inventory and equipment.
Any 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%. We are also required to pay the lender customary letter of credit fees, and a commitment fee of 0.18% per annum
34
in respect of the unutilized commitment amount under the Credit Facility. The Credit Facility requires that we maintain certain
financial ratios and restricts our ability to incur additional indebtedness, pay dividends or distributions, create liens on assets, and
engage in certain other activities. We were in compliance with all of our financial covenants as of the end of each quarter for the year
ended December 31, 2016. The Credit Facility matures in December 2017.
We made no draws and had no outstanding cash borrowings on the line of credit as of December 31, 2016.
As of December 31, 2016, we had $3.3 million in USD equivalent value in outstanding letters of credit and $1.7 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, 2016, we incurred $15.6 million for such
arrangements.
At any particular time, our cash position is affected by the timing of cash receipts for product sales, maintenance contracts,
government co-funding for research and development activities 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, is 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 on Form 10-K 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 liabilities, determination of the
fair value of stock options and other assessments of fair value, evaluation of the probability of vesting of performance-based
restricted stock and restricted stock units, 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.
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, the 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
35
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. 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. We consider the maintenance period to commence upon acceptance of
the product, or installation of the product where a formal acceptance is not required, which may include a warranty period and
accordingly allocate a portion of the arrangement consideration as a separate deliverable which is recognized as service revenue over
the entire service period. Other services such as training and engineering services can be delivered as a discrete delivery or over the
term of the contract. A multiple-element arrangement is separated into more than one unit of accounting if the following criteria are
met:
•
•
The delivered item(s) has value to the customer on a standalone basis; and
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the
undelivered item(s) is considered probable and substantially in our control.
If these criteria are met for each element, the arrangement consideration is allocated to the separate units of accounting based
on each unit’s relative selling price. If these criteria are not met, the arrangement is accounted for as one unit of accounting which
would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are
met or when the last undelivered element is delivered.
We follow a selling price hierarchy in determining the best estimate of the selling price of each deliverable. Certain products
and services are sold separately in standalone arrangements for which we are sometimes able to determine vendor specific objective
evidence, or VSOE. We determine VSOE based on normal pricing and discounting practices for the product or service when sold
separately.
When we are not able to establish VSOE for all deliverables in an arrangement with multiple elements, we attempt to establish
the selling price of each remaining element based on third-party evidence, or TPE. Our inability to establish VSOE is often due to a
relatively small sample of customer contracts that differ in system size and contract terms which can be due to infrequently selling
each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of
certain advanced and emerging technologies. TPE is determined based on our prices or competitor prices for similar deliverables
when sold separately. However, we are often unable to determine TPE, as our offerings usually contain a significant level of
customization and differentiation from those of competitors and we are often unable to reliably determine what similar competitor
products’ selling prices are on a standalone basis.
When we are unable to establish selling price using VSOE or TPE, we use estimated selling price, or ESP, in our allocation of
arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the product or service
were sold on a standalone basis. In determining ESP, we use the cost to provide the product or service plus a margin, or consider
other factors. When using cost plus a margin, we consider the total cost of the product or service, including customer-specific and
geographic factors. We also consider the historical margins of the product or service on previous contracts and several factors
including any changes to pricing methodologies, competitiveness of products and services and cost drivers that would cause future
margins to differ from historical margins.
Products. We most often recognize revenue from sales of products upon delivery or customer acceptance of the system. Where
formal acceptance is not required, we recognize revenue upon delivery or installation. When the product is part of a multiple element
arrangement, we allocate a portion of the arrangement consideration to product revenue based on estimates of selling price.
Services. Maintenance services are provided under separate maintenance contracts with customers. These contracts generally
provide for maintenance services for one year, although some are for multi-year periods, often with prepayments for the term of the
contract. We consider the maintenance period to commence upon acceptance of the product or installation in situations where a
formal acceptance is not required, which may include a warranty period. When service is part of a multiple element arrangement, we
allocate a portion of the arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance
contracts that are billed in advance of revenue recognition are recorded as deferred revenue. Maintenance revenue is recognized
ratably over the term of the maintenance contract.
Revenue from engineering services is recognized as services are performed.
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
36
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 incur additional expenses to write-
down inventory to its estimated market value. Adjustments to these estimates in the future may materially impact our operating
results.
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and
liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect
when the differences and carryforwards are expected to be recovered or settled. A valuation allowance for deferred tax assets is
provided when we estimate that it is more likely than not that all or a portion of the deferred tax assets will not be realized through
future operations. This assessment is based upon consideration of available positive and negative evidence, which includes, among
other things, our recent results of operations and expected future profitability. We consider our actual historical results over 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.
37
Our deferred tax assets increased by $16.6 million as a result of the adoption of ASU 2016-09, Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. No changes were
required to previously recorded valuation allowances at the time of adoption. ASU 2016-09 will result in increased volatility in our
effective tax rate.
As of December 31, 2016, we had approximately $94.3 million of net deferred tax assets before application of a valuation
allowance. As of December 31, 2016, net deferred tax assets after reduction by the valuation allowance of $8.7 million were $85.6
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 full valuation allowance against
deferred tax assets arising in a limited number of foreign jurisdictions as the realization of such assets is not considered to be more
likely than not at this time. In a future period our assessment of the 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
Statements of Operations when that occurs. 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.
Research and Development Expenses
Research and development expenses include costs incurred in the development and production of our hardware and software,
costs incurred to enhance and support existing product features, costs incurred to support and improve our development processes,
and costs related to future product development. Research and development costs are expensed as incurred, and may be offset by co-
funding from third parties. We may also enter into arrangements whereby we make advance, non-refundable payments to a vendor to
perform certain research and development services. These payments are deferred and recognized over the vendor’s estimated
performance period.
Amounts to be received under co-funding arrangements with the U.S. government or other customers are based on either
contractual milestones or costs incurred. These co-funding milestone payments are recognized in operations as performance is
estimated to be completed and are measured as milestone achievements occur or as costs are incurred. These estimates are reviewed
on a periodic basis and are subject to change, including in the near term. If an estimate is changed, net research and development
expense could be impacted significantly.
We do not record a receivable from the U.S. government prior to completing the requirements necessary to bill for a milestone
or cost reimbursement. Funding from the U.S. government is subject to certain budget restrictions and milestones may be subject to
completion risk, and as a result, there may be periods in which research and development costs are expensed as incurred for which
no reimbursement is recorded, as milestones have not been completed or the U.S. government has not funded an agreement.
Accordingly, there can be substantial variability in the amount of net research and development expenses from quarter to quarter and
year to year.
We classify amounts to be received from funded research and development projects as either revenue or a reduction to
research and development expense based on the specific facts and circumstances of the contractual arrangement, considering total
costs expected to be incurred compared to total expected funding and the nature of the research and development contractual
arrangement. In the event that a particular arrangement is determined to represent revenue, the corresponding costs are classified as
cost of revenue.
Share-based Compensation
We measure compensation cost for share-based payment awards at fair value and recognize it as compensation expense over
the service period for awards expected to vest. We recognize share-based compensation expense for all share-based payment awards,
net of an estimated forfeiture rate. We recognize compensation cost for only those shares expected to vest on a straight-line basis
over the requisite service period of the award.
38
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 or units 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 during each reporting period.
39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates and equity price fluctuations.
Interest Rate Risk: We invest our available cash in money market mutual funds whose underlying investments include
investment-grade debt instruments of corporate issuers and in debt instruments of the U.S. government and its agencies. We do not
have any derivative instruments or auction rate securities in our investment portfolio. We protect and preserve invested funds by
limiting default, market and reinvestment risk. Investments in both fixed-rate and floating-rate interest earning instruments carry a
degree of interest rate risks. 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 are subject to the above noted risks, we
believe that 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 U.S. 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, 2016, we had entered into foreign currency exchange contracts that were designated as cash flow hedges
that hedge approximately $46.9 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, 2016, we had entered into foreign currency
exchange contracts that had been dedesignated for the purposes of hedge accounting treatment totaling $107.5 million. Unrealized
gains or losses recorded in the Consolidated Statements 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, 2016, a hypothetical 10% unfavorable change in foreign currency exchange rates would impact our annual operating
results and cash flows by approximately $0.2 million.
40
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS*
Consolidated Balance Sheets at December 31, 2016 and December 31, 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
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-33
________________________________
* The Financial Statements are located following page F-1.
The selected quarterly financial data required by this item is set forth in Note 20 - Quarterly Data of the Notes to Consolidated
Financial Statements in Item 15. Exhibits and Financial Statement Schedules in Part IV of this annual report on Form 10-K
41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions
regarding required disclosure. Our management, with the participation and under the supervision of our Chief Executive Officer,
Chief Financial Officer and Chief Accounting Officer/Corporate Controller, evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report, and based on that evaluation, our Chief Executive Officer and
Chief Financial Officer determined that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter of 2016 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, 2016.
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, 2016.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Cray Inc.
We have audited Cray Inc. and Subsidiaries’ (“the Company”) internal control over financial reporting as of December 31, 2016,
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. 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, 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, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by 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, 2016 and 2015, 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, 2016, and our report dated February 10, 2017, expressed an unqualified opinion.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
February 10, 2017
43
Item 9B. Other Information
None.
44
PART III
Item 10. Directors, Executive Officers and Corporate Governance
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 13, 2017, 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 13, 2017, 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 13, 2017, 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 13, 2017, 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 13, 2017, and such information is incorporated herein by reference.
45
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)(1)
Financial Statements
Consolidated Balance Sheets at December 31, 2016 and December 31, 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015
and 2014
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
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,
2016, 2015 and 2014 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.
Item 16. Form 10-K Summary
None.
46
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 10, 2017.
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 10, 2017.
Signature
Title
By /s/ PETER J. UNGARO
Peter J. Ungaro
By /s/ BRIAN C. HENRY
Brian C. Henry
Chief Executive Officer, President and Director
(Principal Executive Officer)
Chief Financial Officer and Executive Vice President
(Principal Financial Officer)
By /s/ CHARLES D. FAIRCHILD
Charles D. Fairchild
Chief Accounting Officer, Controller and Vice President
(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
By /s/ BRIAN V. TURNER
Brian V. Turner
47
Director
Director
Director
Director
Director
Director
Director
EXHIBIT INDEX
Exhibit Description
Incorporated by Reference
Exhibit
Number
2.1
3.1
3.2
3.3
10.0*
10.1*
10.2*
10.3*
Asset Purchase Agreement between Intel
Corporation and the Company, dated April 24,
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
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*
10.18*
Amended and Restated 2013 Equity Incentive
Plan
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
48
Form
8-K
File No.
000-26820
Filing
Date
04/25/12
Exhibit/
Annex
2.1
Filed
Herewith
8-K
8-K
8-K
S-8
S-8
000-26820
000-26820
000-26820
06/08/06
02/12/07
04/19/12
333-57970
333-57970
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
DEF
14A
10-K
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
000-26820
04/25/16
A
B
B
A
A
A
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
Exhibit
Number
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
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
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
10.28*
2016 Executive Bonus Plan
10-Q
000-26820
05/03/16
10.1
10.29*
Form of Indemnification Agreement
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
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
Lease Agreement between North Pad Office,
LLC and the Company, dated as of April 21,
2016
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
8-K
8-K
000-26820
02/08/11
10.1
000-26820
07/16/09
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
04/27/16
10.10
8-K
000-26820
05/03/12
10.1
8-K
000-26820
01/11/16
10.1
49
Exhibit Description
Incorporated by Reference
Form
8-K
File No.
000-26820
Filing
Date
01/11/16
Exhibit/
Annex
10.2
Filed
Herewith
Exhibit
Number
10.39
21.1
23.1
24.1
31.1
31.2
32.1
101.INS
Revolving Line of Credit Note between Wells
Fargo Bank, National Association and the
Company, dated January 7, 2016
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
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase
Document
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document
*
Management contract or compensatory plan or arrangement.
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.
50
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2016
December 31,
2015
ASSETS
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:
222,962 $
—
—
197,941
88,254
19,117
20,006
548,280
1,655
31,050
30,620
3,023
14,182
1,637
66,496
17,629
714,572 $
45,504 $
17,199
10,303
83,129
156,135
27,258
5,703
189,096
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
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 40,757,458 and 40,693,707 shares,
respectively .......................................................................................................................
Accumulated other comprehensive income .......................................................................
Accumulated deficit ..........................................................................................................
TOTAL SHAREHOLDERS’ EQUITY ......................................................................
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ..................................... $
—
—
622,604
2,782
(99,910)
525,476
714,572 $
610,279
7,642
(125,411)
492,510
694,175
See accompanying notes
F-1
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 ........................................
See accompanying notes
Years Ended December 31,
2016
2015
2014
499,432 $
130,377
629,809
601,294 $
123,395
724,689
332,016
77,578
409,594
220,215
112,130
64,893
34,053
211,076
9,139
(1,365)
2,147
9,921
694
10,615 $
0.27 $
0.26 $
39,833
41,012
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
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
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 on cash flow hedges .............................................
Reclassification adjustments on cash flow hedges included in net
income ............................................................................................
Other comprehensive income (loss) ........................................
Comprehensive income ........................................................... $
See accompanying notes
Years Ended December 31,
2016
2015
2014
10,615 $
27,537 $
62,323
8
426
8,030
(13,324)
(4,860)
5,755 $
(20)
(394)
5,251
(3,698)
1,139
28,676 $
12
(1,188)
8,475
(1,649)
5,650
67,973
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
40,470 $
586,243 $
853 $
(211,509) $
BALANCE, December 31, 2013 .....................
Issuance of shares under employee stock
purchase plan ...................................................
Exercise of stock options .................................
Restricted shares issued for compensation,
net of forfeitures and taxes...............................
Share-based compensation ...............................
Other comprehensive income ..........................
Net income .......................................................
21
411
(80)
—
611
3,086
(1,914)
10,364
5,650
BALANCE, December 31, 2014 .....................
40,822 $
598,390 $
6,503 $
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 .......................................................
27
229
(384)
—
711
2,289
(2,464)
11,353
1,139
BALANCE, December 31, 2015 .....................
40,694 $
610,279 $
7,642 $
(1,853)
62,323
(151,039) $
(1,909)
27,537
(125,411) $
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 ................................
Cumulative-effect adjustment resulting from
adoption of ASU 2016-09 ................................
Net income .......................................................
BALANCE, December 31, 2016 .....................
27
169
(133)
—
718
2,121
(1,665)
11,151
(1,714)
(4,860)
40,757 $
622,604 $
2,782 $
See accompanying notes
16,600
10,615
(99,910) $
16,600
10,615
525,476
F-4
Total
375,587
611
3,086
(3,767)
10,364
5,650
62,323
453,854
711
2,289
(4,373)
11,353
1,139
27,537
492,510
718
2,121
(3,379)
11,151
(4,860)
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2016
2015
2014
Operating activities:
Net income ............................................................................................................................ $ 10,615 $ 27,537 $ 62,323
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:
(78,396)
(17,224)
15,343
2,265
16,903
(21,073)
(7,570)
(52,313)
36,665
11,510
21,292
(3,972)
(19,849)
23,841
8,314
147,756
17,450
(32,889)
(54,147)
(9,349)
14,504
(5,237)
(28,407)
(58,109)
16,324
10,364
(53,204)
4,159
14,684
11,151
(1,861)
2,850
17,017
11,353
12,103
1,945
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 ............................................................
30,990
(16,159)
1,670
(7,503)
8,998
16,229
(14,991)
13,445
(7,467)
7,216
53,608
(56,064)
(3,106)
(17,193)
(22,755)
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: ...................................................................................................
192,633
Beginning of period ..........................................................................................................
End of period .................................................................................................................... $ 222,962 $ 266,660 $ 112,633
718
(3,379)
2,121
(540)
157
(43,698)
711
(4,373)
2,289
(1,373)
428
154,027
611
(3,767)
3,086
(70)
934
(80,000)
266,660
112,633
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................................................................ $
Cash paid for income taxes ..............................................................................................
Non-cash investing and financing activities: ........................................................................
31 $
4 $
2,441
3,890
5
2,935
Inventory transfers to property and equipment and service spares ................................... $
5,292 $
8,177 $
3,313
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 data
analytics, artificial intelligence and storage solutions. The Company also provides software, system maintenance and support
services and engineering services related to supercomputer systems and data analytics, artificial intelligence and storage 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, the Company had $1.7 million in short-term restricted
cash. As of December 31, 2016 and 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.
F-6
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 other income (expense) in
the Consolidated Statements 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
F-7
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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
F-8
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 2016 and concluded that it was more
likely than not that the fair values of its reporting units were greater than their carrying amounts. After reaching this conclusion, the
two-step impairment test was unnecessary and no further testing was performed. The qualitative factors that were considered
included, but were not limited to, general economic conditions, outlook for the HPC and big data markets, recent and forecasted
financial performance and the price of the Company’s common stock.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting and allocates the purchase price
to the tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values at the acquisition
date. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. The Company
uses estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date. During the
measurement period, which may be up to one year from the acquisition date, any refinements made to the fair value of the assets and
liabilities assumed are recorded with retrospective effect.
The fair values of intangible assets acquired are estimated using a discounted cash flow approach with Level 3 inputs. Under
this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings)
attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company uses risk-adjusted cash
flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes
the level and timing of cash flows appropriately reflects market participant assumptions.
Revenue Recognition
The Company recognizes revenue, including transactions under sales-type leases, when it is realized or realizable and earned.
The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has
occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until the products
have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where applicable, a
customer acceptance has been 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.
F-9
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company follows a selling price hierarchy in determining the best estimate of the selling price of each deliverable.
Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to determine
vendor specific objective evidence, or VSOE. The Company determines VSOE based on normal pricing and discounting practices
for the product or service when sold separately.
When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company
attempts to establish the selling price of each remaining element based on third-party evidence, or TPE. The Company’s inability to
establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract terms which
can be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales
history, such as in the case of certain advanced and emerging technologies. TPE is determined based on the Company’s prices or
competitor prices for similar deliverables when sold separately. However, the Company is often unable to determine TPE, as the
Company’s offerings usually contain a significant level of customization and differentiation from those of competitors and the
Company is often unable to reliably determine what similar competitor products’ selling prices are on a standalone basis.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price, or ESP,
in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a
sale if the product or service were sold on a standalone basis. In determining ESP, the Company uses the cost to provide the product
or service plus a margin, or considers other factors. When using cost plus a margin, the Company considers the total cost of the
product or service, including customer-specific and geographic factors. The Company also considers the historical margins of the
product or 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 of the product
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.
F-10
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•
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 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 losses were $1.0 million for
2016 and net transaction gains were $1.6 million and $2.1 million for 2015 and 2014, respectively.
Research and Development
Research and development expenses include costs incurred in the development and production of hardware and software, costs
incurred to enhance and support existing product features, costs incurred to support and improve development processes, and costs
related to future product development. Research and development costs are expensed as incurred, and may be offset by co-funding
from third parties. The Company may also enter into arrangements whereby it makes advance, non-refundable payments to a vendor
to perform certain research and development services. These payments are deferred and recognized over the vendor’s estimated
performance period.
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
F-11
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
basis and are subject to change, including in the near term. If an estimate is changed, net research and development expense could be
impacted significantly.
The Company does not record a receivable from the U.S. government prior to completing the requirements necessary to bill
for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget restrictions and milestones
may be subject to completion risk, and as a result, there may be periods in which research and development costs are expensed as
incurred for which no reimbursement is recorded, as milestones have not been completed or the U.S. government has not funded an
agreement. Accordingly, there can be substantial variability in the amount of net research and development expenses from quarter to
quarter and year to year.
The Company classifies amounts to be received from funded research and development projects as either revenue or a
reduction to research and development expense based on the specific facts and circumstances of the contractual arrangement,
considering total costs expected to be incurred compared to total expected funding and the nature of the research and development
contractual arrangement. In the event that a particular arrangement is determined to represent revenue, the corresponding research
and development costs are classified as cost of revenue.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and
liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect
when the differences and carryforwards are expected to be recovered or settled. A valuation allowance for deferred tax assets is
provided when the Company estimates that it is more likely than not that all or a portion of the deferred tax assets may not be
realized through future operations. This assessment is based upon consideration of available positive and negative evidence, which
includes, among other things, recent results of operations and expected future profitability. The Company considers its actual
historical results over several years to have stronger weight than other more subjective indicators, including forecasts, when
considering whether to establish or reduce a valuation allowance on deferred tax assets. The Company has significant difficulty
projecting future results due to the nature of the business and the industry in which it operates.
The Company’s deferred tax assets increased by $16.6 million as a result of the adoption of Accounting Standards Update No.
2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU
2016-09. No changes were required to previously recorded valuation allowances at the time of adoption. ASU 2016-09 will result in
increased volatility in the Company’s effective tax rate.
As of December 31, 2016, the Company had approximately $94.3 million of net deferred tax assets before application of a
valuation allowance. As of December 31, 2016, net deferred tax assets after reduction by the valuation allowance of $8.7
million were $85.6 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 assessment of the Company’s ability to utilize its
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. The Company’s 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.
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 Statements of Operations when that occurs. 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.
F-12
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Share-Based Compensation
The Company measures compensation cost for share-based payment awards at fair value and recognizes it as compensation
expense over the service period for awards expected to vest. Share-based compensation expense is recognized for all share-based
payment awards, net of an estimated forfeiture rate. Compensation cost is only recognized for those shares expected to vest on a
straight-line basis over the requisite service period of the award.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires subjective
assumptions, including the expected life of the share-based payment awards and stock price volatility. The Company utilizes the
Black-Scholes options pricing model to value the stock options granted under its options plans. In this model, the assumptions
utilized relate to stock price volatility, stock option term and forfeiture rates that are based upon both historical factors as well as
management’s judgment.
The fair value of restricted stock and restricted stock units is determined based on the number of shares or units granted and
the quoted price of the Company’s common stock at the date of grant.
The Company grants performance vesting restricted 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
$3.2 million, $2.3 million, and $2.9 million in 2016, 2015, and 2014, 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, 2016, 2015 and 2014, the added shares from these items included in the calculation of
diluted shares and EPS totaled approximately 1.2 million, 1.4 million, and 1.8 million, respectively. Potentially dilutive shares of 1.2
million, 0.9 million, and 0.6 million, respectively, have been excluded from the denominator in the computation of diluted EPS for
the years ended December 31, 2016, 2015 and 2014, respectively, because they were antidilutive. An additional 1.2 million, 1.2
million and 0.8 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, 2016, 2015 and 2014, 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 loss on available-for-sale investments
Accumulated currency translation adjustments
Accumulated unrealized net gain on cash flow hedges
Accumulated other comprehensive income
F-13
2016
2015
— $
2,101
681
2,782 $
(8)
1,675
5,975
7,642
$
$
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers: Topic 606, or 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, or 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 impact of the adoption
of ASU 2014-09. The Company will be required to make additional disclosures under the new guidance. However, at this time, the
Company does not expect adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory: Topic 330,
or 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 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. The Company will adopt ASU 2015-11 as required in its 2017 interim and annual
reporting periods. The Company does not expect the 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, or 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 will adopt ASU 2015-17 in its 2017 interim and annual reporting periods.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets
and Financial Liabilities: Topic 825, or 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 does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated
financial statements.
In February 2016, FASB issued Accounting Standards Update No. 2016-02, Leases: Topic 842, or ASU 2016-02, that replaces
existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to
record right-of-use assets and corresponding lease liabilities on the balance sheet. Under the new guidance, leases will continue to be
F-14
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated
Statements of Operations. Lessor accounting is largely unchanged under ASU 2016-02. Adoption of ASU 2016-02 is required for
fiscal reporting periods beginning after December 15, 2018, including interim reporting periods within those fiscal years with early
adoption being permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting
period presented with various optional practical expedients. The Company is currently evaluating the potential impact of the pending
adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. The updated guidance simplifies and changes how
companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows.
Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting
periods within those fiscal years with early adoption being permitted. The Company early-adopted ASU 2016-09 in the first quarter
of 2016.
At the time of adoption of ASU 2016-09, the Company recognized $16.6 million in deferred tax assets for all excess tax
benefits that had not been previously recognized because the related tax deduction had not reduced taxes payable. This was
accomplished through a cumulative-effect adjustment to accumulated deficit. All excess tax benefits and all tax deficiencies
generated in the current and future periods will be recorded as income tax benefit or expense in the Company’s Consolidated
Statements of Operations in the reporting period in which they occur. This will result in increased volatility in the Company’s
effective tax rate. The Company has determined that none of the other provisions of ASU 2016-09 will have a significant impact on
its consolidated financial statements.
In August 2016, FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments, or ASU 2016-15. The updated guidance clarifies how companies present and classify
certain cash receipts and cash payments in the statement of cash flows. Adoption of ASU 2016-15 is required for fiscal reporting
periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being
permitted. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial
statements.
In November 2016, FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted
Cash, or ASU 2016-18, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in
the statement of cash flows. The amended guidance requires that amounts that are deemed to be restricted cash and restricted cash
equivalents be included in the cash and cash-equivalent balances in the statement of cash flows. A reconciliation between the
statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes
more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. The guidance also requires that
changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted
cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. An entity with a
material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about
the nature of the restrictions. Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017,
including interim reporting periods within those fiscal years with early adoption being permitted. The Company does not expect the
adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.
In January 2017, FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test.
ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a
qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the
option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15,
2019 with early adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1,
2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial
statements.
F-15
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2016 and 2015, 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 .................................................... $
Foreign currency exchange contracts (1) ............................................................
Assets measured at fair value at December 31, 2016 ....................................... $
235,867 $
Liabilities:
Foreign currency exchange contracts (2) ............................................................
Liabilities measured at fair value at December 31, 2016 ................................. $
41
41 $
—
— $
Fair Value
as of
December 31,
2016
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
224,617 $
11,250
224,617 $
—
224,617 $
—
11,250
11,250
41
41
Description
Assets:
Cash and cash equivalents and restricted cash
Available-for-sale investments (3)
Foreign currency exchange contracts (1)
Assets measured at fair value at December 31, 2015
Liabilities:
Foreign currency exchange contracts (2)
Liabilities measured at fair value at December 31, 2015
_______________________________
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 $
269,966 $
14,925
—
284,891 $
3
3 $
—
— $
—
—
11,602
11,602
3
3
(1) Included in “Prepaid expenses and other current assets” and “Other non-current assets” on the Company’s Consolidated
Balance Sheets.
(2) Included in “Other accrued liabilities” and “Other non-current liabilities” on the Company’s Consolidated Balance
Sheets.
(3) Included in “Short-term investments” on the Company’s Consolidated Balance Sheets.
Foreign Currency Derivatives
The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales transactions that are
payable in foreign currencies.
F-16
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2016 and 2015, 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):
December 31,
2016
2015
British Pounds (GBP) ........................................................................................................................
Euros (EUR) ......................................................................................................................................
Swiss Francs (CHF) ...........................................................................................................................
Canadian Dollars (CAD) ...................................................................................................................
—
1.5
3.6
54.4
39.2
6.0
33.0
—
The Company had hedged foreign currency exposure related to these designated cash flow hedges of approximately $46.9
million and $107.3 million as of December 31, 2016 and December 31, 2015, respectively.
As of December 31, 2016 and 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):
December 31,
2016
2015
British Pounds (GBP) ........................................................................................................................
Euros (EUR) ......................................................................................................................................
Swiss Francs (CHF) ...........................................................................................................................
Japanese Yen (JPY) ............................................................................................................................
Canadian Dollars (CAD) ...................................................................................................................
33.8
8.0
—
2,464.7
32.4
31.5
3.8
0.3
274.0
—
The foreign currency exposure related to these contracts was approximately $107.5 million as of December 31, 2016 and
$55.6 million as of December 31, 2015. Unrealized gains or losses related to these dedesignated contracts are recorded in other
income (expense) 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 2017 through 2022, 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.
As of December 31, 2016 and 2015, the fair value of outstanding foreign currency exchange contracts totaled a net gain of
$11.2 million and $11.6 million, respectively.
Fair values of derivative instruments, consisting of foreign currency exchange contracts, designated as cash flow hedges (in
thousands):
Balance Sheet Location
Prepaid expenses and other current assets
Other non-current assets
Other accrued liabilities
Other non-current liabilities
Total fair value of derivative instruments designated as cash flow hedges
December 31,
2016
2015
71 $
367
(9)
(5)
424 $
3,956
5,183
—
(2)
9,137
$
$
F-17
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2016 and 2015, unrecognized gains, net of tax, of $0.7 million and $6.0 million, respectively, were
included in “Accumulated other comprehensive income” on the Company’s Consolidated Balance Sheets.
Fair values of derivative instruments, consisting of foreign currency exchange contracts, not designated as cash flow hedges (in
thousands):
Balance Sheet Location
Prepaid expenses and other current assets
Other non-current assets
Other accrued liabilities
Total fair value of derivative instruments not designated as cash flow hedges
NOTE 4 ACCUMULATED OTHER COMPREHENSIVE INCOME
December 31,
2016
2015
$
$
5,344 $
5,468
(27)
10,785 $
1,807
656
(1)
2,462
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, 2016, 2015 and 2014 (in thousands). The gross reclassification adjustments increased product revenue for all years presented.
Year Ended
December 31,
2016
2015
2014
Gross of Tax Reclassifications ........................................................................................ $
Net of Tax Reclassifications ............................................................................................ $
22,207 $
13,324 $
6,163 $
3,698 $
2,748
1,649
The following tables show the changes in Accumulated Other Comprehensive Income by component for the years ended
December 31, 2016 and 2015 (in thousands):
Year Ended December 31, 2016
Unrealized 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 ...........................................$
(8) $
8
— $
6 $
1,675 $
426
2,101 $
5,975 $
(5,294)
681 $
7,642
(4,860)
2,782
(152) $
(2,425) $
(2,571)
Year 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 ...........................................$
2,069 $
(394)
1,675 $
4,422 $
1,553
5,975 $
(335) $
1,005 $
6,503
1,139
7,642
657
12 $
(20)
(8) $
(13) $
F-18
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 (loss). The carrying amount of the
Company’s investments in available-for-sale securities are shown in the table below (in thousands):
Short-term available-for-sale securities cost ........................................................................................................ $
Short-term available-for-sale securities unrealized loss ......................................................................................
Short-term available-for-sale securities fair value ............................................................................................... $
14,939
(14)
14,925
December 31,
2015
The Company’s debt securities were investment grade and carried a long-term rating of A2/A or higher.
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,
2016
2015
156,705 $
17,264
1,915
8,683
13,395
197,962
(21)
197,941 $
83,750
7,685
11,637
10,004
11,662
124,738
(19)
124,719
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, 2016 and 2015, accounts receivable included $104.6 million and $44.2 million, respectively, due from the
U.S. Government. Of these amounts, $1.4 million and $2.2 million were unbilled as of December 31, 2016 and 2015, respectively,
based upon contractual billing arrangements with these customers. As of December 31, 2016, two non-U.S. Government customers
accounted for 24% of total accounts and other receivables. As of December 31, 2015, one non-U.S. Government customer
accounted for 18% of total accounts and other receivables.
NOTE 7 SALES-TYPE LEASE
As of December 31, 2016 and 2015, the Company had a sales-type lease with one of its customers. Under the terms of the
original agreement, the Company provided a high performance computing solution to the customer for a term of four years,
beginning at the customer’s acceptance of the system. In the second quarter of 2016, the Company delivered a second high
performance computing solution and extended the original agreement, which will now end in September 2020. The lease extension,
and delivery of the second high performance computing solution, has been accounted for as a separate sale and is not considered a
lease modification. 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.
F-19
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table shows the components of the net investment in the sales-type lease as of December 31, 2016 and
2015 (in thousands):
Total minimum lease payments to be received
Less: executory costs
Net minimum lease payments receivable
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
2016
2015
$
$
52,224 $
(10,139)
42,085
(2,352)
39,733
(31,050)
8,683 $
36,863
(7,434)
29,429
(1,108)
28,321
(18,317)
10,004
As of December 31, 2016, minimum lease payments for each of the succeeding four fiscal years were as follows (in
thousands):
2017
2018
2019
2020
Total minimum lease payments to be received
NOTE 8 INVENTORY
A summary of inventory follows (in thousands):
Components and subassemblies ........................................................................................... $
Work in process ...................................................................................................................
Finished goods .....................................................................................................................
$
$
$
13,681
13,857
14,115
10,571
52,224
December 31
2016
2015
31,695 $
39,894
16,665
88,254 $
20,806
43,071
49,778
113,655
As of December 31, 2016 and 2015, $10.5 million and $49.5 million, respectively, of finished goods inventory was located at
customer sites pending acceptance. At December 31, 2016, two customers accounted for $11.9 million of finished goods inventory
and at December 31, 2015, three customers accounted for $41.7 million of finished goods inventory.
During 2016, 2015 and 2014, the Company wrote-off $4.8 million, $0.5 million and $2.3 million, respectively, of excess and
obsolete inventory.
F-20
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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,
2016
2015
498 $
20,679
11,740
54,541
2,976
90,434
(59,814)
30,620 $
275
20,612
14,190
65,957
1,098
102,132
(71,053)
31,079
Depreciation expense on property and equipment for 2016, 2015 and 2014 was $12.5 million, $13.3 million and $12.8 million,
respectively.
NOTE 10 SERVICE SPARES, NET
A summary of service spares follows (in thousands):
Service spares ...................................................................................................................... $
Accumulated depreciation ...................................................................................................
Service spares, net ............................................................................................................... $
6,503 $
(3,480)
3,023 $
15,082
(11,992)
3,090
Depreciation expense on service spares for 2016, 2015 and 2014 was $1.5 million, $1.1 million and $1.0 million, respectively.
December 31,
2016
2015
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 ............................................................................... $
December 31
2016
2015
14,274 $
96,113
110,387
(27,258)
83,129 $
22,215
97,822
120,037
(33,306)
86,731
As of December 31, 2016 and 2015, the U.S. Government accounted for $60.3 million and $57.7 million, respectively, of total
deferred revenue. As of December 31, 2016 and 2015, 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 2016, 2015 and 2014 of $8.4 million, $5.9 million, and $5.2 million, respectively. The 2016 rent expense includes a $2.3
million lease termination fee for the Company’s St. Paul facility.
F-21
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Minimum contractual commitments as of December 31, 2016, were as follows (in thousands):
Operating
Leases
Development
Agreements
2017 ..................................................................................................................................... $
2018 .....................................................................................................................................
2019 .....................................................................................................................................
2020 .....................................................................................................................................
2021 .....................................................................................................................................
Thereafter.............................................................................................................................
Minimum contractual commitments .................................................................................... $
6,585 $
6,908
6,475
5,857
5,910
26,720
58,455 $
16,002
2,531
40
15
—
—
18,588
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, 2016, 2015 and 2014, the Company incurred $15.6 million, $14.3 million and $12.2 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. Other than
as outlined below, none of these legal proceedings are deemed to be material to the Company’s business.
The Company is subject to patent lawsuits brought by Raytheon. The first suit was brought by Raytheon on September 25, 2015
in the Eastern District of Texas (Civil Action No. 2:15-cv-1554) asserting infringement of four patents owned by Raytheon. Two of
the asserted patents relate to computer hardware alleged to be encompassed by Cray’s current and past products, and the two
remaining asserted patents relate to features alleged to be performed by certain third-party software that Cray optionally includes as
part of its product offerings. A second suit was brought by Raytheon on April 22, 2016 in the Eastern District of Texas (Civil Action
No. 2:16-cv-423) asserting infringement of five patents owned by Raytheon. In this second suit, all five asserted patents relate to
features alleged to be performed by certain third-party software that Cray optionally includes as part of its product offerings. Trial in
the first action is currently scheduled to commence in March 2017 and trial in the second action is currently scheduled to commence
in October 2017. The Company is vigorously defending these actions. The probable outcome of either litigation cannot be
determined, nor can the Company estimate a range of potential loss. Based on its review of the matters to date, the Company
believes that it has valid defenses and claims in each of the two lawsuits. As a result, the Company considers the likelihood of a
material loss related to these matters to be remote.
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, 2016, the Company had U.S. federal net operating loss carryforwards of approximately $90.2 million
and U.S. federal research and development tax credit carryforwards of approximately $25.2 million. Upon the adoption of ASU
2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in March
of 2016, the Company recognized $16.6 million in deferred tax benefits from approximately $47.4 million of federal net operating
losses attributable to share-based income tax deductions that exceeded amounts that had been recognized for financial reporting
purposes. These deferred tax benefits were recorded as a cumulative-effect adjustment to accumulated deficit. The federal net
operating loss carryforwards will expire from 2019 through 2036, and the federal research and development tax credits will expire
from 2021 through 2036 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, 2016, the Company had approximately $6.2 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 2017 to 2026.
F-22
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income before income taxes consisted of the following (in thousands):
United States ........................................................................................................ $
International .........................................................................................................
Total ................................................................................................................... $
Year Ended December 31,
2016
2015
2014
2,648 $
7,273
9,921 $
38,362 $
4,415
42,777 $
5,710
3,987
9,697
The tax provision (benefit) for income taxes related to operations consisted of the following (in thousands):
Current provision (benefit):
Federal ............................................................................................................... $
State ...................................................................................................................
Foreign ..............................................................................................................
Total current provision ......................................................................................
3 $
725 $
(279)
1,443
1,167
1,389
1,023
3,137
230
(392)
740
578
Deferred provision (benefit):
Year Ended December 31,
2016
2015
2014
Federal ...............................................................................................................
State ...................................................................................................................
Foreign ..............................................................................................................
Total deferred provision (benefit) ......................................................................
Total provision (benefit) for income taxes ........................................................... $
(53,242)
(885)
923
(53,204)
(52,626)
The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate as follows (in
12,198
(52)
(43)
12,103
15,240 $
(2,127)
416
(150)
(1,861)
(694) $
thousands):
Income tax provision at statutory rate ................................................................... $
State taxes, net of federal benefit ..........................................................................
Foreign income taxes ............................................................................................
Additional deductions from share-based compensation .......................................
Deemed dividends for U.S. income tax purposes .................................................
Nondeductible expenses .......................................................................................
Disallowed compensation .....................................................................................
Audit settlement ....................................................................................................
Research and development tax credit ...................................................................
Effect of change in valuation allowance on deferred tax assets ............................
Effective income tax provision (benefit) .............................................................. $
Year Ended December 31,
2016
2015
2014
3,472 $
89
(407)
(1,815)
329
231
331
(297)
(2,470)
(157)
(694) $
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)
F-23
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 development 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 development 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,
2016
2015
4,127 $
511
14,742
—
—
5,402
24,782
(819)
23,963
(4,846)
(4,846)
19,117 $
8,188 $
28,241
38,348
106
7,016
7,537
89,436
(7,908)
81,528
(13,728)
(421)
(883)
(15,032)
66,496 $
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
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 an income tax benefit of $0.7 million during the year ended December 31, 2016, income tax expense
of $15.2 million during the year ended December 31, 2015 and an income tax benefit of $52.6 million during the year ended
December 31, 2014. The difference between the income tax provision at the statutory rate and the Company’s effective income tax
benefit for the year ended December 31, 2016 was the result of research and development tax credits and additional tax deductions
from share-based compensation, sometimes referred to as excess tax benefits, partially offset by state taxes, non-deductible expenses
and other permanent items. Excess tax benefits arise when tax deductions recognized by the Company with respect to share-based
compensation exceed the compensation cost attributable to share-based compensation that was recognized in the Company’s
consolidated financial statements. 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
F-24
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 Company’s decision to partially reduce, in the amount of $55.7 million, the valuation allowance held against the
Company’s U.S. deferred tax assets during the year ended December 31, 2014 was based upon an evaluation of all available positive
and negative evidence, known business risks and industry trends. The Company considers its actual results over several years to
have stronger weight than other more subjective indicators, including forecasts, when considering whether or not to establish or
reduce a valuation allowance on deferred tax assets and believes that its ability to forecast results significantly into the future is
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 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 Statements of Operations when that occurs.
The valuation allowance on deferred tax assets decreased by $0.8 million, $0.7 million and $67.7 million in 2016, 2015 and
2014, 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.
As of December 31, 2016, undistributed earnings, in the approximate amount of $14.5 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, 2016, the Company’s foreign subsidiaries held cash
in the amount of $14.3 million.
The following table summarizes changes in the amount of the Company’s unrecognized tax benefits for uncertain tax positions
for the three years ended December 31, 2016, 2015 and 2014 (in thousands):
Balance at December 31, 2013 ............................................................................................................................$
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 ............................................................................................................................$
Increase related to prior year income tax positions ..............................................................................................
Decrease related to prior year income tax positions ............................................................................................
Increase related to current year income tax positions ..........................................................................................
Balance at December 31, 2016 ............................................................................................................................$
202
5,059
369
5,630
151
433
6,214
53
(365)
565
6,467
F-25
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The balance of unrecognized tax benefits as of December 31, 2016 was $6.5 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 2011 and for
periods before 2015 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 2013, although in such
jurisdictions net operating loss and tax credit carryforwards generated in a year are subject to examination and adjustment for at least
three years following the year in which such losses or credits are actually used to offset taxable income.
Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively. Such
amounts were not material for 2016, 2015 and 2014.
NOTE 14 CREDIT FACILITIES
As of December 31, 2016, the Company had a $50.0 million revolving line of credit, or Credit Facility, with Wells Fargo
Bank, National Association, designed to be used for general corporate purposes, including working capital requirements and capital
expenditures. The Credit Facility also supports 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.
Any 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 and restricts its ability to incur additional indebtedness, pay dividends or distributions, create liens
on assets, and engage in certain other activities. The Company was in compliance with all of its financial covenants as of the end of
each quarter for the year ended December 31, 2016. The Credit Facility matures in December 2017.
The Company made no draws and had no outstanding cash borrowings on the credit facility as of December 31, 2016.
As of December 31, 2016, the Company had $3.3 million in USD equivalent value in outstanding letters of credit and $1.7
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, 2016, 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 indicated years ended December 31:
Risk-free interest rate .............................................................................
Expected dividend yield ........................................................................
Volatility ................................................................................................
Expected life (in years) ..........................................................................
Weighted average Black-Scholes value of options granted ................... $
2016
2015
2014
1.12%
—%
50.92%
4.0
1.31%
—%
50.55%
4.0
13.16
$
11.23
$
1.22%
—%
52.43%
4.0
11.16
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not
anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is based
F-26
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2016, 2015 and 2014
were 8.0%, 8.0%, and 8.3%, 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.
A summary of the Company’s stock option activity and related information follows:
Outstanding at January 1, 2014 ..............................................................
Granted ................................................................................................
Exercised .............................................................................................
Canceled and forfeited .........................................................................
Outstanding at December 31, 2014 ........................................................
Granted ................................................................................................
Exercised .............................................................................................
Canceled and forfeited .........................................................................
Outstanding at December 31, 2015 ........................................................
Granted ................................................................................................
Exercised .............................................................................................
Canceled and forfeited .........................................................................
Outstanding at December 31, 2016 ........................................................
Exercisable at December 31, 2016.........................................................
Available for grant at December 31, 2016 .............................................
Options
2,078,069 $
323,900
(411,352)
(59,627)
1,930,990
307,450
(229,118)
(60,847)
1,948,475
240,075
(168,825)
(30,588)
1,989,137
1,486,211
3,600,599
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual
Term (Years)
9.29
26.92
7.50
18.45
12.34
27.86
9.99
20.00
14.83
32.65
12.57
26.60
16.99
12.98
5.8
4.8
Outstanding and exercisable options by price range as of December 31, 2016, were as follows:
Range of Exercise
Prices per Share
$ 0.00 - $ 10.00
$ 10.01 - $ 20.00
$ 20.01 - $ 30.00
$ 30.01 - $ 42.40
$ 0.00 - $ 42.40
Outstanding Options
Exercisable Options
Number
Outstanding
771,511
390,595
560,639
266,392
1,989,137
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
3.1 $
5.9 $
7.8 $
9.3 $
5.8 $
5.58
15.22
26.44
32.73
16.99
Number
Exercisable
771,511 $
364,408 $
304,918 $
45,374 $
1,486,211 $
Weighted
Average
Exercise
Price
5.58
14.90
26.18
34.68
12.98
As of December 31, 2016, there was $13.8 million of aggregate intrinsic value of outstanding stock options, including $13.8
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 2016 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, 2016. This amount changes, based on the fair
F-27
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
market value of the Company’s stock. Total intrinsic value of options exercised was $4.0 million, $5.0 million, and $10.2 million for
the years ended December 31, 2016, 2015 and 2014, respectively.
Restricted Stock: During 2016, 2015 and 2014, the Company issued an aggregate of 9,893, 45,175, and 463,734 shares of
restricted stock, respectively, to certain directors, executives and other employees. The grant date fair value of these grants was
approximately $0.3 million, $1.4 million, and $13.3 million for 2016, 2015 and 2014, 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.
A summary of the Company’s unvested restricted stock grants and changes during the indicated years ended December 31 is as
follows:
Service Vesting Restricted
Shares
Performance Vesting Restricted
Shares
Total Restricted Shares
Weighted
Average
Grant Date
Fair Value
12.05
28.74
15.39
11.14
19.48
30.44
24.00
15.34
24.12
34.86
24.73
22.14
26.43
Shares
1,127,700 $
463,734
(134,653)
(423,179)
1,033,602
45,175
(48,998)
(513,336)
516,443
9,893
(18,685)
(250,849)
256,802
Weighted
Average
Grant Date
Fair Value
15.94
Shares
1,094,000 $
—
(277,000)
—
817,000
—
(219,000)
(12,500)
585,500
—
(72,000)
—
513,500
—
17.49
—
15.41
—
15.60
28.20
15.07
—
15.57
—
15.00
Weighted
Average
Grant Date
Fair Value
13.97
28.74
16.80
11.14
17.68
30.44
17.14
15.64
19.31
34.86
17.46
22.14
18.81
Shares
2,221,700 $
463,734
(411,653)
(423,179)
1,850,602
45,175
(267,998)
(525,836)
1,101,943
9,893
(90,685)
(250,849)
770,302
Outstanding at January 1, 2014 ...........
Granted .............................................
Forfeited ...........................................
Vested ...............................................
Outstanding at December 31, 2014 .....
Granted .............................................
Forfeited ...........................................
Vested ...............................................
Outstanding at December 31, 2015 .....
Granted .............................................
Forfeited ...........................................
Vested ...............................................
Outstanding at December 31, 2016 .....
The estimated forfeiture rates applied to the Company’s service vesting restricted stock grants during the years ended
December 31, 2016, 2015 and 2014 were 8.0%, 8.0% and 6.3%, respectively. The aggregate fair value of restricted shares vested
during 2016, 2015 and 2014 was $7.7 million, $14.2 million, and $11.9 million, respectively. Performance vesting restricted shares
totaling 476,000 will expire unvested at the time of filing this Form 10-K as the criteria for vesting was not satisfied during the
performance period. This will also have the impact of reducing the number of shares of outstanding Common Stock by 476,000
shares. The remaining performance vesting restricted shares are eligible to vest in 2017. No compensation cost has been recorded for
these grants.
Restricted Stock Units: During 2016 and 2015, the Company issued an aggregate of 244,160 and 984,850 restricted stock
and performance vesting restricted stock units, respectively, to certain executives and other employees. The grant date fair value of
these grants was approximately $8.0 million and $29.5 million for 2016 and 2015, respectively. There were no restricted stock units
issued or outstanding as of December 31, 2014. 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.
F-28
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the Company’s unvested restricted stock unit grants and changes during the indicated years ended December 31
is as follows:
Service Vesting Restricted
Stock Units
Performance Vesting
Restricted Stock Units
Total Restricted Stock Units
Outstanding at January 1, 2015 .........................
Granted .......................................................
Forfeited .....................................................
Vested .........................................................
Outstanding at December 31, 2015....................
Granted .......................................................
Forfeited .....................................................
Vested .........................................................
Outstanding at December 31, 2016....................
Weighted
Average
Grant Date
Fair Value
—
29.78
30.48
—
29.75
31.89
29.44
29.57
30.89
Units
— $
285,550 $
(12,500) $
— $
273,050 $
220,575 $
(7,700) $
(60,204) $
425,721 $
Units
— $
699,300 $
(66,600) $
— $
632,700 $
23,585 $
— $
— $
656,285 $
Units
Weighted
Average
Grant Date
Fair Value
—
30.04
30.04
—
30.04
42.65
—
—
— $
984,850 $
(79,100) $
— $
905,750 $
244,160 $
(7,700) $
(60,204) $
30.49 1,082,006 $
Weighted
Average
Grant Date
Fair Value
—
29.97
30.11
—
29.95
32.93
29.44
29.57
30.65
The estimated forfeiture rates applied to the Company’s service vesting restricted stock unit grants during the years ended
December 31, 2016 and 2015 were 8.0% and 8.0%, respectively. The aggregate fair value of restricted stock units vested during
2016 was $1.9 million. 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 $43.1 million of total
unrecognized compensation cost related to unvested stock options, unvested restricted stock and unvested restricted stock units as of
December 31, 2016. Excluding the $27.7 million of unrecognized compensation cost related to unvested restricted stock and
unvested restricted stock units that are subject to performance measures that are currently not considered “probable” of attainment,
unrecognized compensation cost is $15.4 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 2.5 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 indicated
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 ............................................................ $
2016
2015
2014
320 $
211
3,113
3,710
3,797
11,151 $
254 $
276
3,770
3,047
4,006
11,353 $
229
255
2,721
3,152
4,007
10,364
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
F-29
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
end of each offering period. As of December 31, 2016, 2015 and 2014, an aggregate of 1,098,085, 1,070,343 and 1,043,228 shares,
respectively, had been issued under the ESPP.
NOTE 16 BENEFIT PLANS
401(k) Plan
For the three years ended December 31, 2016, 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 2016, 2015 and 2014 Company match
expense was $2.9 million, $2.6 million and $1.6 million, respectively.
Pension Plan
The Company’s German subsidiary maintains a defined benefit pension plan. At December 31, 2016, the excess of plan assets
over the projected benefit obligation of $2.0 million was $0.2 million. At December 31, 2015, the excess of plan assets over the
projected benefit obligation of $2.1 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.
Storage and Data Management
Storage and Data Management includes Cray Data Warp and Sonexion as well as other third-party storage products and their
ongoing maintenance and 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 are the Company’s analytics business and Custom Engineering.
F-30
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents revenues and gross margin for the Company’s operating segments for the indicated years ended
December 31 (in thousands):
2016
2015
2014
Revenue:
Supercomputing ................................................................................................ $
Storage and Data Management ..........................................................................
Maintenance and Support ..................................................................................
Engineering Services and Other ........................................................................
Elimination of inter-segment revenue ...............................................................
Total revenue
Gross Profit:
$
510,403 $
89,438
107,795
29,968
(107,795)
629,809 $
581,733 $
112,862
97,091
30,094
(97,091)
724,689 $
Supercomputing ................................................................................................ $
Storage and Data Management ..........................................................................
Maintenance and Support ..................................................................................
Engineering Services and Other ........................................................................
Elimination of inter-segment gross profit ..........................................................
Total gross profit .................................................................................................. $
173,245 $
34,125
43,147
12,845
(43,147)
220,215 $
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
Revenue and cost of revenue is the only discrete financial information the Company prepares for its segments. Other financial
results or assets are not separated by segment.
The Company’s geographic operations outside the United States include sales and service offices in 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, 2016:
Product revenue ................................................................................................... $
Service revenue .................................................................................................... $
Long-lived assets ................................................................................................. $
For the year ended December 31, 2015:
Product revenue ................................................................................................... $
Service revenue .................................................................................................... $
Long-lived assets ................................................................................................. $
For the year ended December 31, 2014:
Product revenue ................................................................................................... $
United
States
All
Other
Countries
251,317 $
248,115 $
88,208 $
39,933 $
42,169 $
36,555 $
373,494 $
227,800 $
88,956 $
39,014 $
34,439 $
23,238 $
253,930 $
206,818 $
Service revenue .................................................................................................... $
Long-lived assets ................................................................................................. $
72,434 $
41,378 $
28,424 $
36,206 $
Total
499,432
130,377
76,488
601,294
123,395
62,252
460,748
100,858
77,584
Long-lived assets as of December 31, 2016, 2015 and 2014, included $31.1 million, $18.3 million and $31.1 million,
respectively, of 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 $296.9 million, $338.5 million and $272.0 million in 2016, 2015 and 2014,
respectively. In 2016, one non-U.S. Government customer accounted for 10% of total revenue. In 2015 and 2014, no non-U.S.
F-31
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Government customers accounted for more than 10% of total revenue. In general, concentrations of revenue by customer encompass
all segments. In 2016, the United Kingdom accounted for 17% of total revenue. In 2015, no foreign countries 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
Details for the Company’s net research and development expenses for the indicated 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 .............................................................. $
NOTE 19 INTEREST INCOME (EXPENSE)
2016
130,006 $
(12,621)
(5,255)
112,130 $
2015
126,060 $
(16,515)
(12,982)
96,563 $
2014
104,797
(7,713)
(3,036)
94,048
The detail of interest income (expense) for the indicated years ended December 31 follows (in thousands):
Interest income .................................................................................................... $
Interest expense ...................................................................................................
Net interest income .............................................................................................. $
2,120 $
27
2,147 $
1,465 $
(57)
1,408 $
643
(137)
506
2016
2015
2014
Interest income is earned by the Company on cash and cash equivalents, investment balances and the investment in sales-type
lease.
NOTE 20 QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly financial information for the two years ended December 31, 2016. 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)
2016
2015
6/30
3/31
9/30
12/31
64,074
36,161
53,850
23,601
65,587
39,962
For the Quarter Ended
Revenue ............................... $ 105,549 $ 100,235 $ 77,451 $ 346,574 $
Cost of revenue ....................
Gross profit ..........................
Research and development,
net ........................................
Sales and marketing .............
General and administrative ..
Net income (loss) .................
Net income (loss) per
common share, basic ............ $
Net income (loss) per
common share, diluted ......... $
29,084
15,010
7,968
(23,021)
27,399
15,380
9,019
(13,126)
25,840
16,001
7,338
(5,013)
29,807
18,502
9,728
51,775
226,083
120,491
(0.13) $
(0.13) $
(0.58) $
(0.58) $
(0.33) $
(0.33) $
1.30 $
1.27 $
6/30
9/30
3/31
79,644 $ 186,161 $ 191,413 $ 267,471
181,291
55,608
86,180
24,036
136,576 125,531
65,882
49,585
12/31
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
(0.24) $
0.15 $
0.28 $
0.51
(0.24) $
0.14 $
0.27 $
0.50
F-32
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,
2016 and 2015, 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, 2016. 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 from 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, 2016 and 2015, and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting
principles generally accepted in the United States. 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, 2016, 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 10, 2017, expressed an unqualified opinion.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
February 10, 2017
F-33
Schedule II — Valuation and Qualifying Accounts(1)
December 31, 2016
(In thousands)
Description
Year ended December 31, 2014:
Allowance for doubtful accounts
Year ended December 31, 2015:
Allowance for doubtful accounts
Year ended December 31, 2016:
Allowance for doubtful accounts
Balance at
Beginning
of Period
Charge to
Expense
Deductions (2)
Balance at
End of
Period
$
$
$
157 $
22 $
(82) $
97 $
— $
(78) $
19 $
2 $
— $
97
19
21
(1) The Company does not have any warranty liabilities.
(2) Deductions represent uncollectible accounts written off, net of recoveries.
F-34
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
Efstathios Papaefstathiou
Senior Vice President, Research and Development
Michael C. Piraino
Senior Vice President Administration,
General Counsel and Corporate Secretary
Steven L. Scott
Senior Vice President and Chief Technology Officer
CRAY ANNUAL MEETING
JUNE 13, 2017 – 3:00 P.M. PT
901 Fifth Avenue
Fifth Avenue Conference Room
Seattle, WA 98164
CORPORATE HEADQUARTERS
Cray Inc.
901 Fifth Avenue, Suite 1000
Seattle, WA 98164
206-701-2000
206-701-2500 fax
OTHER PRINCIPAL OFFICES
1050 Lowater Road
Chippewa Falls, WI 54729
2131 Lindau Lane, Suite 210
Bloomington, 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
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
• Lost stock certificates
• Transfer of stock to another person
• Additional administrative services
• Account consolidation
Computershare Inc. Shareholder Relations
P. O. Box 30170
College Station, TX 77842-3170
or
211 Quality Circle, Suite 210
College Station, TX 77845
www.computershare.com/investor
Shareholder online inquiries
https://www-us.computershare.com/investor/Contact
Telephone: 877-522-7762
TDD for Hearing Impaired: 800-490-1493
International Shareholders: 201-680-6578
TDD International Shareholders: 781-575-2394
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
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,
as amended, 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 and estimates 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 and acceptances for Cray products in any particular periods at expected levels or with the anticipated timing, the risk
that the segments of the high-end of the supercomputing market that Cray targets do not recover from the current downturn as early or as completely as expected or at all, the risk
that government funding for research and development projects is less than expected, the risk that new third-party processors and other components for our systems are not
available with the anticipated performance, timing or pricing, 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 cannot be corrected within the time for planned acceptances, 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 is not able to successfully sell products and services in the big data, artificial intelligence and
commercial markets as expected or at all, the risk that the expense to address Cray systems at customer sites that have issues with third-party components or with Cray components
is material, 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, 2016, and from time to time
in other reports filed by Cray with the U.S. Securities and Exchange Commission. You should not rely unduly on these forward-looking statements, which apply only as of the date
of this Annual Report. Cray undertakes no duty to publicly announce or report revisions to these statements as new information becomes available that may change Cray’s
expectations.
CRAY, and the stylized CRAY mark, SONEXION and URIKA are registered trademarks of Cray Inc. in the United States and other countries. The CS and XC families of
supercomputers, CS-Storm, DataWarp, Chapel and other Cray technologies are all trademarks of Cray Inc. Other trademarks used in this Annual Report are the property of their
respective owners.