Fellow Shareholders,
Cray customers truly do change the world. Every year it’s an honor to partner with these visionaries and witness how
they combine computation and creativity to produce transformative work. You’ll find a few examples of these amazing
scientific and engineering endeavors, and the researchers behind them, on this report’s inside front cover. The discoveries
represented range from treating bone fractures to capturing energy from ocean waves to designing jet engines to finding cures
for memory-related diseases. What binds these diverse fields together is the scope of their questions. They’re continually asking
“what if” because with Cray systems their problem-solving potential is expanded. We’re proud to help our customers keep
asking the next, bigger question. In turn, their vision pushes us to keep asking bigger questions of ourselves as we work to
support our customers’ need for high-performance technologies.
As we reflect on 2017, our story for the year has two distinct narratives. The first is about continued difficult
conditions in our core market. This drove weaker revenue for the year and produced correspondingly disappointing financial
results — something we are working hard to improve upon in the coming years. We began seeing signs of a slow-down in the
high-end of supercomputing in 2016 as new sales opportunities slowed compared to the previous years. That slow-down
continued into 2017, impacting each of our product groups as well as most of our target geographies. But our story is primed
for a rebound. While this market downturn has been longer and more pronounced than we’ve seen in previous cycles, the long-
term demand drivers for our technology and solutions remain intact, our business is well positioned for growth, and we believe
the market will rally over the next couple of years.
Our competitive position in the market remains strong, as evidenced by a few statistics. We hold over a quarter of the
top end of the Top500 list, an industry list of most of the fastest systems in the world, with 29 systems in the top 100. Our
leadership in the worldwide weather forecasting and climate research market continues to expand — more than 75 percent of
the world’s global modeling centers now run on Cray systems. More than 12 percent of our revenue in 2017 came from
commercial customers, representing a significant increase over 2016 on a percentage basis. We also completed several large
installations throughout the year and won significant awards across all our product lines and geographies.
The second narrative is about growth and the opportunity to drive higher revenue in the coming years. We are
beginning to see a pickup of market activity, a welcome sign after the last couple of years. Customer plans are beginning to
firm, funding is coming together, and new opportunities are moving through their acquisition processes. For Cray, our
differentiated technology leads our efforts to respond here, empowering innovative products and services for each of our target
markets, and we remain focused on growing faster than the market rate in each of them.
Over the course of the year, we also continued to expand in our three strategic growth areas — big data analytics,
high-performance storage, and artificial intelligence (AI). In fact, some of our most exciting wins in 2017 were in these areas.
For example, Samsung’s Strategy and Innovation Center chose our CS-Storm for use in its AI research, the Alan Turing
Institute, the UK’s national institute for data science, selected the Urika-GX for its analytics work, and in storage our list of
U.S. and international government customers continues to grow.
One of our most significant achievements of 2017 was the strategic partnership we formed with Seagate, where we
brought on Seagate’s ClusterStor storage business and combined it with our own efforts. We completed the transaction in the
third quarter and have made excellent progress on the integration. Given the phenomenal growth of data, storage is becoming
more important in our market and the addition of the ClusterStor product line means we can offer a more complete line of
storage solutions to our customers.
Turning to our other products, leadership at the high-end of the market continues to drive us. What’s evolving is how
our customers are using supercomputing. Whereas several years ago their focus may have been entirely on solving the largest
scientific problems as quickly as possible, the kinds of questions our customers are now asking are getting broader. Along with
simulation and modeling, they’re now weaving in big data, machine learning, and deep learning algorithms. These questions
are all converging into common problems and workflows that need an integrated platform and our products and roadmap are
well positioned to respond to these growing demands.
For the supercomputing market, the Cray XC line of supercomputers and the Cray CS line of highly flexible clusters
continue to lead the market for performance, efficiency, and scalability. What makes them so effective at traditional workloads
— the combination of diverse processing technologies, fast system interconnects, and Cray software expertise in a unified
architecture — is also what makes them able to handle the new demands of these converged workloads. Our contract wins this
year provide ample evidence. The GW4 Alliance and the UK Met Office selected us to deliver a system for the unique purpose
of evaluating multiple advanced architectures and comparing different CPUs and GPUs against different applications. We
delivered both XC and CS systems to New Zealand’s National Institute of Water and Atmospheric Research for a broad range
of uses — weather and climate research, numerical weather prediction, data analytics, and general scientific research.
As we discuss converging workloads, AI warrants its own focus. It already commands a great deal of media attention
and we believe its importance will continue to grow. In 2017, we launched the Cray Urika-XC analytics software suite which
brings graph analytics, deep learning, and big data analytics tools to the XC series of supercomputers. What that means is users
have the critical ability to run analytics and AI workloads alongside scientific modeling and simulations — and it points again
to the convergence of HPC and data-intensive workloads. In response to the growth in AI, we also launched our Cray Accel AI
fast start solutions. These are configurations of our Cray CS-Storm supercomputer coupled with software specifically meant to
jumpstart our customer’s efforts to scale up machine and deep learning. Several notable wins in 2017 underscore that customers
have confidence in our technology leadership. For example, leading energy, manufacturing, and financial services companies
chose CS-Storm systems for their deep learning work as did multiple government customers.
We are also expanding our go-to-market strategies as we explore new ways to deliver the value of a Cray
supercomputer and drive growth. Several partnerships we formed in 2017 highlight these efforts. Partnerships with cloud
computing providers Microsoft Azure and Markley are improving customer access to Cray technology. Through Microsoft,
customers can access dedicated, customized, and fully managed Cray systems in an Azure datacenter. This is a unique offering
in the public cloud today. With Markley, our supercomputing technologies are also available as a hosted offering. Additional
efforts include agreements with solution providers, such as Mark III Systems, to deliver solutions that leverage our product
portfolio, and a partnership with big data company Phizzle on a data aggregation solution.
Turning to corporate transitions, we were pleased to welcome Catriona Fallon to our board of directors. She brings
many years of technology industry leadership experience to Cray, having held executive-level positions with companies such as
Itron, Silver Springs Networks, Cognizant, HP, and Marin Software. Ms. Fallon replaces Marty Homlish who stepped down
due to the growing demands for his time from his new company.
As we turn to 2018 and beyond, our focus remains the same — to win new business and expand our presence in the
big data and commercial markets. The high-end supercomputing market looks to be on track to begin to rebound in 2018, and
there are long-term, large, exascale-level opportunities in the coming years. Our supercomputing expertise, our focus on how
workloads are changing and converging, the highly-differentiated solutions we’ve developed, the expanded delivery methods
we’re establishing for our technologies, and the R&D investment we continue to make in developing highly adaptable and
scalable solutions puts us in an excellent position to capitalize on the coming growth opportunities.
On behalf of our board of directors and management, I would like to thank all of our customers, partners, employees,
and shareholders for your continued 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
For the Fiscal Year Ended December 31, 2017
(cid:133)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to .
Commission File Number: 000-26820
CRAY INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington
(State or Other Jurisdiction of
Incorporation or Organization)
901 Fifth Avenue, Suite 1000
Seattle, Washington
(Address of Principal Executive Offices)
93-0962605
(I.R.S. Employer
Identification No.)
98164
(Zip Code)
Registrant’s telephone number, including area code:
(206) 701-2000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes (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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:58)(cid:3)
Non-accelerated filer (cid:133) (Do not check if a smaller reporting company)(cid:3)
Accelerated filer
(cid:133)
Smaller reporting company (cid:133)
Emerging growth company (cid:133)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:59)
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2017, was approximately
$730,642,233 based upon the closing price of $18.40 per share as reported on June 30, 2017, on The Nasdaq Global Market.
As of February 13, 2018, there were 40,475,586 shares of Common Stock issued and outstanding.
Portions of the Proxy Statement to be delivered to shareholders in connection with the registrant’s Annual Meeting of Shareholders to be
held on or around June 12, 2018, are incorporated by reference into Part III.
________________
DOCUMENTS INCORPORATED BY REFERENCE
CRAY INC.
FORM 10-K
For Fiscal Year Ended December 31, 2017
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 URIKA are registered trademarks of Cray Inc. in the United States and other countries. The CS and XC
families of supercomputers, Chapel, ClusterStor, CS-Storm, DataWarp and other Cray technologies are all trademarks of
Cray Inc. This annual report on Form 10-K contains additional trade names, trademarks, and service marks of other
companies that 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,”
“continue,” “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 the effects of the acquisition of
Seagate’s ClusterStor line of business; any statements regarding technological developments or trends; any statements
regarding future research and development or co-funding for such efforts; any statements regarding future expansions of our
facilities and offices; any statements regarding future market and economic conditions; any statements regarding the expected
vesting of our performance-based equity awards; and any statements of assumptions underlying any of the foregoing. These
forward-looking statements are subject to the safe harbor created by Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended (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 II and other sections of this report and our other filings with the U.S. Securities
and Exchange Commission (SEC). 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, except as otherwise required by law.
Item 1. Business
General
PART I
For over 40 years we have been developing highly advanced computing solutions for the world’s most complex science,
engineering and analytics challenges. Ever since we introduced the first Cray supercomputer in 1976, our technologies have
helped solve today’s problems and made tomorrow’s questions possible. We exist to provide the right tools to the world’s
visionaries to help them solve questions they need answered.
We focus on designing, developing, manufacturing, marketing and servicing computing products that magnify and enhance
human capital, foster innovation and create competitive advantages. That means our products are aimed primarily at the high-end
of the high performance computing (HPC) and data analytics and artificial intelligence (AI) markets - the segments populated by
the pioneers, executives and entrepreneurs leading their industries in both the public and private sectors. These products include
compute systems commonly known as supercomputers, as well as storage, data analytics and AI solutions. We offer them
individually, integrated into a complete solution or hosted in the cloud, depending on a customer’s need. We also provide related
software and system maintenance, support, and engineering services.
We provide solutions based on four main models: (1) tightly integrated supercomputing designed throughout for scalability
and sustained performance; (2) customizable cluster supercomputing based on highest-performance industry-standard
components; (3) robust high-performance storage solutions; and (4) integrated solutions for graph analysis, large-scale analytics
and AI applications.
Close customer partnerships are fundamental to our business. The questions driving our customers’ work inform our product
direction and, in turn, our products combined with our customer engagement enable users to ask the next, more complex
questions. To ensure customer success, we also provide customized service from installation to 24x7 onsite support. Our
customers include domestic and foreign government and government-funded entities, academic institutions and commercial
companies.
Our continuing strategy is to gain market share by extending our technology leadership and differentiation and expanding
our share and addressable market in areas where we can leverage our experience and technology, such as in AI applications and
data analytics. Underpinning this strategy is our focus on understanding our customers’ needs and building products that
continually extend their capabilities.
Overview
Huge growth in data volumes and data complexity, the development of advanced algorithmic techniques, and increased
time-to-value expectations are driving the need for supercomputing-class architectures. We believe that our experience building
some of the largest supercomputers in the world has positioned us to address the data analytics and emerging AI markets with
products that apply supercomputing technologies to solve the most challenging use cases at scale.
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 increased productivity; and
very high levels of sustained performance on real applications. We achieve this by partnering with users to understand what is
limiting them and then designing and integrating supercomputers that help clear those obstacles. Our systems combine highly
capable processors, high-speed interconnect technology, and innovative packaging to address increased thermal requirements
driven by density and processor power requirements, upgradability, energy efficiency and system reliability. In addition, our
robust, HPC-optimized software environment enhances performance, productivity and manageability at supercomputing scale.
Our storage and data management products include integrated data storage solutions designed to support systems requiring
the highest performance requirements needed for supercomputing and data-intensive workloads. These solutions leverage years
of experience delivering high-performance parallel storage and file systems to leading-edge customers. With our storage
solutions, users can also rapidly deploy highly scalable and extremely fast file systems that integrate with supercomputer and
cluster computing solutions from both Cray and third-party HPC vendors.
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Products, Services and Customer Support
We concentrate on building product solutions in two major markets: the supercomputing portion of the HPC market and big
data, including storage and AI solutions. We also provide related software and system maintenance, support, and engineering
services that leverage our intimate understanding of our customers and their requirements.
Cray Supercomputing Systems
Our “Adaptive Supercomputing” vision has expanded the concept of heterogeneous computing to a fully integrated view
of hardware and software supporting multiple processing technologies and diverse workloads.
This approach means our supercomputers integrate diverse technologies into a unified architecture enabling customers to
match the computational solution to their desired outcome. Our Cray XC series supercomputers, including the Cray XC40 and
Cray XC50 supercomputers, provide significantly higher sustained performance on challenging applications that require the
highest levels of scaling, with substantial performance improvements over competing solutions. Our Cray CS series of cluster
supercomputer solutions, including the Cray CS500 and Cray CS-Storm systems, emphasize flexibility, capacity, custom design
and integration for compute-intensive customer needs.
Our supercomputer systems offer a variety of benefits, including:
•
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•
•
•
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superior price-performance compared to other supercomputer systems, cluster computing solutions, and traditional
cloud computing solutions;
productivity, quality, reliability and resiliency at the highest scale;
scalability to the world’s fastest supercomputers for HPC, analytics and AI workloads leveraging the innovative Aries
network;
support for open standards: Linux-based operating systems, containers, open file systems (e.g., Lustre), open
programming models (e.g., MPI, PGAS, shared memory, OpenMP and OpenACC), popular programming languages
such as Python, Scala and R, traditional HPC languages such as Fortran, C and C++, new languages such as Chapel,
big data environments (Apache Spark and distributed Dask) and machine learning frameworks (TensorFlow and
BigDL);
flexible and customizable 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; and
the Cray service experience, which 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, the increasing diversity of processor
architectures, 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. It
provides extreme scale, sustained performance, and heterogeneous computational resources through the combination of processor
options, including Intel Xeon Scalable processors and the Cavium ThunderX2 Arm processor, the Aries interconnect and its
flexible and unique Dragonfly network topology, our robust and fully-integrated software environment and innovative power and
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cooling technologies. In addition, the XC series includes Intel Xeon Phi processors and NVIDIA Tesla graphics processor units
(GPU).
The Cray XC series supercomputer utilizes the Cray Linux Environment, a suite of high-performance software which has
been enhanced and hardened over more than a decade on our 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 XC series system also includes our powerful compiler, runtime and related software which leverages the
underlying hardware components. Users have access to a variety of carefully optimized applications on the XC series system,
including Fortran and C++ applications, applications written in languages like Python, Scala as well as 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 container technologies familiar to cloud and enterprise application
developers. Additionally, XC customers can run analytics and AI workloads alongside modeling and simulation workloads, using
Urika-XC, familiar system tools and schedulers.
The Cray XC50 supercomputer supports the newest generation of CPU and GPU processors - Intel Xeon Scalable
processors, Cavium ThunderX2 processors, NVIDIA Tesla P100 PCIe GPUs and Intel Xeon Phi - coupled with the Aries network
and Cray’s HPC-optimized software stack including the Cray Linux Environment and Cray Programing Environment, to deliver
our fastest system with peak system performance of 500 petaflops (PF) and 1 PF in a single cabinet.
The Cray XC50-AC air-cooled supercomputer, supporting NVIDIA Tesla P100 PCIe GPUs, Intel Xeon Scalable processors
and Arm-based ThunderX2 processors, currently is capable of delivering up to 236 teraflops peak performance in a 24” cabinet
with no requirement for liquid cooling or extra blower cabinets. Ideal for dedicated test, development, AI and analytics use cases,
the air-cooled XC50 system offers all of the benefits of our XC50 supercomputer in a smaller form factor.
The Cray XC40 system is designed for production supercomputing and user productivity. It offers the combined advantages
of the Aries interconnect and Dragonfly network topology, Intel Xeon multi-core and Intel Xeon Phi many-core processors,
bringing more than 125 PF of peak system performance.
Cray CS500 Cluster Supercomputer. The Cray CS500 cluster supercomputing system is a modular, highly scalable, high
availability platform designed for a broad range of workloads. It offers an energy-efficient, air-cooled architecture and comes
integrated with a comprehensive and easy to manage HPC software stack, software tools compatible with most open source and
commercial compilers, tools, schedulers and libraries. This solution supports both Cray and third-party systems management
software solutions.
Cray CS-Storm Accelerated GPU Supercomputer. The CS-Storm supercomputer is a purpose-built solution employing
NVIDIA Volta or NVIDIA Pascal GPUs in a high-density architecture to deliver industry-leading performance, density and energy
efficiency for HPC and AI applications. The Cray CS-Storm 500NX system combines an innovative architecture design that
supports up to eight GPUs connected by the NVIDIA NVLink high-speed network. The Cray CS-Storm 500GT provides
configurations that can maximize network bandwidth with up to four network links per node with up to 10 GPU or FPGA cards
per node all running at full power. These configurations are all provided with the same HPC software environment available on
the Cray CS500 cluster system. Additionally, an available analytics and AI software environment, including popular machine and
deep learning frameworks (e.g. TensorFlow, MXNet, Torch, Microsoft Cognitive Toolkit, Caffe, Caffe2 and others) makes the
Cray CS-Storm ideal for machine and deep learning training workloads. A CS-Storm supercomputer chassis may also be
incorporated within a CS500 cluster supercomputer. The software stack, programming environment and management
infrastructure are shared, making such integration seamless.
Cray Analytics and AI Products
Cray Urika-XC Analytics and AI Software Suite. The Cray Urika-XC software suite extends the use of the Cray XC series
supercomputer to the world of big data analytics and AI. It includes the widely used Apache Spark cluster framework for big data
processing, popular Python-based tools (Anaconda, distributed Dask), and open source deep learning frameworks (BigDL and
TensorFlow) optimized to take advantage of the performance and scale of the XC series.
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Google’s widely used TensorFlow library for machine learning is enhanced with the Cray Programming Environment
Machine Learning Plugin - a Cray innovation delivering highly efficient scaling. By leveraging the Aries interconnect and
eliminating many of the mundane administrative tasks required for distributed deep learning, data scientists can train neural
networks at scale on an XC supercomputer - leveraging either CPUs or GPUs to more than 500 nodes. Finally, the Urika-XC
software suite includes an implementation of the world’s most scalable graph database - the Cray Graph Engine. With the Cray
Graph Engine, customers can tackle multi-terabyte datasets comprised of billions of objects to uncover hidden relationships in
even the noisiest of data. It can run in conjunction with open analytics tools, enabling users to build complete end-to-end analytics
workflows and avoid unnecessary data movement.
Cray Urika-GX Platform. The Cray Urika-GX platform is architected for production-class big data analytics workloads. It
comes pre-integrated with Apache Hadoop and Apache Spark frameworks as well as Cray’s high-performance Cray Graph
Engine. The Cray 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.
Cray Storage and Data Management Products
Cray ClusterStor Storage Systems. Our flagship storage product line, the Cray ClusterStor HPC storage system, embeds the
Lustre parallel file system and other software in an optimal configuration to reduce deployment time and total cost of ownership
while increasing reliability, capacity and performance. ClusterStor systems offer an optimal combination of modular scaling
capacity from terabytes to petabytes and sustained input/output (I/O) performance from several gigabytes per second to over one
terabyte per second in a single file system. ClusterStor 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. Together with ClusterStor storage, we offer storage management software.
Cray DataWarp Applications Accelerator. Our DataWarp technology addresses a key problem experienced by
supercomputing customers: disk-based storage I/O has not kept up with improvements in processor performance 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 software 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 increased the I/O bandwidth of their production supercomputing systems by
over two times, enhancing their ability to make scientific discoveries faster.
Engineering and Customer Support
Custom Engineering. When a customer’s 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.
Customer Support. Our worldwide customer support organization delivers the “Cray experience.” This unique, high-quality
support relationship gives us a competitive advantage and 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. Our
support arrangements generally provide for support services on an annual basis, although many 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 24x7 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 government-funded research laboratories, to academic institutions and commercial entities requiring HPC, big data
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systems and storage. Our primary sales model is direct, and we offer solutions through a highly-trained direct sales force operating
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. Our ClusterStor storage systems are available both
through our direct sales force as well as through a partner network of global and regional resellers.
A formal request-for-proposal process for HPC systems or technology drives a majority of our large 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. We actively manage our relationship with U.S. government agencies and Congress.
Our Technology
We are dependent on the successful early identification, development and timely introduction of new products and
capabilities. This process relies on developing and maintaining close customer and user partnerships - an activity we embrace
and which we believe sets us apart from our competitors. 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 our specialized
expertise and 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
solutions.
Hardware
We have extensive experience and expertise in the definition, design and integration of the hardware components required
of HPC system solutions. This includes processors, board design, memory, storage, network and interconnect technologies, I/O
subsystems, power, cooling and packaging infrastructures, 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:
•
•
Compute and storage architectures, high-speed interconnect and board integration and design. We integrate 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 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 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
expertise and 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 (RAS) for Cray systems. The Cray programming environment includes our
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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. We believe this suite of products provide
Cray with competitive advantage and allow us more flexibility in adopting new processing technologies as they become available.
Additionally, we research, evaluate and develop innovative software for advanced data analytics, machine learning, and
deep learning at scale. This work includes 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, machine learning, and
deep learning 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 19 - 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, storage enclosures, 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. Our manufacturing personnel are located in
Chippewa Falls, Wisconsin.
Our systems designed for the supercomputer market segment and our custom-engineered solutions incorporate components
that are available from single or limited sources, often containing our design input or proprietary designs. Such components
include integrated circuits, interconnect systems and certain memory devices. Prior to development of a particular product,
components are typically competitively bid to a short list of technology partners. The technology partner that provides the highest
value solution for the component is often awarded the contract for the life of the component. Once we have engaged a technology
partner, changing our product designs to utilize another supplier’s standard 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 obtain key processor components from Intel, NVIDIA and other vendors from time to time 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
application specific integrated circuit (ASIC). Our procurements from these vendors are primarily through purchase orders. We
have chosen to deal with sole sources in specific cases due to the availability of specific technologies, economic advantages and
other factors. Reliance on single or limited source vendors involves several risks, including the possibility of shortages of key
components, long lead times, reduced control over delivery schedules, 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
high-end analytics, storage and AI markets. High performance, real-time analytics and machine learning on large volumes of data
is developing into an important success driver for business, government and academia, and successfully addressing this market
is important to our future success. Several of our core strengths and technologies, such as the abilities to process vast amounts of
unique data at very high speeds and to drive faster time to actionable insights, are demonstrated capabilities of our supercomputing
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solutions. Bringing these technologies to market is core to our ability to address anticipated and emerging analytics and AI
challenges, enabling us to bring highly differentiated analytics offerings to market. Our target markets are as follows:
• Scientific Research. Scientific research includes government research laboratories and research universities
around the world. In the United States, 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, Canada, Japan, Australia, New
Zealand 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.
• Financial Services. 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. Machine
learning and analytics are key to making sense and creating insight in the enormous volumes of data being generated.
Our solutions can help discover new relationships that can allow existing drugs to help address new medical issues. Our
customers are utilizing our products and solutions across these ranges of use cases today.
• Manufacturing. Supercomputers are used to design lighter, safer and more durable vehicles, study wind noise
and airflow around vehicles, improve airplane flight characteristics and, in many other computer-aided engineering
applications, to improve time-to-market and product quality. We currently have aerospace, automotive and
manufacturing customers around the globe that are actively using our HPC and big data solutions.
• Emerging Markets. The rise of analytics and AI across industries has resulted in growing interest in Cray
supercomputers. AI is rapidly becoming the next major driver in the HPC market. Deep learning and machine learning,
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both subsets of AI, 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 United States federal government (U.S. Government) and system acquisitions primarily funded by the
U.S. Government, accounted for approximately 53% of our total revenue in 2017, 47% of our total revenue in 2016 and 47% of
our total revenue in 2015. Significant customers with over 10% of our annual total revenue were the U.S. Government and a
foreign weather center in 2017, the U.S. Government and a foreign weather center in 2016 and the U.S. Government in 2015.
International customers accounted for 35% of our total revenue in 2017, 46% of our total revenue in 2016 and 36% of our total
revenue in 2015.
We have four operating segments that are reportable for financial reporting purposes. Segment information and related
disclosures are set forth in Note 18 — 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. Many of our competitors are established, well-known companies in the HPC
market, including IBM, HPE, Lenovo, Dell/EMC, Huawei, NEC, Hitachi, Fujitsu and Atos-Bull. We also compete with systems
builders and resellers of systems that are constructed from commodity components using processors manufactured by Intel,
NVIDIA, AMD and others. IBM, Intel, 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 CS500 and CS-Storm supercomputing cluster products are designed to
help us better address this market by providing flexible HPC 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.
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 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 high-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 CS product line is very competitive. The majority of competition is from Lenovo, HPE, Huawei,
Dell/EMC, Atos-Bull and Fujitsu, all of which offer open-standards cluster solutions to address the growth in the supercomputing
market. We compete primarily on the basis of price-performance, open-standards architecture, flexible configurations, energy-
efficiency, reliability, scalability, corporate reputation and account relationships. Our market approach is to offer cluster solutions
that better address large and complex computational problems, a superior integration, support and relationship experience.
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 analytics market for pattern recognition
and knowledge discovery using graph databases 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 and Spark are often used. However, customers
with large, mission-critical graph problems have discovered that commodity approaches do not scale or deliver results in an
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acceptable timeframe, and have recognized the advantages of specialized solutions. We introduced the Cray Urika-XC and Urika-
GX offerings - which compete primarily on the basis of performance, scalability, integration and total cost of ownership - as an
alternative for users of big data and analytics. The AI market is nascent and rapidly evolving. Competition will include cloud
infrastructure companies, systems and subsystems developed by processor vendors, start-up companies and our traditional system
competitors.
Our storage products compete with a number of manufacturers and integrators of parallel storage solutions, including IBM
with its Spectrum Scale parallel file system, as well as solutions from Data Direct Networks, Lenovo, 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, 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 others who may have access to such information. 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.
Employees
As of December 31, 2017, we had 1,273 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.
Corporation Information
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.
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 occur, our business, financial condition or operating results could be materially
adversely affected and the trading price of our common stock could decline. Additional risks and uncertainties not presently
known to us or that we currently believe are not material may also impair our business, financial condition or operating results.
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 product revenue generally depends on the timing of product
acceptances by customers and contractual provisions affecting revenue recognition. Receiving less than anticipated customer
orders, delays in achieving customer acceptances of installed systems and recognizing revenue from a product transaction or
transactions due to development or product delivery delays, customer site readiness delays, unexpected manufacturing delays or
defects, not receiving needed components on time, not receiving components with anticipated quality and performance, 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, particularly in the case of
revenue expected to be realized in the fourth quarter of any year, as has happened in the past. In addition, because our revenue
can be concentrated in particular quarters, often the fourth quarter, we generally do not expect to sustain profitability over
successive quarters even if we are profitable for the year.
Although we recorded positive annual net income between 2010 and 2016, we recorded a net loss in 2017 and we expect
to report a net loss in 2018 and may well experience a net loss in any year in addition to quarterly losses. Net income may fluctuate
significantly as a result of many factors, including as a result of reduced revenue, gross margins or significant investments we
may make to grow our business which often require many years to come to fruition and may not be realized when expected, if at
all. For example, we anticipate incurring significant expenditures in connection with 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 in both 2016 and 2017,
substantially driven by a slow-down in the segments of the high-end of the supercomputing market that we target. It is uncertain
whether or when the segments of the high-end of the supercomputing market that we target 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 at high enough gross margins 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 ordered systems, including attached
storage systems;
our ability to successfully integrate the ClusterStor product line, business and associated sales channel and our
ability to successfully generate revenue and profitability from sales of our storage, data analytics and AI solutions;
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, such as our next generation Shasta system;
our expense levels, including research and development expense;
delays in delivery of upgraded or new systems, longer than expected customer acceptance cycles or penalties
resulting from system acceptance issues;
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•
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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, such as the current
“Meltdown” and “Spectre” processor vulnerabilities or intellectual property rights;
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;
revenue delays or losses due to customers postponing purchases as a result of delays in available budgets or waiting
for the availability of future upgraded or new systems, including those containing new processors, such as our next
generation Shasta systems;
the level of product gross profit contribution in any given period due to volume, competition or product mix,
particularly with the introduction of flexible commodity-based supercomputers, competitive factors, strategic
transactions, product life cycle, currency fluctuations, acceptance penalties and component costs;
the competitiveness of our products, 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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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 segments of the high-end of the supercomputing market that we target, which are currently
experiencing a slow-down, rebound and resume growing;
the timely availability of acceptable components, including, but not limited to, processors and memory, in sufficient
quantities to meet customer delivery schedules and other customer commitments at a competitive cost and the
identification of issues with already-delivered components, including processors, that require remediation and/or
impact the performance of our products;
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;
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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 operating results, 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 in the segments of the high-end of the
supercomputing market that we target, 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 operating results in 2018 and in future years.
Our business could be adversely affected by conditions affecting the HPC market. A substantial portion of our business
depends on the demand for HPC products by large enterprise, the U.S. Government and foreign government customers, and we
are dependent upon the overall economic health of the high-end of the supercomputing market. Demand for our products and
services depends substantially upon the general demand for supercomputers and associated services, as well as technological
needs in the data analytics, AI and storage markets, which fluctuate based on numerous factors, including capital spending levels
and growth of our current and prospective customers. Moreover, the purchase of our products is often discretionary and may
involve a significant commitment of capital and other resources. As a result, spending priorities for our current and future
customers may vary and demand for our products and services may also fluctuate. For instance, while we were profitable in 2016,
our revenue and profitability declined year over year in both 2016 and 2017, substantially driven by a slow-down in the segments
of the high-end of the supercomputing market that we target, and we believe that this downturn has continued into 2018. It is
uncertain whether or when these segments will recover from the ongoing downturn. While we believe that the market’s long-
term growth drivers remain intact, there is no assurance that these markets will rebound and resume growing. A prolonged slow-
down in these markets could continue to harm our financial condition and results of operations.
If we are unable to successfully develop, sell and deliver our Cray XC systems and successor systems, such as our
next generation Shasta system, our operating results will be adversely affected. We expect that a substantial portion of our
revenue in the foreseeable future will come from the sale of 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.
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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 after 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 and costs, such as has been and will be required with our Cray XC systems, next generation
Shasta systems and ClusterStor storage systems;
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 with reasonable costs and
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, will adversely affect our operating results.
If our current and future products targeting markets outside of our traditional markets, primarily products
targeting the data analytics, AI 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 data analytics, AI and storage opportunities as well as the commercial market for all of our products.
To grow 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, win awards for new contracts, timely perform on existing contracts, develop our capability for
broader market sales and business development and successfully develop and introduce new solution-oriented offerings,
notwithstanding that these are relatively new businesses for us and we do not have significant experience targeting these markets.
Data analytics, AI 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 ultimately successful in the longer term. In addition, if we do not successfully
integrate the ClusterStor product line and related business, including its more than 125 employees and contractors, our ability to
generate revenue from our storage business may be adversely affected.
Our reliance on third-party suppliers poses significant risks to our operating results, business and prospects. We
rely upon third-party vendors, particularly Intel, to supply processors including graphics processing units and memory, and for
most of the products, we sell and use service providers to co-develop key technologies. We purchase or subcontract the
manufacturing of a majority of the hardware components for our high-end products, including integrated circuits, printed circuit
boards, memory parts, hard disk drives and storage product enclosures, 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, disk
drives and storage subsystems. Because specific components must be designed into our systems well in advance of initial
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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 specifications in sufficient quantities and with
acceptable performance, price 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 repair and/or delay costs and penalties even once
delivered and accepted, which is currently happening and has happened multiple times in the past and has at times
significantly lowered our revenue for a particular quarter or year;
if a supplier provides us with hardware or software that contains bugs or other errors, defects or security
vulnerabilities, such as the recent “Meltdown and “Spectre” processor vulnerabilities, 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, including of required patches, re-spins
of integrated circuits and/or development of replacement components, and the production and sales of our systems
could be delayed and systems installed at customer sites could require significant, expensive field component
replacements or other remediation and/or we might be required to pay penalties;
if our relationship with a key supplier, such as Intel, is adversely affected for any reason, such as due to competitive
pressures or changes in company strategies and priorities, 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 at all;
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 future processors from our competitors who are willing to take greater risk on
delivery, our operating results will be adversely affected;
if Cray systems at customer sites develop significant issues with third-party components, as has occurred in the past,
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, we may not be able to obtain necessary components or our cost to
obtain such components could increase significantly;
if a key supplier is acquired or undergoes a significant business change, as has occurred in the past, 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;
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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; and
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.
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, the discovery of issues with components after delivery and
introduction into our products and increases in prices and order lead times for certain components, have occurred in the past. We
have also experienced increased prices and/or delivery timelines of memory and other key components and the “Meltdown” and
“Spectre” security vulnerabilities in processors included in our products. These types of issues have adversely affected our
revenue and operating results in multiple prior periods, in some cases significantly, and could result in significant costs and/or
effort to address. For instance, we expect that significant costs and efforts may be required to address the “Meltdown” and
“Spectre” processor vulnerabilities, which could adversely affect our future 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/EMC, Huawei, NEC,
Hitachi, Fujitsu and Atos-Bull. 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, AMD, NVIDIA, 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, such as Intel, we may experience greater competitive
pressures.
Our growth initiatives in the data analytics, AI and storage 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 we may be required to provide lease financing for our products,
which could result in a multi-year deferral of our receipt of cash and revenue for these systems. These developments limit our
revenue and financial resources and reduce our ability to be profitable and grow.
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
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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 2015, 2016 and 2017, approximately 47%, 47% and 53%, 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 current administration or adverse decisions by the current administration to
reduce or eliminate budgets for governmental agencies or departments that purchase or fund the purchase of our
products and services;
Congressional and executive branch decisions in addressing budget concerns and current policy;
disruptions in the operations of the U.S. Government, including impacts of the current administration and
government “shutdowns” such as recently occurred;
“sequestration”;
the downgrading of U.S. Government debt or the possibility of such action;
the political climate in the United States focusing on cutting or limiting budgets and its effect 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;
domestic crises, such as costs of addressing the damage associated with natural disasters;
international political developments, such as the downgrading of European debt or the United Kingdom’s departure
from the European Union; or
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 U.S. National Security Agency for certain companies
doing business with state governments.
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 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, including those related to our next generation Shasta system. 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,
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increase the level of compensation paid to existing and new employees, which could materially increase our operating expenses.
In July 2017, we implemented a restructuring plan that included a reduction of our workforce and as a result we may have lost
important talent and skill sets and may have a more difficult time retaining and motivating those employees not directly impacted
by the restructuring as well as attracting new employees.
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-
parties. Companies in the technology industry, and other patent, copyright, and trademark holders seeking to profit from royalties,
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 (Raytheon) which is described in
Note 13 - 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 third-parties, which license may not be available on commercially reasonable terms, or
at all.
In addition, litigation can involve significant management time and attention and 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 our cluster systems are not successful, our operating results could be adversely affected. Our cluster products were
first introduced in late 2012. Cluster-based solutions face intense competition in the marketplace with buying decisions often
driven by price, and if we cannot successfully sell these solutions with acceptable margins, our operating results will be adversely
affected.
We have made and entered into in the past, and may make and enter into in the future, acquisitions or strategic
transactions which could require significant management attention, disrupt our business, result in dilution to our
shareholders, deplete our cash reserves, increase our business risks and adversely affect our financial results. Acquisitions
and strategic transactions, such as our recent acquisition of the ClusterStor business from Seagate, involve numerous risks,
including the following:
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difficulties in successfully integrating the operations, systems, technologies, products, sales channels,
manufacturing processes, offerings and personnel of the acquired company or companies, assets and/or business;
insufficient revenue, margin or other benefits to offset increased expenses or other negative impacts associated with
acquisitions or strategic transactions;
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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 or strategic transactions, including other
customers of an acquired business;
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;
the potential loss of key employees, customers, distributors, vendors and other business partners of the companies
or businesses we acquire following and continuing after announcement of any transaction; and
the potential to invest significant time and resources into a potential acquisition or strategic transaction that does
not ultimately complete or close.
Acquisitions or strategic transactions 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 or incur liabilities, including potentially unknown or underestimated 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, assets and/or businesses are inherently risky and subject to many factors
outside of our control, and no assurance can be given that our previously completed, currently planned or future acquisitions or
strategic transactions 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.
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,
inherent hardware or software vulnerabilities, 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
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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 35% of our total revenue for the year ended December 31, 2017, 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 and
the potentially high cost related to employee separations;
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;
risks and costs associated with employee-favorable labor laws in many foreign jurisdictions;
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.
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, privacy and data security, financial and other disclosures 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, the United Kingdom gave formal notice of withdrawal from the European Union in March 2017. Consequently,
the British government is currently 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
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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 2015, 2016 and 2017, approximately 47%, 47% and 53%, 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 and requirements could lead to suspension or debarment, for cause, from U.S. government
contracting or subcontracting for a period of time or the inability to participate in certain procurements and could have a negative
effect on our reputation and ability to secure future U.S. government contracts.
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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, others in the industry or our customers, a significant aggressive seller or buyer, litigation activities, general economic
conditions and conditions in our industry. From January 1, 2017 through December 31, 2017, the closing sales price of our
common stock on The Nasdaq Global Market ranged from $16.35 to $26.55 per share. 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 software from third parties, such as for file systems, job scheduling and storage subsystems.
We have experienced 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, or at all, 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 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. The SEC requires public companies to disclose 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. Companies must 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
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components of our products be certified as conflict free, and if we cannot satisfy these customers, they may choose a competitor’s
products. We continue to investigate the presence of conflict materials within our supply chain.
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley
Act of 2002 at the end of each fiscal year, and any adverse results from such future evaluations could result in a loss of
investor confidence in our financial reports and have an adverse effect on our stock price. Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management and a report by our independent registered
public accounting firm on our internal control over financial reporting in our annual reports on Form 10-K as to whether we have
any material weaknesses in our internal controls over financial reporting. Depending on their nature and severity, any future
material weaknesses could result in our having to restate financial statements, could make it difficult or impossible for us to
obtain an audit of our annual financial statements or could result in a qualification of any such audit. In such events, we could
experience a number of adverse consequences, including our inability to comply with applicable reporting and listing
requirements, a loss of market confidence in our publicly available information, delisting from The Nasdaq Global Market, an
inability to complete a financing, loss of other financing sources such as our line of credit, and litigation based on the events
themselves or their consequences.
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.
U.S. federal income tax reform could adversely affect us. On December 22, 2017, the Tax Cuts and Jobs Act was signed
into law, enacting a broad range of changes to the U.S. Internal Revenue Code. The Tax Cuts and Jobs Act, among other things,
includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net
operating losses, allows for the expensing of certain capital expenditures and puts into effect a number of changes impacting
operations outside of the United States. In the fourth quarter of 2017, we reduced our deferred tax asset by approximately
$28.9 million as a result. The Company will continue to assess the impact of the new tax legislation on its net deferred tax assets
and liabilities and will continue to examine the impact this tax legislation may have on our business.
Provisions of our Restated Articles of Incorporation and Amended and Restated Bylaws could make a proposed
acquisition of our business that is not approved by our Board of Directors more difficult. Provisions of our Restated Articles
of Incorporation and Amended and Restated Bylaws could make it more difficult for a third-party to acquire us. These provisions
could limit the price that investors might be willing to pay in the future for our common stock. For example, our Restated Articles
of Incorporation and Amended and Restated Bylaws provide for:
•
•
•
•
•
•
•
•
removal of a director only in limited circumstances and only upon the affirmative vote of not less than two-thirds
of the shares entitled to vote to elect directors;
the ability of our Board of Directors to issue up to 5,000,000 shares of preferred stock, without shareholder approval,
with rights senior to those of the common stock;
no cumulative voting of shares;
the right of shareholders to call a special meeting of the shareholders only upon demand by the holders of not less
than 30% of the shares entitled to vote at such a meeting;
the affirmative vote of not less than two-thirds of the outstanding shares entitled to vote on an amendment, unless
the amendment was approved by a majority of our continuing directors, who are defined as directors who have
either served as a director since August 31, 1995, or were nominated to be a director by the continuing directors;
special voting requirements for mergers and other business combinations, unless the proposed transaction was
approved by a majority of continuing directors;
special procedures to bring matters before our shareholders at our annual shareholders’ meeting; and
special procedures to nominate members for election to our Board of Directors.
22
These provisions could delay, defer or prevent a merger, consolidation, takeover or other business transaction between us
and a third-party that is not approved by our Board of Directors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal properties are as follows:
Location of Property
Uses of Facility
Chippewa Falls, WI
Bloomington, MN
Seattle, WA
San Jose, CA
Austin, TX
Longmont, CO
Manufacturing, hardware development, central service and
warehouse
Software development, sales and marketing
Executive offices, hardware and software development, sales
and marketing
Hardware and software development
Hardware development
ClusterStor product development
Approximate
213,600
87,705
51,643
21,733
20,916
14,292
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 30,000 square feet of office space, in
international locations. We believe our facilities are adequate to meet our needs at least through 2018.
Item 3. Legal Proceedings
For a discussion of legal proceedings, see Note 13 — 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.
23
PART II
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock and Dividend Policy
Our common stock is traded on The Nasdaq Global Market under the symbol CRAY. As of February 13, 2018, we had
40,475,586 shares of common stock outstanding that were held by 456 holders of record. The actual number of shareholders is
greater than this number of registered record holders, and includes shareholders who are beneficial owners, but whose shares are
held in “street name” by brokers and other nominees.
The quarterly high and low sales prices of our common stock for the periods indicated are as follows:
Year Ended December 31, 2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
22.55 $
21.98 $
20.95 $
26.65 $
43.79 $
43.40 $
32.30 $
23.68 $
16.10
16.50
17.35
17.90
28.25
27.39
20.60
16.77
$
$
$
$
$
$
$
$
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, 2017, 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)
2,008,538 $
25,936 $
2,034,474
17.42
4.88
3,107,064
—
3,107,064
(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 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
24
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, 2017, under our 2013 equity
incentive plan, an aggregate of 3,107,064 shares were available for grant as stock options or stock appreciation rights and
an aggregate of 2,004,557 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, 2017, under our 2000 non-executive employee stock
plan, we had options for 25,936 shares outstanding.
Unregistered Sales of Securities
We had no unregistered sales of our securities in 2017 not previously reported.
Issuer Repurchases
We did not repurchase any of our common stock in 2017, 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.
25
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, 2012, 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, 2017
s
r
a
l
l
o
D
260
240
220
200
180
160
140
120
100
80
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
Cray Inc.
Nasdaq US Benchmark TR Index
ICB: 9572 Computer Hardware
Cray Inc.
Nasdaq US Benchmark TR Index
ICB: 9572 Computer Hardware Index
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
$
100.0 $
100.0
100.0
172.2 $
133.5
117.6
216.2 $
150.1
159.5
203.4 $
150.8
145.2
129.8 $
170.5
167.4
151.7
206.9
240.7
26
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
Restructuring
Operating expenses
Income (loss) from operations
Other income (expense), net
Interest income, net
Gain on strategic transaction
Income (loss) before income taxes
Benefit (provision) for income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average outstanding shares:
Basic
Diluted
Cash Flow Data:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Depreciation and amortization
Purchases of property and equipment
Balance Sheet Data:
Cash, cash equivalents, restricted cash and
investments
Working capital
Total assets
Shareholders’ equity
$
$
$
$
$
Years Ended December 31,
2017
2016
2015
2014
2013
(In thousands, except for per share data)
250,195 $
142,314
392,509
188,830
72,975
261,805
130,704
98,777
59,894
29,113
8,568
196,352
(65,648)
5,002
3,276
4,480
(52,890)
(80,939)
(133,829) $
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 $
(3.33) $
(3.33) $
0.27 $
0.26 $
0.70 $
0.68 $
1.61 $
1.54 $
40,139
40,139
39,833
41,012
39,257
40,691
38,634
40,435
436,330
89,419
525,749
298,244
43,179
341,423
184,326
87,728
51,345
23,603
—
162,676
21,650
(1,378)
757
—
21,029
11,194
32,223
0.85
0.81
37,832
39,776
(73,341) $
(13,663)
(332)
16,760
17,467
(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
$
147,317 $
224,617 $
284,891 $
145,796 $
220,449
354,300
618,757
400,297
373,028
714,572
525,476
376,559
694,175
492,510
325,541
651,434
453,854
325,733
603,366
375,587
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Executive Summary
We focus on designing, developing, manufacturing, marketing and servicing computing products that magnify and enhance
human capital, foster innovation and create competitive advantages. That means our products are aimed primarily at the high-end
of the high performance computing (HPC) and data analytics and artificial intelligence (AI) markets - the segments populated by
the pioneers, executives and entrepreneurs leading their industries in both the private and public sectors. These products include
compute systems commonly known as supercomputers, and storage, data analytics and AI solutions. We offer them individually,
integrated into a complete solution or hosted in the cloud, depending on a customer’s need. We also provide related software and
system maintenance, support, and engineering services. Our customers include domestic and foreign government and
government-funded entities, academic institutions and commercial companies. We provide customer-focused solutions based on
four main models: (1) tightly integrated supercomputing designed throughout for scalability and sustained performance;
(2) customizable cluster supercomputing based on highest-performance industry-standard components; (3) robust high-
performance storage solutions; and (4) integrated solutions for graph analysis and large-scale analytics and AI applications. All
of our solutions also emphasize total cost of ownership, scalable performance and data center flexibility as key features. Our
continuing strategy is to gain market share by extending our technology leadership and differentiation and expanding our share
and addressable market in areas where we can leverage our experience and technology, such as in AI applications and data
analytics. We also meet diverse customer requirements by combining supercomputing, cluster supercomputing, and data analytics
and AI into unique offerings that work in a workflow-driven datacenter environment.
Summary of 2017 Results
Total revenue decreased by $237.3 million in 2017 compared to 2016, from $629.8 million to $392.5 million. Product
revenue decreased by $249.2 million and service revenue increased by $11.9 million over the same period. The year over year
decrease in product revenue was substantially driven by a slow-down in the high-end segments of the supercomputing market
that we target, as well as the timing of contracts and deliveries. Some 2017 deliveries were impacted by certain customer site
readiness issues. The year over year increase in service revenue was primarily driven by increased maintenance revenue, which
continues to be driven by our larger installed system base, including the benefit from longer lifetimes of installed systems due to
the slowdown in acquisitions of new replacement systems.
Product gross profit margin decreased from 34% in 2016 to 25% in 2017. In the third quarter of 2017, we determined that
a large contract currently scheduled for acceptance in 2018 would be performed at a loss of $4.1 million. The loss is attributable
in part to higher component costs, predominantly for memory, changes in the configuration of the system from the time of bid,
and changes in exchange rate. We recorded the full amount of the loss in 2017, which negatively affected margins. One relatively
large sale to a U.S. government customer in the second quarter of 2017 and one relatively large sale to a foreign customer in the
fourth quarter of 2017, both carrying lower margins, also significantly contributed to the decrease in product gross profit margin
from 2016 to 2017. Gross profit margin from services increased from 40% in 2016 to 49% in 2017. Service gross profit margins
for 2016 were unusually low as the result of $3.0 million of costs incurred to replace a high-value third party component in a
customer system. The improved gross profit margin for 2017 also benefited, in part, from the leveraging of our fixed service
costs.
We recorded a loss from operations of $65.6 million in 2017 compared to income from operations of $9.1 million in 2016.
The decrease was primarily attributable to lower revenue and product gross profit margin and increased costs due to restructuring
charges in 2017, partially offset by a decrease in our other operating expenses.
We recorded a net loss of $133.8 million in 2017 compared to net income of $10.6 million in 2016. The year over year
change was primarily driven by the decrease in operating income discussed above and an increase of $81.6 million in income tax
expense for 2017 compared to 2016. Income tax expense for 2017 included $28.9 million directly attributable to the enactment
of the Tax Cuts and Jobs Act that required us to revalue our U.S. deferred tax assets as a result of a reduction in the U.S. federal
corporate income tax rate to 21% and income tax expense of $74.1 million as a result of our decision to increase the valuation
allowance held against our U.S. deferred tax assets. These amounts were partially offset by the gain on the strategic transaction
with Seagate and a $3.3 million gain from the sale of an investment in a private company.
28
Net cash used in operations during 2017 was $73.3 million, compared to net cash used in operations of $52.3 million in
2016. Net cash used in operations during 2017 was primarily driven by an increase of $97.7 million in inventory as a result of
system builds for future deliveries and our net loss, adjusted for non-cash and non-operating items, of $31.7 million. These
amounts were partially offset by collections from customers that resulted in a decrease of $38.7 million in accounts and other
receivables. Working capital decreased from $373.0 million at December 31, 2016 to $354.3 million at December 31, 2017.
Market Overview and Challenges
Significant trends in the HPC industry include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
convergence of traditional supercomputing modeling simulation with big data analytics and AI;
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;
the rise of AI along with machine learning and deep learning technologies which utilize HPC technologies for performance
and scale;
technology innovations in memory and storage allowing for faster data access such as high bandwidth memory, NVRAM,
SSDs and flash devices;
the increasing commoditization of HPC hardware, particularly processors and system interconnects;
the growing concentration of very large suppliers of key computing, memory 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;
increased adoption of cloud computing as a solution for loosely-coupled HPC applications;
large increases in memory prices during the past year; and
decreasing demand for supercomputers and significant variability in market demand from quarter-to-quarter and year-to-
year.
Several of these trends have recently impacted the growth rate and related improvements in price-performance of products
in the industry and has contributed to 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 portions of the supercomputing 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 $10 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, 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.
29
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
and applications 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 invest relatively significantly in next-generation technology to
successfully and uniquely address the challenges of “Exascale computing” (systems with exaflops-levels of performance). In
addition, we have demonstrated expertise in system and performance 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, AI and storage.
In analytics and AI, we are developing and delivering high performance data discovery, advanced analytics, machine
learning and deep learning solutions. These solutions compete with open source software, running on commodity cluster or cloud
systems. Although these competitive systems have low acquisition costs, the total cost of ownership (TCO) is driven up by
management, power, efficiency and scaling challenges. We concentrate our efforts on developing solutions that minimize the
TCO, delivering faster time-to-solution and advanced capabilities that are key drivers for many of our data analytics and AI
customers. We support open source technologies such as Hadoop, Spark and Jupyter Notebook to design large-scale data analytics
stacks that simplify analyses of scientific and commercial application and Python and R, distributed Dask, BigDL, TensorFlow
and TensorBoard for advanced AI solutions.
In storage, we are developing and delivering high value products for the high performance parallel storage market. Our
recent transaction with Seagate enhances our capabilities in storage and data management. 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.
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 and is difficult to
forecast. In the short term, we closely review the status of customer proposals, customer contracts, product shipments, installations
and acceptances in order to forecast revenue and cash receipts. In the longer-term, we monitor the status of the pipeline of product
sales opportunities and product development cycles. We believe product revenue growth measured over several quarters is a
better indicator of whether we are achieving our objective of increased market share in the supercomputing market. The Cray XC
and Cray CS products, along with our longer-term product roadmap are efforts to increase product revenue. We have increased
our business and product development efforts in big data analytics, AI and storage and data management. 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 the level of revenue, different customer requirements, competitive
considerations, product type and our cost to build and deliver our products and services. Our services tend to carry higher gross
profit margins than our products. We often bid contracts and commit to future system performance where certain key components
are not available in the market at the time of bid and/or whose price might change from what was expected. While we have
significant experience doing so, such actions are inherently risky and can impact our gross profit margin significantly in any
period. For example, memory prices have more than doubled in less than a year which has had a significant impact on our
30
reported product gross profit margin. To mitigate this and other similar risks, 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, including
variable incentive compensation and contracted third-party research and development services. As part of our ongoing expense
management efforts, we continue to monitor headcount levels in specific geographic and operational areas. With the recent
reduction in revenue levels, we reduced the size of our workforce in 2017. However, the recent transaction with Seagate has
partially offset this reduction but should help increase revenue and improve storage gross profit margin in the future.
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.
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,
2017
250,195
188,830
61,365
25%
142,314
72,975
69,339
49%
392,509
261,805
130,704
$
$
$
$
$
$
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
33%
35%
31%
$
$
$
$
$
$
Product revenue for 2017 decreased by $249.2 million, or 50%, compared to 2016, substantially driven by a slow-down in
the high-end segments of the supercomputing market that we target, as well as the timing of contracts and deliveries. Some 2017
deliveries were impacted by certain customer site readiness issues.
Product revenue for 2016 decreased by $101.9 million, or 17%, compared to 2015, substantially driven by a slow-down in
the high-end segments of the supercomputing market that we target compared to recent years. 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.
Service Revenue
Service revenue for 2017 increased by $11.9 million, or 9%, compared to 2016. The year over year increase in service
revenue was primarily driven by increased maintenance revenue, which continues to be driven by our larger installed system
base, including the benefit from longer lifetimes of installed systems due to the slowdown in acquisitions of new replacement
systems.
31
Service revenue for 2016 increased by $7.0 million, or 6%, compared to 2015. The year over year increase in service
revenue was primarily driven by increased maintenance revenue which benefited from a larger installed system base.
Cost of Product Revenue and Product Gross Profit
Cost of product revenue for 2017 decreased by $143.2 million compared to 2016, driven primarily by lower product
revenue. Product gross profit percentage was 25% in 2017 compared to 34% in 2016. In the third quarter of 2017, we determined
that a large contract currently scheduled for acceptance in 2018 would be performed at a loss of $4.1 million. The loss is
attributable in part to higher component costs, predominantly for memory, changes in the configuration of the system from the
time of bid, and changes in exchange rate. We recorded the full amount of the loss in 2017, which negatively affected margins.
One relatively large sale to a U.S. government customer in the second quarter of 2017 and one relatively large sale to a foreign
customer in the fourth quarter of 2017, both carrying lower margins, also significantly contributed to the decrease in product
gross profit margin from 2016 to 2017.
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 compared to 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 Service Revenue and Service Gross Profit
Cost of service revenue decreased by $4.6 million in 2017 compared to 2016, primarily driven by $3.0 million of costs
incurred in 2016 to replace a high-value third party component in a customer system and lower outside service costs in 2017.
Service gross profit margin increased from 40% in 2016 to 49% in 2017. Service gross profit margins for 2016 were unusually
low as the result of the $3.0 million of costs incurred to replace a high-value third party component in a customer system. The
improved gross profit margin also benefited, in part, from the leveraging of fixed costs with improved revenue.
Cost of service revenue increased by $5.4 million in 2016 compared to 2015, driven by the costs to support 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 customer system that is under a service contract. Service gross profit margin decreased from 42% in 2015
to 40% in 2016. The service gross profit margin decreased primarily due to the impact of the $3.0 million described previously,
higher headcount and related base compensation expense as well as higher third-party costs. These amounts were partially offset
by a decrease in incentive compensation expense.
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,
2017
141,289
$
2016
$ 130,006
2015
$ 126,060
(9,473 )
(33,039 )
(12,621)
(5,255)
(16,515)
(12,982)
$
98,777 $ 112,130
$
96,563
25 %
18%
13%
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 contract engineering expenses.
In 2017, gross research and development expenses increased by $11.3 million compared to 2016, primarily due to increased
investments in the development of new products. We also increased our average headcount which resulted in compensation costs
32
increasing by $6.4 million compared to 2016. Net research and development expenses decreased by $13.4 million compared to
2016 as a result of increased reimbursements from third-parties related to projects for the development of new products, primarily
our next generation “Shasta” system. We anticipate that reimbursed research and development will continue to vary significantly
from period to period but will remain at relatively high levels over the next couple of years as a result of these projects.
In 2016, gross research and development expenses increased by $3.9 million compared to 2015, 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.
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,
$
$
2017
59,894
15%
29,113
$
$
2016
64,893
10%
34,053
$
$
7%
5%
2015
60,150
8%
27,966
4%
Sales and Marketing. Sales and marketing expense decreased by $5.0 million in 2017 compared to 2016. We lowered our
average headcount which resulted in compensation costs decreasing by $4.7 million compared to 2016.
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.
General and Administrative. General and administrative expense decreased by $4.9 million in 2017 compared to 2016,
primarily due to a $2.3 million termination fee for our St. Paul facility that was expensed in 2016 and a $2.0 million decrease in
legal costs, from $7.5 million in 2016 to $5.5 million in 2017, related to our ongoing litigation with Raytheon, see Note 13 —
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. Due to our ongoing litigation with Raytheon, legal expenses may vary
over the next several quarters but will likely remain at above historical levels until the matter is resolved. We also lowered our
average headcount which resulted in compensation costs decreasing by $0.8 million compared to 2016
The $6.1 million increase in general and administrative expense in 2016 compared to 2015 was primarily due to a
$6.0 million increase in legal costs associated with our ongoing litigation with Raytheon. We also incurred a $2.3 million lease
termination fee for our St. Paul facility in 2016. These amounts were partially offset by a $2.1 million decrease in incentive
compensation expense in 2016 compared to 2015.
Restructuring
In the third quarter of 2017, we implemented a restructuring plan to reduce our operating costs and better align our workforce
with long-term business strategies. The restructuring plan reduced our workforce by approximately 190 employees, with the
majority of such terminations effective in July 2017. For the year ended December 31, 2017, we recorded $8.6 million in expense
in connection with the restructuring plan, primarily related to employee severance.
33
Other Income (Expense), Net
We recorded $5.0 million and $0.4 million of net other income for the years ended December 31, 2017 and 2015,
respectively, and $1.4 million of net other expense for the year ended December 31, 2016. Net other income and expense includes
gains and losses from foreign currency transactions, investments and disposals of assets. Net other income for 2017 included a
$3.3 million gain from the sale of an investment in a private company.
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
Year Ended December 31,
2017
2016
2015
$
$
3,386 $
(110)
3,276 $
2,120 $
27
2,147 $
1,465
(57)
1,408
Interest income is earned on cash and cash equivalents, investment balances and the investment in sales-type lease.
Gain on Strategic Transaction
In the third quarter of 2017, we completed a strategic transaction with Seagate Cloud Systems Inc. centered around the
transfer of Seagate’s ClusterStor high-performance storage business to Cray. As part of the transaction, we have assumed customer
support obligations associated with the ClusterStor product line and have added more than 125 employees and contractors. For
the year ended December 31, 2017, we recognized a gain of approximately $4.5 million associated with the transaction.
Taxes
We recorded income tax benefit (expense) for the indicated years ended December 31 as follows (in thousands):
Net income (loss) before income taxes
Tax benefit (expense)
Net income (loss)
Effective tax rate
Year Ended December 31,
2017
$ (52,890)
(80,939)
$(133,829)
$
2016
9,921
694
$ 10,615
2015
$ 42,777
(15,240)
$ 27,537
(153)%
(7)%
36%
The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, made significant changes to existing U.S.
tax law, including, but not limited to, a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%,
imposition of a one-time tax on deferred foreign income (“Repatriation Transition Tax”), adoption of a participation exemption
system with respect to the taxation of future dividends received from foreign corporations, and repeal of the corporate alternative
minimum tax system. Other significant changes in the Tax Cuts and Jobs Act include taxing payments made to foreign related
parties that are deemed to be excessive, imposing a minimum tax on certain foreign earnings, requiring (beginning after
December 31, 2021) the capitalization and subsequent amortization of certain research and development related expenses, and
placing additional limits on the use of net operating losses and the deductibility of certain executive compensation.
Amounts we recorded during the year ended December 31, 2017 directly attributable to the enactment of the Tax Cuts and
Jobs Act included a reduction, in the amount of $28.9 million, in the carrying value of our U.S. deferred tax assets as a result of
a reduction in the U.S. federal corporate income tax rate to 21%, the estimated impact, in the amount of $0.3 million, associated
with the Repatriation Transaction Tax, and the estimated impact, in the amount of $0.3 million, associated with our decision to
no longer consider the undistributed earnings of our foreign subsidiaries to be permanently reinvested outside of the U.S.
Estimated amounts have been recorded on a provisional basis in accordance with Securities and Exchange Commission Staff
Accounting Bulletin 118 and may be adjusted, during a one-year measurement period, when we have had sufficient time to obtain,
prepare and analyze historical tax returns, financial statements and related accounts that is required to finalize our accounting
with respect to those items.
34
For the year ended December 31, 2017, the difference between the income tax benefit at the federal statutory rate of 35%
and our income tax expense at the effective rate of (153)% was primarily attributable to the reduction in the U.S. federal corporate
income tax rate as a result of the Tax Cuts and Jobs Act and its impact on the carrying value of our U.S. deferred tax assets and
our decision after the Tax Cuts and Jobs Act was enacted to increase the valuation allowance held against our U.S. deferred tax
assets, offset, in part, by research and development tax credits. For the year ended December 31, 2016, the difference between
the income tax provision at the federal statutory rate of 35% and our income tax benefit at the effective income tax rate of (7)%
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. For the year ended
December 31, 2015, the difference between the income tax provision at the federal statutory rate of 35% and our income tax
expense at the effective rate of 36% was the result of state taxes, non-deductible expenses and other permanent items, partially
offset by research and development tax credits.
During 2017, our valuation allowance increased by $74.1 million, substantially all of which was attributable to our decision
to increase the valuation allowance held against our U.S. deferred tax assets on December 31, 2017.
The assessment of our ability to utilize our U.S. deferred tax assets was based upon all available positive and negative
evidence, which included, among other things, our recent results of operations, forecasted domestic and international earnings
over a number of years, all known business risks and industry trends, and applicable tax planning strategies. 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. As of December 31, 2017, we had
experienced a significant decline in revenue, gross profit, and operating income since 2015, had reported a cumulative pre-tax
loss in recent years and are currently forecasting to report a pre-tax loss for the year ending December 31, 2018. 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. If we had determined
that it was appropriate to increase the valuation allowance held against our U.S. deferred tax assets prior to enactment of the Tax
Cuts and Jobs Act total tax expense for the year ended December 31, 2017 would not have changed. The decrease in the carrying
value of our U.S. deferred tax assets as a result of the reduction in the U.S. federal corporate income tax rate would have been
completely offset by a reduction in the valuation allowance that would have been previously established against those deferred
tax assets.
As of December 31, 2017, we had U.S. federal net operating loss carryforwards of approximately $72.6 million and U.S.
federal research and development tax credit carryforwards of approximately $36.0 million. The federal net operating loss
carryforwards will expire between 2019 through 2037, and the research and development tax credits will expire from 2021
through 2037 if not utilized.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers: Topic 606 (ASU 2014-09) to supersede nearly all existing revenue recognition guidance
under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to
customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09
defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be
required within the revenue recognition process than required under existing GAAP, including identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. Adoption of ASU 2014-09 was initially required for fiscal and interim
reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period
presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method); or
35
(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 (modified retrospective method).
In August 2015, FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers -
Deferral of the Effective Date: Topic 606 (ASU 2015-14) that deferred the effective date of ASU 2014-09 by one year. Application
of the new revenue standard is permitted for fiscal and interim reporting periods beginning after December 15, 2016 and required
for fiscal and interim reporting periods beginning after December 15, 2017. We believe the impact of adopting the new guidance
will be immaterial to our annual and interim financial statements. We believe that the impact will be limited to the identification
of a significant financing component in a small number of our contracts with customers. We will also be required to make
additional disclosures under the new guidance. We plan to adopt this standard in the first quarter of 2018 using the modified
retrospective method.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory:
Topic 330 (ASU 2015-11) to amend Topic 330, Inventory. Topic 330 previously required 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 now 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 adopted ASU 2015-
11 at the beginning of the first quarter of 2017. Adoption of ASU 2015-11 did not have a material impact on our consolidated
financial statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred
Taxes: Topic 740 (ASU 2015-17). Current GAAP requires the deferred taxes for each jurisdiction to be presented as a net current
asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the
classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit
carryforwards, based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to
be allocated on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. The new guidance requires
that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance
sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not
change the existing requirement that only permits offsetting within a jurisdiction. We adopted ASU 2015-17 at the beginning of
the first quarter of 2017. At the time of adoption, all of our deferred tax assets and liabilities, along with any related valuation
allowance, were classified as noncurrent on our Consolidated Balance Sheet. We adopted ASU 2015-17 on a retrospective basis.
As such, prior period amounts have been adjusted to reflect the retrospective application of ASU 2015-17. This resulted in
$19.1 million of current net deferred tax assets being reclassified as noncurrent on our December 31, 2016 Consolidated Balance
Sheet.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities: Topic 825 (ASU 2016-01). The updated guidance enhances the reporting model for financial
instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. Adoption
of ASU 2016-01 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods
within those fiscal years. 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 (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. As of December 31, 2017, the new standard requires application with a modified retrospective
approach to each prior reporting period presented with various optional practical expedients. While we expect adoption to lead
36
to a material increase in the assets and liabilities recorded on our Consolidated Balance Sheet, we are still evaluating the overall
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 (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 (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 consolidated balance sheet and the statement of cash flows must be disclosed when the consolidated
balance sheet 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 (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 adopted ASU 2017-04 at the beginning of the second quarter of 2017. Adoption of ASU 2017-04
did not have a material impact on our consolidated financial statements.
In August 2017, FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities (ASU 2017-12). The new standard simplifies and expands the eligible
hedging strategies for financial and nonfinancial risks. It also enhances the transparency of how hedging results are presented and
disclosed. Further, the new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates
the requirement to recognize hedge ineffectiveness separately in earnings. Adoption of ASU 2017-12 is required for fiscal
reporting periods beginning after December 15, 2018, including interim reporting periods within those fiscal years with early
adoption being permitted. We are currently evaluating the potential impact of the pending adoption of ASU 2017-12 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 level and timing of: product
deliveries and customer acceptances, contractually determined billings, cash collections of receivables, inventory purchased for
future deliveries, and incentive compensation. Working capital requirements, including inventory purchases and normal capital
expenditures, are generally funded with cash from operations.
37
In the third quarter of 2017, we implemented a restructuring plan to reduce our operating costs and better align our workforce
with long-term business strategies. The restructuring plan reduced our workforce by approximately 190 employees, with the vast
majority of such terminations effective in July 2017. We recorded $8.6 million in expense associated with the restructuring plan,
primarily related to employee severance, in 2017. The majority of the cash payments related to the restructuring charges were
paid in 2017.
In September of 2017, we completed a strategic transaction with Seagate Cloud Systems Inc. centered around the addition
of Seagate’s ClusterStor high-performance storage business. As part of the transaction, we have assumed customer support
obligations associated with the ClusterStor product line and have added more than 125 employees and contractors. Assets received
as part of the transaction included cash of $8.0 million. We expect to receive approximately $1.8 million in additional cash in the
first half of 2018 as part of post-closing adjustments based on the final analysis of obligations to be assumed
Total cash and investments decreased from $224.6 million at December 31, 2016 to $147.3 million at December 31, 2017.
As of December 31, 2017, $19.1 million of our total cash and investments balance was held by foreign subsidiaries. As of
December 31, 2017, we had $3.0 million in restricted cash associated with certain letters of credit outstanding to secure customer
prepayments. As of December 31, 2017, we had working capital of $354.3 million compared to $373.0 million as of December 31,
2016.
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
2017
2016
2015
$
(73,341) $
(13,663)
(332)
(52,313) $
8,998
(540 )
147,756
7,216
(1,373)
Operating Activities. For the year ended December 31, 2017, cash used in operating activities was primarily driven by an
increase of $97.7 million in inventory as a result of system builds for future deliveries and the net loss, adjusted for non-cash and
non-operating items, of $31.7 million. These amounts were partially offset by collections from customers that resulted in a
decrease of $38.7 million in accounts and other receivables. For the year ended December 31, 2016, cash used in operating
activities was primarily driven by a $78.4 million increase in our accounts and other receivable balance from December 31, 2015
to December 31, 2016. This was due to a number of large customer acceptances in the fourth quarter of 2016 for which we
collected cash 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, 2017, cash used in investing activities was primarily due to
purchases of debt securities of $94.9 million and purchases of property and equipment of $17.5 million, mostly related to
leasehold improvements for our new facilities in Bloomington, Minnesota. These amounts were partially offset by sales and
maturities of debt securities of $87.5 million and $8.0 million of cash received as part of the strategic transaction with Seagate,
respectively. 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 2017, 2016 and 2015 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.
38
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, 2017 (in thousands):
Contractual Obligations
Development agreements
Operating leases
Total contractual cash obligations
Total
1 Year
Years 2-3
Years 4-5
Thereafter
$
$
25,061 $
53,933
78,994 $
19,930 $
7,461
27,391 $
5,131 $
13,150
18,281 $
— $
12,613
12,613 $
—
20,709
20,709
Amounts Committed by Year
As of December 31, 2017, we had a $50.0 million revolving line of credit (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 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, 2017. The Credit Facility matures in March 2018. We have begun discussions with the
bank that may result in changes to the size and terms of this arrangement.
We made no draws and had no outstanding cash borrowings on the line of credit as of December 31, 2017.
As of December 31, 2017, we had $15.0 million in USD equivalent value in outstanding letters of credit and $3.0 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, 2017, we incurred $17.5 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
39
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 net realizable
value, 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 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.
40
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 (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 (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 (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 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
41
•
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 net realizable value, with cost computed on a first-in, first-out basis (FIFO).
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 net realizable value. Prior to the adoption of ASU 2015-11 at the beginning of the first
quarter of 2017, inventory was valued at the lower of cost or market. The adoption of ASU 2015-11 did not have a material impact
on our consolidated financial statements.
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 net realizable value 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 net realizable 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 all
available positive and negative evidence, which includes, among other things, our recent results of operations, forecasted domestic
and international earnings over a number of years, all known business risks and industry trends, and applicable tax planning
strategies that should, if implemented, enable us to utilize our deferred tax assets before they expire. We consider our actual
historical results over several years to have stronger weight than other more subjective indicators, including forecasts, when
considering whether to establish or reduce a valuation allowance on deferred tax assets. We have significant difficulty projecting
future results due to the nature of the business and the industry in which we operate.
We provided a valuation allowance against our U.S. deferred tax assets and against the majority of our foreign deferred tax
assets at December 31, 2017 as the realization of such assets is not considered to be more likely than not at this time. In a future
42
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 benefit in our Consolidated Statement 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.
As of December 31, 2017, we had approximately $84.0 million of net deferred tax assets before application of a valuation
allowance. As of December 31, 2017, net deferred tax assets after reduction by the valuation allowance of $82.9 million were
$1.1 million. Included in our deferred tax assets is a deferred tax asset of $15.2 million related to federal net operating loss
carryforwards that will expire between 2019 and 2037 and a deferred tax asset of $36.0 million related to federal research and
development tax credits that will expire between 2021 and 2037.
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.
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
43
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 have granted 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. We do not currently believe that any of our
performance vesting restricted stock or performance vesting restricted stock units are “probable” of vesting.
Business Combinations
We account for business combinations using the purchase method of accounting and allocate 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 excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. If the fair value of the net
assets acquired exceeds the purchase price we record a bargain purchase gain. We use estimates and assumptions to 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 in the period in which
the adjustments are recognized.
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, we use risk-adjusted
cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. We believe the
level and timing of cash flows appropriately reflects market participant assumptions.
44
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, 2017, we had entered into foreign currency exchange contracts that were designated as cash flow
hedges that hedge approximately $96.3 million of anticipated cash receipts on specific foreign currency denominated sales
contracts. These foreign currency exchange contracts hedge the risk of foreign exchange rate changes between the time that the
related contracts were signed and when the cash receipts are expected to be received. As of December 31, 2017, we had entered
into foreign currency exchange contracts that had been dedesignated for the purposes of hedge accounting treatment totaling
$46.9 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, 2017, a hypothetical 10% unfavorable change in foreign currency exchange rates would impact our annual
operating results and cash flows by approximately $0.5 million.
45
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS*
Consolidated Balance Sheets at December 31, 2017 and December 31, 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016
and 2015
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
F-2
F-3
F-4
F-5
F-7
F-42
________________________________
* The Financial Statements are located following page F-1.
The selected quarterly financial data required by this item is set forth in Note 22 - 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
46
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 2017 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, 2017.
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, 2017.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Cray Inc.
Opinion on Internal Control over Financial Reporting
We have audited Cray Inc. and Subsidiaries' (“the Company”) internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on the 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)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated
statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”)
and our report dated February 15, 2018, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/S/ PETERSON SULLIVAN LLP
We have served as the Company’s auditor since 2005.
Seattle, Washington
February 15, 2018
48
Item 9B. Other Information
None.
49
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is contained in the proxy statement for our annual meeting of shareholders scheduled
to be held on or around June 12, 2018, 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 12, 2018, 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 12, 2018, 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 12, 2018, 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 12, 2018, and such information is incorporated herein by reference.
50
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)(1)
Financial Statements
Consolidated Balance Sheets at December 31, 2017 and December 31, 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017,
2016 and 2015
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and
2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
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,
2017, 2016 and 2015 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 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.
51
Exhibit
Exhibit Description
Incorporated by Reference
EXHIBIT INDEX
Form
File No.
Filing
Exhibit/
Filed
8-K
000-26820
04/25/12
2.1
8-K
8-K
8-K
8-K
S-8
S-8
10-K
DEF
14A
DEF
14A
DEF
14A
DEF
14A
DEF
14A
DEF
14A
10-K
10-K
10-K
8-K
8-K
000-26820
000-26820
000-26820
06/08/06
02/12/07
04/19/12
3.3
3.1
3.1
000-26820
02/28/17
3.1
333-57970
333-57970
03/30/01
03/30/01
4.1
4.2
000-26820
03/04/11
10.28
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
000-26820
04/01/05
10.33
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
2.1
3.1
3.2
3.3
3.4
10.0*
10.1*
10.2*
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
Second Amendment to Amended and Restated
Bylaws
1999 Stock Option Plan
2000 Non-Executive Employee Stock Option
Plan
Amended and Restated 2001 Employee Stock
Purchase Plan
10.3*
2003 Stock Option Plan
10.4*
2004 Long-Term Equity Compensation Plan
10.5*
2006 Long-Term Equity Compensation Plan
10.6*
2009 Long-Term Equity Compensation Plan
10.7*
2013 Equity Incentive Plan
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
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
52
Exhibit
Exhibit Description
Incorporated by Reference
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
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
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
Frederick A. Kohout, dated January 31, 2016
Offer Letter between the Company and
Charles A. Morreale, dated March 14, 2004
Offer Letter between the Company and
Efstathios Papaefstathiou, dated November 11,
2016
Offer Letter between the Company and
Michael C. Piraino, dated August 31, 2009
Offer Letter between the Company and Steve
Scott, dated August 30, 2014
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
Form
8-K
File No.
Filing
Exhibit/
Filed
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
8-K
000-26820
03/08/05
10.1
10-Q
000-26820
11/09/05
10.1
10-Q
000-26820
05/02/17
10.2
10-Q
000-26820
04/29/14
10.2
10-Q
000-26820
10/28/14
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
X
X
Amended and Restated Non-Employee Director
Compensation Policy
10-Q
000-26820
04/29/14
10.3
10.30*
2017 Executive Bonus Plan
10.31*
Form of Indemnification Agreement
10-Q
8-K
000-26820
05/02/17
10.1
000-26820
02/08/11
10.1
53
Exhibit
Exhibit Description
Incorporated by Reference
Form
8-K
File No.
Filing
Exhibit/
Filed
000-26820
04/27/16
10.10
8-K
000-26820
05/03/12
10.1
8-K
000-26820
01/11/16
10.2
10.32
10.33
10.34
10.35
21.1
23.1
24.1
31.1
31.2
32.1
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, as
amended
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
101.INS
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
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.
Item 16. Form 10-K Summary
None.
54
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 15, 2018.
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 15, 2018.
Signature
Title
By /s/ PETER J. UNGARO
Chief Executive Officer, President and Director
Peter J. Ungaro
(Principal Executive Officer)
By /s/ BRIAN C. HENRY
Chief Financial Officer and Executive Vice President
Brian C. Henry
(Principal Financial Officer)
By /s/ CHARLES D. FAIRCHILD
Chief Accounting Officer, Controller and Vice President
Charles D. Fairchild
(Principal Accounting Officer)
By /s/ PRITHVIRAJ BANERJEE
Prithviraj Banerjee
By /s/ CATRIONA M. FALLON
Catriona M. Fallon
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
55
Director
Director
Director
Director
Director
Director
Director
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2017
December 31,
2016
222,962
—
—
197,941
88,254
20,006
529,163
1,655
31,050
30,620
3,023
14,182
1,637
85,613
17,629
714,572
45,504
17,199
10,303
83,129
156,135
27,258
5,703
189,096
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts and other receivables, net
Inventory
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
ASSETS
$
137,326 $
1,964
6,997
162,034
186,307
25,015
519,643
1,030
23,367
36,623
2,551
14,182
4,345
1,106
15,910
$
618,757 $
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 13)
Shareholders’ equity:
Preferred stock — Authorized and undesignated, 5,000,000 shares; no shares issued or
outstanding
Common stock and additional paid-in capital, par value $.01 per share — Authorized,
75,000,000 shares; issued and outstanding 40,464,963 and 40,757,458 shares,
respectively
Accumulated other comprehensive income
Accumulated deficit
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
$
57,207 $
18,546
9,471
80,119
165,343
38,622
14,495
218,460
—
—
633,408
622,604
915
(234,026)
400,297
618,757 $
2,782
(99,910)
525,476
714,572
The accompanying notes are an integral part of these consolidated financial statements
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
Restructuring
Total operating expenses
Income (loss) from operations
Other income (expense), net
Interest income, net
Gain on strategic transaction
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per common share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Years Ended December 31,
2017
2016
2015
$
250,195 $
142,314
392,509
499,432 $
130,377
629,809
188,830
72,975
261,805
130,704
98,777
59,894
29,113
8,568
196,352
(65,648)
5,002
3,276
4,480
(52,890)
(80,939)
(133,829) $
(3.33) $
(3.33) $
40,139
40,139
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
$
$
$
601,294
123,395
724,689
426,821
72,185
499,006
225,683
96,563
60,150
27,966
—
184,679
41,004
365
1,408
—
42,777
(15,240)
27,537
0.70
0.68
39,257
40,691
The accompanying notes are an integral part of these consolidated financial statements
F-2
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (loss)
Other comprehensive income (loss), net of tax:
Years Ended December 31,
2017
2016
2015
$
(133,829) $
10,615 $
27,537
Unrealized gain (loss) on available-for-sale investments
Foreign currency translation adjustments
Unrealized gain (loss) on cash flow hedges
Reclassification adjustments on cash flow hedges included in net
income (loss)
(7)
(490)
(1,457)
87
8
426
8,030
(13,324)
Other comprehensive income (loss)
Comprehensive income (loss)
(1,867)
(135,696) $
$
(4,860)
5,755 $
(20)
(394)
5,251
(3,698)
1,139
28,676
The accompanying notes are an integral part of these consolidated financial statements
F-3
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
BALANCE, December 31, 2014
Issuance of shares under employee stock
purchase plan
Exercise of stock options
Restricted shares issued for compensation,
net of forfeitures and taxes
Share-based compensation
Other comprehensive income
Net income
Common Stock
and Additional
Paid In Capital
Number
of Shares
Amount
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
40,822 $
598,390 $
6,503 $
(151,039) $
27
229
711
2,289
Total
453,854
711
2,289
(384)
(2,464)
(1,909)
(4,373)
—
11,353
1,139
27,537
11,353
1,139
27,537
BALANCE, December 31, 2015
40,694 $
610,279 $
7,642 $
(125,411) $
492,510
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 (Note 14)
Net income
27
169
718
2,121
718
2,121
(133)
(1,665)
(1,714)
(3,379)
—
11,151
(4,860)
11,151
(4,860)
16,600
16,600
10,615
10,615
BALANCE, December 31, 2016
40,757 $
622,604 $
2,782 $
(99,910) $
525,476
Issuance of shares under employee stock
purchase plan
Exercise of stock options
Restricted shares issued for compensation,
net of forfeitures and taxes
Share-based compensation
Other comprehensive loss
Net loss
20
157
365
1,342
(469)
(1,752)
—
10,849
365
1,342
(287)
(2,039)
(1,867)
(133,829)
10,849
(1,867)
(133,829)
BALANCE, December 31, 2017
40,465 $
633,408 $
915 $
(234,026) $
400,297
The accompanying notes are an integral part of these consolidated financial statements
F-4
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization
Share-based compensation expense
Deferred income taxes
Gain on strategic transaction
Gain on sale of equity investment
Other
Cash provided (used) due to changes in operating assets and liabilities:
Accounts and other receivables
Long-term investment in sales-type lease, net
Inventory
Prepaid expenses and other assets
Accounts payable
Accrued payroll and related expenses and other accrued liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Investing activities:
Sales and maturities of available-for-sale investments
Purchases of available-for-sale investments
Cash received in strategic transaction
Proceeds from sale of equity investment
Change in restricted cash
Purchases of property and equipment
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of common stock through employee stock purchase plan
Purchase of employee restricted shares to fund related statutory tax withholding
Proceeds from exercise of options
Net cash used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of period
End of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
F-5
Years Ended December 31,
2017
2016
2015
$ (133,829) $
10,615 $
27,537
16,760
10,849
81,468
(4,480)
(3,349)
837
38,660
10,129
(97,688)
(5,306)
11,527
7,572
(6,491)
14,684
11,151
(1,861)
—
—
2,850
(78,396)
(17,224)
15,343
2,265
16,903
(21,073)
(7,570)
17,017
11,353
12,103
—
—
1,945
36,665
11,510
21,292
(3,972)
(19,849)
23,841
8,314
(73,341)
(52,313)
147,756
87,513
(94,902)
8,000
4,481
(1,288)
(17,467)
(13,663)
365
(2,039)
1,342
(332)
1,700
30,990
(16,159)
—
—
1,670
(7,503)
8,998
718
(3,379)
2,121
(540)
157
16,229
(14,991)
—
—
13,445
(7,467)
7,216
711
(4,373)
2,289
(1,373)
428
(85,636)
(43,698)
154,027
222,962
266,660
112,633
$ 137,326 $ 222,962 $ 266,660
$
14 $
31 $
930
2,441
4
3,890
Non-cash investing and financing activities:
Inventory transfers to property and equipment and service spares
Strategic transaction:
Non-cash assets acquired:
Receivable from Seagate
Inventory
Property and equipment
Intangible assets
Liabilities assumed:
Deferred revenue
Deferred tax liabilities
Other liabilities
$
$
$
2,429 $
5,292 $
8,177
1,782 $
4,120
2,915
3,350
12,168 $
3,019
500
— $
—
—
—
— $
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements
F-6
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF BUSINESS
Cray Inc. (Cray or the Company) designs, develops, manufactures, markets and services products primarily at the high-end
of the high performance computing (HPC) and data analytics and artificial intelligence (AI) markets. These products include
compute systems commonly known as supercomputers, and storage, data analytics and AI solutions leveraging more than four
decades of delivering the world’s most advanced computing systems. The Company also provides related software, system
maintenance and support and engineering services. The Company’s customers include domestic and foreign government 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 (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 (loss) 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, 2017 and 2016, the Company had $3.0 million and
$1.7 million, respectively, in restricted cash associated with certain letters of credit to secure customer prepayments and other
customer related obligations.
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
F-7
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
required to sell the debt securities prior to recovery of its amortized cost basis, the Company records an impairment charge in the
amount of the credit loss and the balance, if any, to other comprehensive income (loss).
Investments that mature between three months and one year from the purchase date are initially classified as short-term
investments in the Consolidated Balance Sheet. Investments that mature beyond one year from the purchase date are initially
classified as long-term investments in the Consolidated Balance Sheet.
Foreign Currency Derivatives
The Company uses foreign currency exchange contracts to hedge certain foreign currency exposures. Foreign currency
exchange contracts are cash flow hedges of the Company’s foreign currency exposures on certain revenue contracts and are
recorded at the contract’s fair value. Most of the Company’s foreign currency exchange contracts are designated as cash flow
hedges for 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 18 — 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 8 — 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.
F-8
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounts Receivable
Accounts receivable are stated at principal amounts and are primarily comprised of amounts contractually due from
customers for products and services and amounts due from government research and development contracts. The Company
provides an allowance for doubtful accounts based on an evaluation of customer past due account balances. In determining
whether to record an allowance for a specific customer, the Company considers a number of factors, including prior payment
history and financial information for the customer.
Fair Values of Financial Instruments
The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants. The Company’s financial instruments primarily consist of debt
securities, time deposits, money market funds, and foreign currency derivatives. See Note 4 — Fair Value Measurement for a
further discussion on fair value of financial instruments.
Inventories
Inventories are valued at the lower of cost or net realizable value, 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 net realizable value. Prior to the adoption
of ASU 2015-11 at the beginning of the first quarter of 2017, inventories were valued at the lower of cost or market. The adoption
of ASU 2015-11 did not have a material impact on the Company’s consolidated financial statements.
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 or there is an expected scrap value 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 net realizable value 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). Prior to the
adoption of ASU 2015-11 at the beginning of the first quarter of 2017, service spares were valued at the lower of cost or market.
The adoption of ASU 2015-11 did not have a material impact on the Company’s consolidated financial statements.
F-9
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 and whenever events or changes in circumstances indicate that the fair value of a reporting unit may be less than its
carrying amount (a triggering event). In the second quarter of 2017, the Company determined that declining revenues in recent
years, coupled with the anticipated loss for 2017, should be construed as a triggering event for the purposes of impairment testing
of goodwill in accordance with ASC 350. The Company performed a quantitative goodwill impairment test on June 30, 2017.
Due to the proximity of the triggering event to the October 1 annual testing date, the Company has elected to change the date of
its annual goodwill impairment test from the beginning of its fourth fiscal quarter to the beginning of its second fiscal quarter.
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 quantitative 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 quantitative goodwill 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 quantitative goodwill impairment test.
In performing the quantitative goodwill impairment test, 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. If the carrying value of a reporting unit exceeds its fair value, the Company records an impairment
loss equal to the difference.
The Company performed a quantitative goodwill impairment test during the second fiscal quarter of 2017 and concluded
that the fair values of its reporting units were greater than their carrying amounts.
Business Combinations
The Company accounts for business combinations using the purchase 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 excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. If the fair value of
the net assets acquired exceeds the purchase price the Company records a bargain purchase gain. The Company uses estimates
and assumptions to 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 in the period in which the adjustments are recognized.
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-
F-10
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
adjusted cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The
Company believes the level and timing of cash flows appropriately reflects market participant assumptions.
Revenue Recognition
The Company recognizes revenue, including transactions under sales-type leases, when it is realized or realizable and
earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement,
delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur
until the products have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where
applicable, a customer acceptance has been obtained. The sales price is not considered to be fixed or determinable until all material
contingencies related to the sales have been resolved. The Company records revenue in the Consolidated Statements of Operations
net of any sales, use, value added or certain excise taxes imposed by governmental authorities on specific sales transactions. In
addition to the aforementioned general policy, the following are the Company’s statements of policy with regard to multiple-
element arrangements and specific revenue recognition policies for each major category of revenue.
Multiple-Element Arrangements. The Company commonly enters into revenue arrangements that include multiple
deliverables of its product and service offerings due to the needs of its customers. Products may be delivered in phases over time
periods which can be as long as five years. Maintenance services generally begin upon acceptance of the first equipment delivery
and future deliveries of equipment generally have an associated maintenance period. The Company considers the maintenance
period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which
may include a warranty period and accordingly allocates a portion of the arrangement consideration as a separate deliverable
which is recognized as service revenue over the entire service period. Other services such as training and engineering services
can be delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement is separated into more
than one unit of accounting if the following criteria are met:
•
•
The delivered item(s) has value to the customer on a standalone basis; and
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the
undelivered item(s) is considered probable and substantially in the control of the Company.
If these criteria are met for each element, the arrangement consideration is allocated to the separate units of accounting
based on each unit’s relative selling price. If these criteria are not met, the arrangement is accounted for as one unit of accounting
which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such
criteria are met or when the last undelivered element is delivered.
The Company follows a selling price hierarchy in determining the best estimate of the selling price of each deliverable.
Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to
determine vendor specific objective evidence (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 (TPE). The Company’s
inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract
terms which can be due to infrequently selling each element separately, not pricing products within a narrow range, or only having
a limited sales history, such as in the case of certain advanced and emerging technologies. TPE is determined based on the
Company’s prices or competitor prices for similar deliverables when sold separately. However, the Company is often unable to
determine TPE, as the Company’s offerings usually contain a significant level of customization and differentiation from those of
competitors and the Company is often unable to reliably determine what similar competitor products’ selling prices are on a
standalone basis.
F-11
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price
(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 (POC)
method. Under the POC method, revenue is recognized based on the costs incurred to date as a percentage of the total estimated
costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress
toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues
or costs, and such revisions are recorded in income in the period in which the circumstances that gave rise to the revision become
known by management. The Company performs ongoing profitability analyses of its contracts accounted for under the POC
method in order to determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any time
these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded
immediately.
The Company records revenue from certain research and development contracts which include milestones using the
milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive if management
believes there is substantive uncertainty that it will be achieved and the milestone consideration meets all of the following criteria:
•
It is commensurate with either of the following:
•
•
The Company’s performance to achieve the milestone; or
The enhancement of value of the delivered item or items as a result of a specific outcome resulting from
the Company’s performance to achieve the milestone.
•
•
It relates solely to past performance.
It is reasonable relative to all of the deliverables and payment terms (including other potential milestone
consideration) within the arrangement.
The individual milestones are determined to be substantive or non-substantive in their entirety and milestone consideration
is not bifurcated.
F-12
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 gains were $1.7 million and $1.6 million for 2017 and 2015, respectively. Net transaction losses were $1.0 million
for 2016.
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
F-13
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
be completed and are measured as milestone achievements occur or as costs are incurred. These estimates are reviewed on a
periodic basis and are subject to change, including in the near term. If an estimate is changed, net research and development
expense could be impacted significantly.
The Company does not record a receivable from the U.S. government prior to completing the requirements necessary to
bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget restrictions and
milestones may be subject to completion risk, and as a result, there may be periods in which research and development costs are
expensed as incurred for which no reimbursement is recorded, as milestones have not been completed or the U.S. government
has not funded an agreement. Accordingly, there can be substantial variability in the amount of net research and development
expenses from quarter to quarter and year to year.
The Company classifies amounts to be received from funded research and development projects as either revenue or a
reduction to research and development expense based on the specific facts and circumstances of the contractual arrangement,
considering total costs expected to be incurred compared to total expected funding and the nature of the research and development
contractual arrangement. In the event that a particular arrangement is determined to represent revenue, the corresponding research
and development costs are classified as cost of revenue.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets
and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be
in effect when the differences and carryforwards are expected to be recovered or settled.
A valuation allowance for deferred tax assets is provided when the Company estimates that it is more likely than not that
all or a portion of the deferred tax assets will not be realized through future operations. This assessment is based upon
consideration of all available positive and negative evidence, which includes, among other things, the Company’s recent results
of operations, forecasted domestic and international earnings over a number of years, all known business risks and industry trends,
and applicable tax planning strategies that should, if implemented, enable the Company to utilize its deferred tax assets before
they expire. 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 provided a valuation allowance against its U.S. deferred tax assets and against the majority of its deferred
tax assets arising in foreign jurisdictions at December 31, 2017 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 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.
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
F-14
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 has granted 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 $3.4 million, $3.2 million, and $2.3 million in 2017, 2016, and 2015, 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 (EPS)
Basic EPS is computed by dividing net income (loss) 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 (loss) 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 year ended December 31, 2017, outstanding stock options, unvested restricted stock and unvested restricted stock
units were antidilutive because of the net loss and, as such, their effect has not been included in the calculation of basic or diluted
net loss per share. For the years ended December 31, 2016 and 2015, the added shares from these items included in the calculation
of diluted shares and EPS totaled approximately 1.2 million, and 1.4 million, respectively. Potentially dilutive shares of
3.1 million, 1.2 million, and 0.9 million, respectively, have been excluded from the denominator in the computation of diluted
EPS for the years ended December 31, 2017, 2016 and 2015, respectively, because they were antidilutive. An additional
0.5 million, 1.2 million and 1.2 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, 2017, 2016 and 2015, respectively, because the
conditions for vesting had not been met as of the balance sheet date.
F-15
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accumulated Other Comprehensive Income
Accumulated other comprehensive income, a component of shareholders’ equity, consisted of the following at December 31
(in thousands):
Accumulated unrealized net loss on available-for-sale investments
Accumulated currency translation adjustments
Accumulated unrealized net gain (loss) on cash flow hedges
Accumulated other comprehensive income
Recent Accounting Pronouncements
2017
2016
(7) $
1,611
(689)
915 $
—
2,101
681
2,782
$
$
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers: Topic 606 (ASU 2014-09) to supersede nearly all existing revenue recognition guidance
under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to
customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09
defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be
required within the revenue recognition process than required under existing GAAP, including identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. Adoption of ASU 2014-09 was initially required for fiscal and interim
reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period
presented with the option to elect certain practical expedients as defined within ASU 2014-09 (full retrospective method); 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 (modified retrospective method).
In August 2015, FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers -
Deferral of the Effective Date: Topic 606 (ASU 2015-14) that deferred the effective date of ASU 2014-09 by one year. Application
of the new revenue standard is permitted for fiscal and interim reporting periods beginning after December 15, 2016 and required
for fiscal and interim reporting periods beginning after December 15, 2017. The Company believes the impact of adopting the
new guidance will be immaterial to its annual and interim financial statements. The Company believes that the impact will be
limited to the identification of a significant financing component in a small number of its contracts with customers. The Company
will also be required to make additional disclosures under the new guidance. The Company plans to adopt this standard in the
first quarter of 2018 using the modified retrospective method.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory:
Topic 330 (ASU 2015-11). Topic 330 previously required 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 now 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 adopted ASU 2015-11 at the beginning of
the first quarter of 2017. Adoption of ASU 2015-11 did not have a material impact on the Company’s consolidated financial
statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred
Taxes: Topic 740 (ASU 2015-17). Current GAAP requires the deferred taxes for each jurisdiction to be presented as a net current
asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the
classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit
carryforwards, based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to
F-16
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. The Company adopted ASU 2015-17 at the
beginning of the first quarter of 2017. At the time of adoption, all of the Company’s deferred tax assets and liabilities, along with
any related valuation allowance, were classified as noncurrent on its Consolidated Balance Sheet. The Company adopted
ASU 2015-17 on a retrospective basis. As such, prior period amounts have been adjusted to reflect the retrospective application
of ASU 2015-17. This resulted in $19.1 million of current net deferred tax assets being reclassified as noncurrent on the
Company’s December 31, 2016 Consolidated Balance Sheet.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities: Topic 825 (ASU 2016-01). The updated guidance enhances the reporting model for financial
instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. Adoption
of ASU 2016-01 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods
within those fiscal years. The Company 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 (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. As of December 31, 2017, the new standard requires application with a modified retrospective
approach to each prior reporting period presented with various optional practical expedients. While the Company expects
adoption to lead to a material increase in the assets and liabilities recorded on its Consolidated Balance Sheet, the Company is
still evaluating the overall 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 (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 (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 consolidated balance sheet and the statement of cash flows must be disclosed when the consolidated
balance sheet 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
F-17
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 (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 adopted ASU 2017-04 at the beginning of the second quarter of 2017. Adoption of
ASU 2017-04 did not have a material impact on the Company’s consolidated financial statements.
In August 2017, FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities (ASU 2017-12). The new standard simplifies and expands the eligible
hedging strategies for financial and nonfinancial risks. It also enhances the transparency of how hedging results are presented and
disclosed. Further, the new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates
the requirement to recognize hedge ineffectiveness separately in earnings. Adoption of ASU 2017-12 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 Company is currently evaluating the potential impact of the pending adoption of ASU 2017-12 on
its consolidated financial statements.
NOTE 3 STRATEGIC TRANSACTION
On September 25, 2017, the Company completed a strategic transaction with Seagate Cloud Systems Inc. (Seagate) centered
around the transfer of Seagate’s ClusterStor high-performance storage business (ClusterStor) to Cray. The ClusterStor business
consists of the ClusterStor L300, ClusterStor L300N and the ClusterStor SL220 storage solutions. The Company will sell, support,
develop, manufacture, and test the ClusterStor storage solutions. The addition of ClusterStor will allow the Company to have
more control over its storage products and to increase the value added in its solutions. It will also enhance the opportunity for the
Company to sell its storage products through other resellers and to consolidate its service capability.
The transaction was accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed
by the Company were primarily recognized at their fair value at the acquisition date using significant inputs that are not observable
in the market (i.e., Level 3 inputs). The Company utilized a third-party appraisal in its determination of the fair value of the
various intangible assets acquired and deferred revenue.
The Company received assets valued at $20.2 million and assumed liabilities valued at $15.7 million. The excess of assets
received over liabilities assumed of $4.5 million has been accounted for as a bargain purchase and recognized as a gain in the
line item gain on strategic transaction in the Consolidated Statements of Operations for the year ended December 31, 2017. The
bargain purchase gain was primarily the result of the seller’s planned exit from the business. Assets received included cash of
$8.0 million. The Company expects to receive approximately $1.8 million in additional cash in the first half of 2018 as part of
post-closing adjustments based on the final analysis of obligations to be assumed.
The Company has assumed customer support obligations associated with the ClusterStor business and has added more than
125 employees and contractors. Because the fair value of the assets acquired exceeded the amount of liabilities assumed, resulting
in a $4.5 million gain on the transaction, the Company reassessed and reaffirmed that the recognition and measurement of
identifiable assets acquired and liabilities assumed were appropriate as required by the accounting standards applicable to bargain
purchase transactions.
F-18
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company incurred approximately $0.5 million of legal and other transaction costs directly related to the transaction,
all of which were expensed and included in general and administrative expenses in the Consolidated Statements of Operations
for the year ended December 31, 2017.
The Company estimated the fair value of the assets acquired and liabilities assumed as of the acquisition date based on
information that is currently available. The Company may obtain additional information to assist it in determining the fair value
of the net assets acquired at the acquisition date during the measurement period and, as such, additional purchase price
adjustments may be recorded. The Company will record measurement period adjustments, if any, in the period in which the
adjustments are recognized.
Pro forma financial results are not presented as it is impractical to obtain the necessary information. The seller did not
operate the acquired assets as a standalone business and, therefore, historical financial information is not available. It is
impractical to determine the revenue or net income (loss) included in the Consolidated Statements of Operations related to
ClusterStor since the date of acquisition because ClusterStor has been fully integrated into the Company’s storage and data
management segment. The Company was also previously purchasing the same ClusterStor products from Seagate for resale that
it acquired as part of the transaction. For these reasons, the operating results of ClusterStor cannot be separately identified.
The following are the estimated values of the assets acquired and the liabilities assumed (in thousands):
Cash
Receivable from Seagate
Inventory
Property and equipment
Deferred revenue
Deferred tax liabilities
Other liabilities
Net tangible assets
Trademarks
Developed technology
Customer relationships
Supply agreement
Total net assets acquired
$
$
8,000
1,782
4,120
2,915
(12,168)
(3,019)
(500)
1,130
90
1,400
260
1,600
4,480
The fair values of the major components of the intangible assets acquired and their estimated useful lives are as follows (in
thousands):
Trademarks
Developed technology
Customer relationships
Supply agreement
Intangible Asset Class
Fair Value
$
$
$
$
90
1,400
260
1,600
Useful Life
(in Years)
5
3
10
4
F-19
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The carrying amount of the major components of intangible assets acquired are as follows as of December 31, 2017 (in
thousands):
Trademarks
Developed technology
Customer relationships
Supply agreement
Total
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
90 $
5 $
1,400
260
1,600
117
7
100
3,350 $
229 $
85
1,283
253
1,500
3,121
Aggregate amortization expense of these intangible assets expected for the years ending December 31 are as follows (in
thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
911
911
794
344
40
121
$
3,121
NOTE 4 FAIR VALUE MEASUREMENTS
Under FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, based on the
observability of the inputs used in the valuation techniques used to determine the fair value of certain financial assets and
liabilities, the Company is required to provide the following information according to the fair value hierarchy. The fair value
hierarchy ranks the quality and reliability of the information used to determine fair values.
F-20
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined
by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market
activity for the asset or liability. The following table presents information about the Company’s financial assets and liabilities that
have been measured at fair value on a recurring basis as of December 31, 2017 and 2016, and indicates the fair value hierarchy
of the valuation inputs utilized to determine such fair value (in thousands):
Description
Assets:
Cash and cash equivalents and restricted cash
Available-for-sale investments (1)
Foreign currency exchange contracts (2)
Assets measured at fair value at December 31, 2017
Liabilities:
Foreign currency exchange contracts (3)
Liabilities measured at fair value at December 31, 2017
Description
Assets:
Cash and cash equivalents and restricted cash
Foreign currency exchange contracts (2)
Assets measured at fair value at December 31, 2016
Liabilities:
Foreign currency exchange contracts (3)
Liabilities measured at fair value at December 31, 2016
_______________________________
Fair Value
as of
December 31,
2017
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
)
(
Level 2
140,320 $
6,997
3,251
150,568 $
140,320 $
6,997
—
147,317 $
2,431
2,431 $
—
— $
—
—
3,251
3,251
2,431
2,431
Fair Value
as of
December 31,
2016
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
)
(
Level 2
224,617 $
11,250
235,867 $
224,617 $
—
224,617 $
41
41 $
—
— $
—
11,250
11,250
41
41
$
$
$
$
$
$
(1) Included in “Short-term investments” on the Company’s Consolidated Balance Sheets.
(2) Included in “Prepaid expenses and other current assets” and “Other non-current assets” on the Company’s Consolidated
Balance Sheets.
(3) Included in “Other accrued liabilities” and “Other non-current liabilities” on the Company’s Consolidated Balance Sheets.
Foreign Currency Derivatives
The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales transactions that
are payable in foreign currencies.
F-21
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2017 and 2016, 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):
Euros (EUR)
Swiss Francs (CHF)
Japanese Yen (JPY)
Canadian Dollars (CAD)
New Zealand Dollars (NZD)
December 31,
2017
2016
2.1
—
4,345.6
56.0
16.2
1.5
3.6
—
54.4
—
The Company had hedged foreign currency exposure related to these designated cash flow hedges of approximately
million and $46.9 million as of December 31, 2017 and 2016, respectively.
$96.3
As of December 31, 2017 and 2016, the Company had outstanding foreign currency exchange contracts that had been
dedesignated for the purposes of hedge accounting treatment. The Company dedesignates cash flow hedges when the receivable
related to the hedged cash flow is recorded. The outstanding notional amounts were approximately (in millions):
British Pounds (GBP)
Euros (EUR)
Japanese Yen (JPY)
Canadian Dollars (CAD)
Swiss Francs (CHF)
December 31,
2017
2016
26.1
4.7
—
0.3
2.6
33.8
8.0
2,464.7
32.4
—
The foreign currency exposure related to these contracts was approximately $46.9 million as of December 31, 2017 and
$107.5 million as of December 31, 2016. 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 2018 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, 2017 and 2016, the fair value of outstanding foreign currency exchange contracts totaled a net gain of
$0.8 million and $11.2 million, respectively.
F-22
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
December 31,
2017
2016
$
546 $
—
(129)
(1,907)
Total fair value of derivative instruments designated as cash flow hedges
$
(1,490) $
71
367
(9)
(5)
424
As of December 31, 2017, unrecognized losses, net of tax, of $0.7 million were included in “Accumulated other
comprehensive income” on the Company’s Consolidated Balance Sheets. As of December 31, 2016, unrecognized gains, net of
tax, of $0.7 million, 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
December 31,
2017
2016
$
$
1,252 $
1,453
(395)
2,310 $
5,344
5,468
(27)
10,785
NOTE 5 ACCUMULATED OTHER COMPREHENSIVE INCOME
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, 2017, 2016 and 2015 (in thousands). The gross reclassification adjustments decreased product revenue for the year
ended December 31, 2017 and increased product revenue for the years ended December 31, 2016 and 2015.
Gross of Tax Reclassifications
Net of Tax Reclassifications
Year Ended
December 31,
2017
2016
2015
$
$
(146 ) $
(87 ) $
22,207 $
13,324 $
6,163
3,698
F-23
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables show the changes in Accumulated Other Comprehensive Income by component for the years ended
December 31, 2017 and 2016 (in thousands):
Year Ended December 31, 2017
Unrealized Loss on
Investments
Foreign Currency
Translation
Adjustments
Unrealized Gain
(Loss) on Cash
Flow Hedges
Accumulated Other
Comprehensive
Income
Beginning balance
Current-period change, net of tax
Ending balance
Income tax expense (benefit) associated with
current-period change
$
$
$
— $
(7)
(7) $
2,101 $
(490)
1,611 $
681 $
(1,370)
(689) $
2,782
(1,867)
915
(3) $
1,110 $
(1,399) $
(292)
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
— $
1,675 $
426
2,101 $
5,975 $
(5,294)
681 $
7,642
(4,860)
2,782
6 $
(152) $
(2,425) $
(2,571)
NOTE 6 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
December 31,
2017
$
$
7,007
(10)
6,997
The Company’s investments in debt securities were investment grade and carried a long-term rating of A2/A or higher.
F-24
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 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,
2017
2016
131,151 $
9,321
3,569
10,684
7,337
162,062
(28)
162,034 $
156,705
17,264
1,915
8,683
13,395
197,962
(21)
197,941
$
$
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, 2017 and 2016, accounts receivable included $45.3 million and $104.6 million, respectively, due from
the U.S. Government. Of these amounts, $2.1 million and $1.4 million were unbilled as of December 31, 2017 and 2016,
respectively, based upon contractual billing arrangements with these customers. As of December 31, 2017, two non-
U.S. Government customers accounted for 38% of total accounts and other receivables. As of December 31, 2016, two non-U.S.
Government customers accounted for 24% of total accounts and other receivables.
NOTE 8 SALES-TYPE LEASE
The Company has a sales-type lease with one non-U.S. Government customer, under which it will receive quarterly
payments over the term of the lease, which expires in September 2020. The lease is denominated in British Pounds and the
Company has entered into certain foreign currency exchange contracts that act as an economic hedge for the foreign currency
exposure associated with this arrangement.
The following table shows the components of the net investment in the sales-type lease as of December 31, 2017 and
2016 (in thousands):
December 31
2017
2016
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
$
42,268 $
(6,831)
35,437
(1,386)
34,051
(23,367)
Investment in sales-type lease included in accounts and other receivables
$
10,684 $
52,224
(10,139)
42,085
(2,352)
39,733
(31,050)
8,683
F-25
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2017, minimum lease payments for each of the succeeding three fiscal years were as follows (in
thousands):
2018
2019
2020
Total minimum lease payments to be received
NOTE 9 INVENTORY
A summary of inventory follows (in thousands):
Components and subassemblies
Work in progress
Finished goods
$
$
15,197
15,478
11,593
42,268
December 31
2017
2016
$
$
37,219 $
59,456
89,632
186,307 $
31,695
39,894
16,665
88,254
As of December 31, 2017 and 2016, $48.1 million and $10.5 million, respectively, of finished goods inventory was located
at customer sites pending acceptance. At December 31, 2017, two customers accounted for $67.7 million of finished goods
inventory and at December 31, 2016, two customers accounted for $11.9 million of finished goods inventory.
The Company did not write-off any inventory in 2017. During 2016 and 2015, the Company wrote-off $4.8 million and
$0.5 million, respectively, of excess and obsolete inventory.
NOTE 10 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,
2017
2016
203 $
20,480
13,219
58,358
9,961
102,221
(65,598)
36,623 $
498
20,679
11,740
54,541
2,976
90,434
(59,814)
30,620
$
$
Depreciation expense on property and equipment for 2017, 2016 and 2015 was $14.4 million, $12.5 million and
million, respectively.
$13.3
F-26
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 SERVICE SPARES, NET
A summary of service spares follows (in thousands):
Service spares
Accumulated depreciation
Service spares, net
December 31,
2017
2016
$
$
7,670 $
(5,119)
2,551 $
6,503
(3,480)
3,023
Depreciation expense on service spares for 2017, 2016 and 2015 was $1.6 million, $1.5 million and $1.1 million, respectively.
NOTE 12 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
2017
2016
22,245 $
96,496
118,741
(38,622)
80,119 $
14,274
96,113
110,387
(27,258)
83,129
$
$
As of December 31, 2017 and 2016, the U.S. Government accounted for $32.5 million and $60.3 million, respectively, of
total deferred revenue. As of December 31, 2017 and 2016, no non-U.S. Government customers accounted for more than 10% of
total deferred revenue.
NOTE 13 COMMITMENTS AND CONTINGENCIES
The Company has recorded rent expense under leases for buildings or office space, which were accounted for as operating
leases, in 2017, 2016 and 2015 of $8.7 million, $8.4 million, and $5.9 million, respectively. The 2016 rent expense includes a
$2.3 million lease termination fee for the Company’s St. Paul facility.
Minimum contractual commitments as of December 31, 2017, were as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Minimum contractual commitments
Operating
Leases
Development
Agreements
$
$
7,461 $
6,918
6,232
6,271
6,342
20,709
53,933 $
19,930
5,116
15
—
—
—
25,061
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, 2017, 2016 and 2015, the Company incurred $17.5 million, $15.6 million and
$14.3 million, respectively, for such arrangements.
F-27
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 Company (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. As of July 18, 2017, trial in the first action has been stayed by the trial court until further notice
from the court. The United States Court of Appeals for the Federal Circuit granted Cray’s petition for writ of mandamus and
overturned the trial court’s determination that venue was proper in the Eastern District of Texas. The Federal Circuit also
remanded so the district court could determine where the case should be transferred, but the trial court has not yet ruled on that
issue. Trial in the second action is currently stayed pending resolution of the first action. 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 14 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.
On December 22, 2017, the President of the United States signed into law H.R. 1, “An Act to Provide for Reconciliation
Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Cuts and Jobs Act”). ASC
Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment.
The Tax Cuts and Jobs Act made significant changes to existing U.S. tax law, including, but not limited to, a permanent reduction
to the U.S. federal corporate income tax rate from 35% to 21%, imposition of a one-time tax on deferred foreign income
(“Repatriation Transition Tax”), adoption of a participation exemption system with respect to the taxation of future dividends
received from foreign corporations, and repeal of the corporate alternative minimum tax system. Other significant changes in the
Tax Cuts and Jobs Act include taxing payments made to foreign related parties that are deemed to be excessive, imposing a
minimum tax on certain foreign earnings, requiring (beginning after December 31, 2021) the capitalization and subsequent
amortization of certain research and development related expenses, and placing additional limits on the use of net operating losses
and the deductibility of certain executive compensation.
Given the significance of the Tax Cuts and Jobs Act, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin 118 (“SAB 118”) that expresses the views of the SEC regarding ASC Topic 740 in the reporting period that
includes the date of enactment. The SEC staff issuing SAB 118 recognized that a company’s review of the income tax effects
attributable to the enactment of the Tax Cuts and Jobs Act may be incomplete at the time financial statements are issued for the
reporting period that included the date of enactment and allows a company to record provisional amounts during a one year
measurement period similar to the principles adopted in ASC Topic 805, Business Combinations. During the measurement period,
income tax effects attributable to the enactment of the Tax Cuts and Jobs Act are expected to be recorded at the time a reasonable
estimate for all or a portion of the effects can be made, and provisional amounts can be adjusted and recognized, as a discreet
item in the applicable reporting period, as information becomes available, prepared or analyzed. The measurement period is
F-28
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
deemed to have ended when the company has obtained, prepared and analyzed the information necessary to finalize its
accounting.
SAB 118 summarizes a three-step process to be applied to each reporting period to account for and qualitatively disclose
income tax effects attributable to the enactment of the Tax Cuts and Jobs Act: (1) the effects of the change in tax law for which
accounting is complete; (2) provisional amounts (including subsequent adjustments to those amounts) for the effects of the tax
law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot
yet be made and therefore taxes are reflected in accordance with the law prior to the enactment of the Tax Cuts and Jobs Act.
Amounts recorded by the Company during the year ended December 31, 2017 where the accounting is considered to be
complete relate to a reduction, in the amount of $28.9 million, in the carrying value of the Company’s U.S. deferred tax assets
resulting from the Tax Cuts and Jobs Act’s reduction in the U.S. federal corporate income tax rate from 35% to 21%. The Tax
Cuts and Jobs Act also includes a Repatriation Transaction Tax on the net accumulated and previously untaxed earnings and
profits of a U.S. taxpayer’s foreign subsidiaries. As of December 31, 2017, the Company has recorded provisional tax expense,
in the amount of $0.3 million, attributable to the Repatriation Transition Tax and provisional tax expense, in the amount of
$0.3 million, as a result of the Company’s decision to no longer consider the undistributed earnings of its foreign subsidiaries to
be permanently reinvested outside of the U.S. The Company has not had sufficient time to obtain, prepare and analyze historical
tax returns, financial statements and related accounts that is required to finalize its accounting with respect to the items for which
provisional tax expense has been recorded
A majority of the Company’s deferred tax assets result from net operating loss carryforwards and research and development
tax credits. As of December 31, 2017, the Company had U.S. federal net operating loss carryforwards of approximately
$72.6 million and U.S. federal research and development tax credit carryforwards of approximately $36.0 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 2037, and the federal research and
development tax credits will expire from 2021 through 2037 if not utilized. Utilization of $21.2 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, 2017, the Company had approximately $7.1 million of foreign net operating loss
carryforwards in various jurisdictions. Most of the Company’s foreign net operating losses can be carried forward indefinitely,
with certain amounts expiring from 2018 to 2027.
Income (loss) before income taxes consisted of the following (in thousands):
United States
International
Total
Year Ended December 31,
2017
(53,201) $
311
(52,890) $
$
$
2016
2015
2,648 $
7,273
9,921 $
38,362
4,415
42,777
F-29
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax provision (benefit) for income taxes related to operations consisted of the following (in thousands):
Current provision (benefit):
Federal
State
Foreign
Total current provision
Deferred provision (benefit):
Federal
State
Foreign
Total deferred provision (benefit)
Total provision (benefit) for income taxes
Year Ended December 31,
2017
2016
2015
$
$
445 $
310
1,735
2,490
77,152
1,185
112
78,449
80,939 $
3 $
(279)
1,443
1,167
(2,127)
416
(150)
(1,861)
(694) $
725
1,389
1,023
3,137
12,198
(52)
(43)
12,103
15,240
The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate as follows
(in thousands):
Income tax provision (benefit) at statutory rate
State taxes, net of federal benefit
Foreign income taxes
Additional increases (deductions) from share-based compensation
Deemed dividends for U.S. income tax purposes
Nondeductible expenses
Disallowed compensation
Audit accrual (settlement)
Research and development tax credit
Tax effect of repatriation transition tax on unremitted earnings
Gain on strategic transaction
Deferred tax impact from tax rate change
Effect of change in valuation allowance on deferred tax assets
Effective income tax provision (benefit)
Year Ended December 31,
2017
(18,511) $
(1,066)
135
1,036
—
222
60
1,156
(3,827)
605
(1,568)
28,907
73,790
80,939 $
$
$
2016
2015
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
F-30
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):
Deferred Income Tax Assets
Inventory
Accrued compensation
Deferred revenue
Research and development credit carryforwards
Net operating loss carryforwards
Property and equipment
Goodwill
Research and development expenses
Share-based compensation
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Deferred Income Tax Liabilities
Investment in sales-type lease, net
Intangible assets
Other
Deferred tax liabilities
Net deferred tax asset
December 31,
2017
2016
6,495 $
262
8,285
32,218
22,775
4,136
289
9,944
4,124
2,592
91,120
(82,875)
8,245
(3,084)
(205)
(3,850)
(7,139)
1,106 $
4,127
511
14,742
28,241
38,348
8,188
106
—
7,016
12,939
114,218
(8,727)
105,491
(13,728)
(421)
(5,729)
(19,878)
85,613
$
$
The Company recorded income tax expense of $80.9 million during the year ended December 31, 2017, an income tax
benefit of $0.7 million during the year ended December 31, 2016 and income tax expense of $15.2 million during the year ended
December 31, 2015. The difference between the income tax benefit at the statutory rate and the Company’s effective income tax
expense for the year ended December 31, 2017 was primarily attributable to the reduction in the U.S. federal corporate income
tax rate as a result of the Tax Cuts and Jobs Act and its impact on the carrying value of the Company’s U.S. deferred tax assets
and the Company’s decision after the Tax Cuts and Jobs Act was enacted to increase the valuation allowance held against its U.S.
deferred tax assets, offset, in part, by research and development tax credits. 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 permanent items, partially offset by research and
development tax credits.
The valuation allowance on deferred tax assets increased by $74.1 million in 2017 and decreased by $0.8 million and
$0.7 million in 2016 and 2015, respectively. Substantially all of the increase in the valuation allowance during 2017 was
attributable to the Company’s decision to increase the valuation allowance held against its U.S. deferred tax assets on
December 31, 2017.
F-31
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s assessment of its ability to utilize its U.S. deferred tax assets was based upon all available positive and
negative evidence, which included, among other things, the Company’s recent results of operations, forecasted domestic and
international earnings over a number of years, all known business risks and industry trends, and applicable tax planning strategies.
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 its business and the industry in which it operates.
As of December 31, 2017, the Company had experienced a significant decline in revenue, gross profit, and operating income
since 2015, had reported a cumulative pre-tax loss in recent years and is currently forecasting to a report a pre-tax loss for the
year ending December 31, 2018. If the Company had determined that it was appropriate to increase the valuation allowance held
against our U.S. deferred tax assets prior to enactment of the Tax Cuts and Jobs Act total tax expense for the year ended
December 31, 2017 would not have changed. The decrease in the carrying value of our U.S. deferred tax assets as a result of the
reduction in the U.S. federal corporate income tax rate would have been completely offset by a reduction in the valuation
allowance that would have been previously established against those deferred tax assets.
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 benefit in the Consolidated Statements of Operations when that occurs.
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, 2017, 2016 and 2015 (in thousands):
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
Increase related to prior year income tax positions
Increase related to current year income tax positions
Balance at December 31, 2017
$
$
$
$
5,630
151
433
6,214
53
(365)
565
6,467
1,440
673
8,580
Included in the balance of unrecognized tax benefits as of December 31, 2017 was $1.2 million of tax benefits that, if
recognized, would affect the effective tax rate. It is not anticipated that the balance of unrecognized tax benefits will significantly
change over the next twelve months.
The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. The Company defines its major tax jurisdictions to include United Kingdom and the United States. The Company
is no longer subject to income tax examinations with respect to periods before 2016 in the United Kingdom and before 2014 in
the United States, although in the United States net operating loss and tax credit carryforwards generated in a year are subject to
examination and adjustment for at least three years following the year in which such losses or credits are actually used to offset
taxable income.
F-32
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively. Such
amounts were not material for 2017, 2016 and 2015.
NOTE 15 CREDIT FACILITIES
As of December 31, 2017, the Company had a $50.0 million revolving line of credit (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, 2017. The Credit Facility matures in March 2018. The Company
has begun discussions with the bank that may result in changes to the size and terms of this arrangement.
The Company made no draws and had no outstanding cash borrowings on the credit facility as of December 31, 2017.
As of December 31, 2017, the Company had $15.0 million in USD equivalent value in outstanding letters of credit and
$3.0 million in restricted cash associated with certain letters of credit to secure customer prepayments and other customer related
obligations.
NOTE 16 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, 2017, 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
2017
2016
2015
1.64%
—%
54.14%
4.0
1.12%
—%
50.92%
4.0
$
7.91
$
13.16
$
1.31%
—%
50.55%
4.0
11.23
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not
anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is
based on the assumption that options will be exercised, on average, about two years after vesting occurs. The Company recognizes
compensation expense for only the portion of options that are expected to vest. Therefore, management applies an estimated
forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates.
F-33
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The estimated forfeiture rates applied to the Company’s stock option grants for the years ended December 31, 2017, 2016 and
2015 was 8.0%. 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, 2015
Granted
Exercised
Canceled and forfeited
Outstanding at December 31, 2015
Granted
Exercised
Canceled and forfeited
Outstanding at December 31, 2016
Granted
Exercised
Canceled and forfeited
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Available for grant at December 31, 2017
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual
Term (Years)
12.34
27.86
9.99
20.00
14.83
32.65
12.57
26.60
16.99
18.36
8.51
27.02
17.26
15.39
5.2
4.0
Options
1,930,990 $
307,450
(229,118)
(60,847)
1,948,475
240,075
(168,825)
(30,588)
1,989,137
324,500
(157,257)
(121,906)
2,034,474
1,532,691
3,107,064
Outstanding and exercisable options by price range as of December 31, 2017, 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
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
Number
Outstanding
673,584
619,941
507,844
233,105
2,034,474
1.9 $
6.7
6.6
7.5
5.2
5.49
16.78
26.30
32.86
17.26
Exercisable Options
Number
Exercisable
673,584 $
327,941
411,552
119,614
1,532,691
Weighted
Average
Exercise
Price
5.49
15.71
26.15
33.34
15.39
As of December 31, 2017, there was $17.4 million of aggregate intrinsic value of outstanding stock options, including
$15.5 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 2017 and
F-34
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2017. This amount changes,
based on the fair market value of the Company’s stock. Total intrinsic value of options exercised was $1.8 million, $4.0 million,
and $5.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Restricted Stock: During 2017, 2016 and 2015, the Company issued an aggregate of 44,002, 9,893, and 45,175 shares
of restricted stock, respectively, to certain directors, executives and other employees. The grant date fair value of these grants was
approximately $0.8 million, $0.3 million, and $1.4 million for 2017, 2016 and 2015, 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
19.48
30.44
24.00
15.34
24.12
34.86
24.73
22.14
26.43
17.55
28.15
25.25
24.09
Shares
1,033,602 $
45,175
(48,998)
(513,336)
516,443
9,893
(18,685)
(250,849)
256,802
44,002
(32,207)
(156,272)
112,325
Weighted
Average
Grant Date
Fair Value
15.41
—
15.60
28.20
15.07
—
15.57
—
15.00
—
15.00
—
—
Weighted
Average
Grant Date
Fair Value
17.68
30.44
17.14
15.64
19.31
34.86
17.46
22.14
18.81
17.55
15.78
25.25
24.09
Shares
1,850,602 $
45,175
(267,998)
(525,836)
1,101,943
9,893
(90,685)
(250,849)
770,302
44,002
(545,707)
(156,272)
112,325
Shares
817,000 $
—
(219,000)
(12,500)
585,500
—
(72,000)
—
513,500
—
(513,500)
—
—
Outstanding at January 1, 2015
Granted
Forfeited
Vested
Outstanding at December 31, 2015
Granted
Forfeited
Vested
Outstanding at December 31, 2016
Granted
Forfeited
Vested
Outstanding at December 31, 2017
The estimated forfeiture rates applied to the Company’s service vesting restricted stock grants during the years ended
December 31, 2017, 2016 and 2015 was 8.0%. The aggregate fair value of restricted shares vested during 2017, 2016 and 2015
was $2.9 million, $7.7 million, and $14.2 million, respectively. There are no longer any performance vesting restricted shares
outstanding.
Restricted Stock Units: During 2017, 2016 and 2015, the Company issued an aggregate of 825,000, 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 $15.2 million, $8.0 million and $29.5 million for 2017, 2016 and
2015, respectively. 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-35
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
Weighted
Average
Grant Date
Fair Value
—
29.78
30.48
—
29.75
31.89
29.44
29.57
30.89
18.40
25.75
30.91
21.29
Units
— $
285,550
(12,500)
—
273,050
220,575
(7,700)
(60,204)
425,721
799,000
(95,001)
(141,697)
988,023
Weighted
Average
Grant Date
Fair Value
—
30.04
30.04
—
30.04
42.65
—
—
Units
— $
984,850
(79,100)
—
905,750
244,160
(7,700)
(60,204)
30.49 1,082,006
825,000
20.25
(294,801)
30.04
— (141,697)
30.13 1,470,508
Units
— $
699,300
(66,600)
—
632,700
23,585
—
—
656,285
26,000
(199,800)
—
482,485
Weighted
Average
Grant Date
Fair Value
—
29.97
30.11
—
29.95
32.93
29.44
29.57
30.65
18.46
28.66
30.91
24.19
Outstanding at January 1, 2015
Granted
Forfeited
Vested
Outstanding at December 31, 2015
Granted
Forfeited
Vested
Outstanding at December 31, 2016
Granted
Forfeited
Vested
Outstanding at December 31, 2017
The estimated forfeiture rates applied to the Company’s service vesting restricted stock unit grants during the years ended
December 31, 2017, 2016 and 2015 was 8.0%. The aggregate fair value of restricted stock units vested during 2017 and 2016
was $2.7 million and $1.9 million, respectively. 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 2018 and 2020.
Share-based Compensation Expense: Including performance-based equity awards, the Company had $33.0 million of
total unrecognized compensation cost related to unvested stock options, unvested restricted stock and unvested restricted stock
units as of December 31, 2017. Excluding the $14.5 million of unrecognized compensation cost related to unvested restricted
stock units that are subject to performance measures that are currently not considered “probable” of attainment, unrecognized
compensation cost is $18.5 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 2.9 years.
F-36
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
2017
2016
2015
$
$
294 $
290
3,759
2,432
4,074
10,849 $
320 $
211
3,113
3,710
3,797
11,151 $
254
276
3,770
3,047
4,006
11,353
Employee Stock Purchase Plan (ESPP): The Company’s non-compensatory employee stock purchase plan was
discontinued in the third quarter of 2017. The maximum number of shares of the Company’s common stock that employees could
acquire under the ESPP was 1,750,000 shares. Eligible employees were 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 was 95% of
the closing market price on the fourth business day after the end of each offering period. As of December 31, 2017, 2016 and
2015, an aggregate of 1,118,151, 1,098,085 and 1,070,343 shares, respectively, had been issued under the ESPP.
NOTE 17 BENEFIT PLANS
401(k) Plan
For the three years ended December 31, 2017, 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 2017, 2016 and 2015 Company
match expense was $3.0 million, $2.9 million and $2.6 million, respectively.
Pension Plan
The Company’s German subsidiary maintains a defined benefit pension plan. At December 31, 2017, the excess of plan
assets over the projected benefit obligation of $2.0 million was $0.2 million. At December 31, 2016, the excess of plan assets
over the projected benefit obligation of $2.0 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 18 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.
F-37
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 offers Cray DataWarp and ClusterStor, as well as other third-party storage products and
their ongoing maintenance as well as system analysts.
Maintenance and Support
Maintenance and Support provides ongoing maintenance of Cray supercomputers, big data storage and analytics systems,
as well as system analysts.
Engineering Services and Other
Included within Engineering Services and Other are the Company’s analytics and artificial intelligence businesses and
Custom Engineering.
The following table presents revenues and gross margin for the Company’s operating segments for the indicated years
ended December 31 (in thousands):
Revenue:
Supercomputing
Storage and Data Management
Maintenance and Support
Engineering Services and Other
Elimination of inter-segment revenue
Total revenue
Gross Profit:
Supercomputing
Storage and Data Management
Maintenance and Support
Engineering Services and Other
Elimination of inter-segment gross profit
Total gross profit
2017
2016
2015
$
$
$
$
282,217 $
63,620
124,840
46,672
(124,840)
392,509 $
510,403 $
89,438
107,795
29,968
(107,795)
629,809 $
93,272 $
20,288
61,305
17,144
(61,305)
130,704 $
173,245 $
34,125
43,147
12,845
(43,147)
220,215 $
581,733
112,862
97,091
30,094
(97,091)
724,689
177,048
37,181
41,487
11,454
(41,487)
225,683
Revenue and cost of revenue is the only discrete financial information the Company prepares for its segments. Other
financial results or assets are not separated by segment.
F-38
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s geographic operations outside the United States include sales and service offices in Europe and the Middle
East, South America, Asia Pacific and Canada. The following data represents the Company’s revenue and long-lived assets for
the United States and all other countries (in thousands):
For the year ended December 31, 2017:
Product revenue
Service revenue
Long-lived assets
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
United
States
All
Other
Countries
$
$
$
$
$
$
$
$
$
159,279 $
90,916 $
96,406 $
48,989 $
45,908 $
28,009 $
251,317 $
248,115 $
88,208 $
39,933 $
42,169 $
36,555 $
373,494 $
227,800 $
88,956 $
39,014 $
34,439 $
23,238 $
Total
250,195
142,314
76,998
499,432
130,377
76,488
601,294
123,395
62,252
Long-lived assets as of December 31, 2017, 2016 and 2015, included $23.4 million, $31.1 million and $18.3 million,
respectively, of long-term investment in sales-type lease which was held by the Company’s United Kingdom subsidiary.
Revenue derived from the U.S. Government totaled approximately $206.1 million, $296.9 million and $338.5 million in
2017, 2016 and 2015, respectively. In 2017, one non-U.S. Government customer accounted for 11% of total revenue. In 2016,
one non-U.S. Government customer accounted for 10% of total revenue. In 2015, no non-U.S. Government customers accounted
for more than 10% of total revenue. Revenue attributed to foreign countries is derived from sales to customers located outside
the United States. In general, concentrations of revenue by customer encompass all segments. In 2017, revenue in India accounted
for 11% of total revenue. In 2016, revenue in the United Kingdom accounted for 17% of total revenue. In 2015, no foreign
countries accounted for more than 10% of total revenue.
NOTE 19 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
$
$
141,289 $
(9,473)
(33,039)
98,777 $
130,006 $
(12,621)
(5,255)
112,130 $
126,060
(16,515)
(12,982)
96,563
2017
2016
2015
F-39
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20 INTEREST INCOME (EXPENSE)
The detail of interest income (expense) for the indicated years ended December 31 follows (in thousands):
Interest income
Interest expense
Net interest income
2017
2016
2015
$
$
3,386 $
(110)
3,276 $
2,120 $
27
2,147 $
1,465
(57)
1,408
Interest income is earned by the Company on cash and cash equivalents, investment balances and the investment in sales-
type lease.
NOTE 21 RESTRUCTURING
In the third quarter of 2017, the Company implemented a restructuring plan intended to reduce the Company’s operating
costs and better align its workforce with long-term business strategies. The restructuring plan involved reducing the Company’s
workforce by approximately 190 employees, with the vast majority of such terminations effective in July 2017. For the year
ended December 31, 2017, the Company recorded $8.6 million in expense in connection with the restructuring plan, primarily
related to employee severance. The majority of the cash payments related to the restructuring charges were paid in 2017. The
actions associated with the restructuring plan are expected to be completed by the end of the first half of 2018. Restructuring
charges associated with the restructuring plan were included in restructuring on the company’s Consolidated Statements of
Operations.
NOTE 22 QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly financial information for the two years ended December 31, 2017. 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.
F-40
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
2017
2016
$
For the Quarter Ended
Revenue
Cost of revenue
Gross profit
Research and development,
net
Sales and marketing
General and administrative
Restructuring
Net income (loss)
Net income (loss) per
common share, basic
Net income (loss) per
common share, diluted
9/30
6/30
3/31
59,031 $ 87,135 $ 79,700 $ 166,643 $ 105,549 $ 100,235 $ 77,451 $ 346,574
226,083
35,222
120,491
23,809
64,074
36,161
116,583
50,060
58,792
28,343
53,850
23,601
65,587
39,962
51,208
28,492
12/31
12/31
9/30
6/30
3/31
32,640
17,325
26,626
22,186
25,840
27,399
29,084
29,807
14,653
8,797
—
(19,215)
15,247
7,205
—
(6,840)
13,392
7,022
7,653
(10,232)
16,602
6,089
915
(97,542)
16,001
7,338
—
(5,013)
15,380
9,019
—
(13,126 )
15,010
7,968
—
(23,021)
18,502
9,728
—
51,775
$
(0.48) $
(0.17) $
(0.25) $
(2.42) $
(0.13) $
(0.33) $
(0.58) $
1.30
$
(0.48) $
(0.17) $
(0.25) $
(2.42) $
(0.13) $
(0.33) $
(0.58) $
1.27
F-41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Cray Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cray Inc. and Subsidiaries (“the Company”) as of December
31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement
schedule listed in the index at item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company
as of December 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 15, 2018, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/S/ PETERSON SULLIVAN LLP
We have served as the Company’s auditor since 2005.
Seattle, Washington
February 15, 2018
F-42
Schedule II — Valuation and Qualifying Accounts(1)
December 31, 2017
(In thousands)
Description
Year ended December 31, 2015:
Allowance for doubtful accounts
Year ended December 31, 2016:
Allowance for doubtful accounts
Year ended December 31, 2017:
Allowance for doubtful accounts
Balance at
Beginning
of Period
Charge to
Expense
Deductions (2)
Balance at
End of
Period
$
$
$
97 $
— $
(78) $
19 $
21 $
2 $
7 $
— $
— $
19
21
28
(1) The Company does not have any warranty liabilities.
(2) Deductions represent uncollectible accounts written off, net of recoveries.
F-43
INVESTOR INFORMATION
BOARD OF DIRECTORS
Stephen C. Kiely, Chairman
Retired Chief Executive Officer
Prithviraj Banerjee
Senior Client Partner
Korn/Ferry International
Catriona M. Fallon
Senior Vice President, Networks Segment
Itron Inc.
Sally G. Narodick
Retired Chief Executive Officer
Daniel C. Regis
General Partner
Regis Investments, LP
Max L. Schireson
Executive in Residence
Battery Ventures
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
Charles D. Fairchild
Vice President, Corporate Controller and
Chief Accounting Officer
Frederick A. Kohout
Senior Vice President Products 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
SHAREHOLDER SERVICES
CRAY ANNUAL MEETING
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 505000
Louisville, KY 40233
or
462 South 4th Street, Suite 1600
Louisville, KY 40202
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
JUNE 12, 2018 – 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
2131 Lindau Lane, Suite 1000
Bloomington, MN 55425
1050 Lowater Road
Chippewa Falls, WI 54729
INTERNET
E-Mail: ir@cray.com
Website: www.cray.com
LEGAL COUNSEL
Fenwick & West LLP
Seattle, WA
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Peterson Sullivan LLP
Seattle, WA
STOCK MARKET INFORMATION
Cray Inc. common stock is traded on the
Nasdaq Global Market under the
Symbol CRAY
EQUAL OPPORTUNITY
Cray is an equal opportunity employer
Safe Harbor Statement
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933,
including, but not limited to, statements related to Cray’s financial guidance and expected operating results, Cray’s competitive position in the high-end supercomputing market
and the timing of a rebound in that market, Cray’s ability to grow in the future, 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 for Cray products and systems to be accepted in the future when or at the levels expected, 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 the systems ordered by customers
are not delivered when expected, do not perform as expected once delivered or have technical issues that must be corrected before acceptance, the risk that the acceptance process
for delivered systems is not completed, or customer acceptances are not received, when expected or at all, the risk that Cray is not able to successfully sell products and services in
the big data analytics, high performance storage, artificial intelligence and commercial markets as expected or at all, the risk that Cray is not able to expand and penetrate its
addressable market 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 Cray is not able to realize the expected benefits of the Seagate
transaction and partnership, the risk that Cray is not able to reach new customers through cloud services offerings as expected or at all, the risk that the expense and/or effort to
address Cray systems at customer sites that have issues with third party components or with Cray components, including issues related to the “Spectre” and “Meltdown” processor
security vulnerabilities, 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 year ended December 31, 2017, 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, the stylized CRAY mark, and URIKA are registered trademarks of Cray Inc. in the United States and other countries. The CS and XC families of supercomputers, Chapel,
ClusterStor, CS-Storm, DataWarp and other Cray technologies are all trademarks of Cray Inc. Other trade names, trademarks, and service marks of other companies used in this
Annual Report are the property of their respective owners.