Item 15.
Exhibits and Financial Statement Schedules
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(a)(1)
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Financial Statements
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Consolidated Balance Sheets at December 31, 2016 and December 31, 2015
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Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
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Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
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Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014
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Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
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Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
|
(a)(2)
Financial Statement Schedules
Schedule II — Valuation and Qualifying Accounts — The financial statement schedule for the years ended
December 31, 2016, 2015 and 2014
should be read in conjunction with the consolidated financial statements of Cray Inc. filed as part of this annual report on Form 10-K.
Schedules other than that listed above have been omitted since they are either not required, not applicable, or because the information required is included in the consolidated financial statements or the notes thereto.
(a)(3)
Exhibits
The Exhibits listed in the Exhibit Index, which appear immediately following the signature page and are incorporated herein by reference, are filed as part of this annual report on Form 10-K. Each management contract or compensatory plan or agreement listed on the Exhibit Index is identified by an asterisk.
Item 16.
Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on
February 10, 2017
.
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CRAY INC.
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By
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/s/ P
ETER
J. U
NGARO
|
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Peter J. Ungaro
|
|
|
Chief Executive Officer and President
|
Each of the undersigned hereby constitutes and appoints Peter J. Ungaro, Brian C. Henry and Michael C. Piraino and each of them, the undersigned’s true and lawful attorney-in-fact and agent, with full power of substitution, for the undersigned and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and any other instruments or documents that said attorneys-in-fact and agents may deem necessary or advisable, to enable Cray Inc. to comply with the Securities Exchange Act of 1934 and any requirements of the Securities and Exchange Commission in respect thereof, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on
February 10, 2017
.
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Signature
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Title
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By /s/ P
ETER
J. U
NGARO
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Chief Executive Officer, President and Director
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Peter J. Ungaro
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(Principal Executive Officer)
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By /s/ B
RIAN
C. H
ENRY
|
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Chief Financial Officer and Executive Vice President
|
Brian C. Henry
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(Principal Financial Officer)
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By /s/ C
HARLES
D. F
AIRCHILD
|
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Chief Accounting Officer, Controller and Vice President
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Charles D. Fairchild
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(Principal Accounting Officer)
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By /s/ P
RITHVIRAJ
B
ANERJEE
|
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Director
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Prithviraj Banerjee
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By /s/ M
ARTIN
J. H
OMLISH
|
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Director
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Martin J. Homlish
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By /s/ S
TEPHEN
C. K
IELY
|
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Director
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Stephen C. Kiely
|
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By /s/ S
ALLY
G. N
ARODICK
|
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Director
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Sally G. Narodick
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By /s/ D
ANIEL
C. R
EGIS
|
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Director
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Daniel C. Regis
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By /s/ M
AX
L. S
CHIRESON
|
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Director
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Max L. Schireson
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By /s/ B
RIAN
V. T
URNER
|
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Director
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Brian V. Turner
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EXHIBIT INDEX
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Exhibit
Number
|
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Exhibit Description
|
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Incorporated by Reference
|
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Form
|
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File No.
|
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Filing
Date
|
|
Exhibit/
Annex
|
|
Filed
Herewith
|
2.1
|
|
Asset Purchase Agreement between Intel Corporation and the Company, dated April 24, 2012
|
|
8-K
|
|
000-26820
|
|
04/25/12
|
|
2.1
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3.1
|
|
Restated Articles of Incorporation
|
|
8-K
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|
000-26820
|
|
06/08/06
|
|
3.3
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3.2
|
|
Amended and Restated Bylaws
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8-K
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000-26820
|
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02/12/07
|
|
3.1
|
|
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3.3
|
|
First Amendment to Amended and Restated Bylaws
|
|
8-K
|
|
000-26820
|
|
04/19/12
|
|
3.1
|
|
|
10.0*
|
|
1999 Stock Option Plan
|
|
S-8
|
|
333-57970
|
|
03/30/01
|
|
4.1
|
|
|
10.1*
|
|
2000 Non-Executive Employee Stock Option Plan
|
|
S-8
|
|
333-57970
|
|
03/30/01
|
|
4.2
|
|
|
10.2*
|
|
Amended and Restated 2001 Employee Stock Purchase Plan
|
|
10-K
|
|
000-26820
|
|
03/04/11
|
|
10.28
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|
|
10.3*
|
|
2003 Stock Option Plan
|
|
DEF
14A
|
|
000-26820
|
|
03/31/03
|
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A
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|
|
10.4*
|
|
2004 Long-Term Equity Compensation Plan
|
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DEF
14A
|
|
000-26820
|
|
03/24/04
|
|
B
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10.5*
|
|
2006 Long-Term Equity Compensation Plan
|
|
DEF
14A
|
|
000-26820
|
|
04/28/06
|
|
B
|
|
|
10.6*
|
|
2009 Long-Term Equity Compensation Plan
|
|
DEF
14A
|
|
000-26820
|
|
03/31/09
|
|
A
|
|
|
10.7*
|
|
2013 Equity Incentive Plan
|
|
DEF
14A
|
|
000-26820
|
|
04/24/13
|
|
A
|
|
|
10.8*
|
|
Amended and Restated 2013 Equity Incentive Plan
|
|
DEF 14A
|
|
000-26820
|
|
04/25/16
|
|
A
|
|
|
10.9*
|
|
Form of Officer Non-Qualified Stock Option Agreement
|
|
10-K
|
|
000-26820
|
|
04/01/05
|
|
10.32
|
|
|
10.10*
|
|
Form of Officer Incentive Stock Option Agreement
|
|
10-K
|
|
000-26820
|
|
04/01/05
|
|
10.33
|
|
|
10.11*
|
|
Form of Employee Restricted Stock Agreement
|
|
10-K
|
|
000-26820
|
|
03/09/07
|
|
10.11
|
|
|
10.12*
|
|
Form of Director Restricted Stock Agreement
|
|
8-K
|
|
000-26820
|
|
06/08/06
|
|
10.1
|
|
|
10.13*
|
|
Form of 2013 Equity Incentive Plan Notice of Stock Option Grant and Stock Option Award Agreement
|
|
8-K
|
|
000-26820
|
|
07/03/13
|
|
99.1
|
|
|
10.14*
|
|
Form of 2013 Equity Incentive Plan Notice of Restricted Stock Award and Restricted Stock Purchase Agreement
|
|
8-K
|
|
000-26820
|
|
07/03/13
|
|
99.2
|
|
|
10.15*
|
|
Form of 2013 Equity Incentive Plan Notice of Restricted Stock Award and Restricted Stock Purchase Agreement
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|
8-K
|
|
000-26820
|
|
12/17/14
|
|
10.1
|
|
|
10.16*
|
|
Form of 2013 Equity Incentive Plan Notice of Stock Option Grant and Stock Option Award Agreement
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|
8-K
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|
000-26820
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|
12/17/14
|
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10.2
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10.17*
|
|
Form of 2013 Equity Incentive Plan Notice of Restricted Stock Unit Award and Restricted Stock Unit Award Agreement
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8-K
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|
000-26820
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|
12/17/14
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|
10.3
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|
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10.18*
|
|
Form of 2013 Equity Incentive Plan Notice of Stock Appreciation Right Award Grant and Stock Appreciation Right Award Agreement
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8-K
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000-26820
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12/17/14
|
|
10.4
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Exhibit
Number
|
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Exhibit Description
|
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Incorporated by Reference
|
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Form
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File No.
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Filing
Date
|
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Exhibit/
Annex
|
|
Filed
Herewith
|
10.19*
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Letter Agreement between the Company and Peter J. Ungaro, dated March 4, 2005
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8-K
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000-26820
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03/08/05
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10.1
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10.20*
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Offer Letter between the Company and Brian C. Henry, dated May 16, 2005
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10-Q
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000-26820
|
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11/09/05
|
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10.1
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10.21*
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|
Offer Letter between the Company and Steve Scott, dated August 30, 2014
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10-Q
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|
000-26820
|
|
10/28/14
|
|
10.1
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|
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10.22*
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|
Offer Letter between the Company and Ryan W. J. Waite, dated October 27, 2014
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|
10-Q
|
|
000-26820
|
|
05/05/15
|
|
10.1
|
|
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10.23*
|
|
Offer Letter between the Company and Margaret A. Williams, dated April 14, 2005
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|
8-K
|
|
000-26820
|
|
05/09/05
|
|
10.1
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|
|
10.24*
|
|
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)
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|
8-K
|
|
000-26820
|
|
12/22/08
|
|
10.1
|
|
|
10.25*
|
|
Form of Management Retention Agreement entered into with executive officers from September 27, 2011 forward
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|
10-K
|
|
000-26820
|
|
02/13/14
|
|
10.20
|
|
|
10.26*
|
|
Executive Severance Policy, as adopted on December 13, 2010
|
|
8-K
|
|
000-26820
|
|
12/17/10
|
|
10.1
|
|
|
10.27*
|
|
Amended and Restated Non-Employee Director Compensation Policy
|
|
10-Q
|
|
000-26820
|
|
04/29/14
|
|
10.3
|
|
|
10.28*
|
|
2016 Executive Bonus Plan
|
|
10-Q
|
|
000-26820
|
|
05/03/16
|
|
10.1
|
|
|
10.29*
|
|
Form of Indemnification Agreement
|
|
8-K
|
|
000-26820
|
|
02/08/11
|
|
10.1
|
|
|
10.30
|
|
Lease Agreement between NEA Galtier, LLC and the Company, dated as of July 2, 2009
|
|
8-K
|
|
000-26820
|
|
07/16/09
|
|
10.1
|
|
|
10.31
|
|
First Amendment to Lease between NEA Galtier, LLC and the Company, dated as of October 1, 2009
|
|
10-K
|
|
000-26820
|
|
02/19/15
|
|
10.28
|
|
|
10.32
|
|
Second Amendment to Lease between NEA Galtier, LLC and the Company, dated as of April 21, 2011
|
|
10-K
|
|
000-26820
|
|
02/19/15
|
|
10.29
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|
|
10.33
|
|
Third Amendment to Lease between NEA Galtier, LLC and the Company, dated as of August 31, 2011
|
|
10-K
|
|
000-26820
|
|
02/19/15
|
|
10.30
|
|
|
10.34
|
|
Fourth Amendment to Lease between NEA Galtier, LLC and the Company, dated as of April 1, 2012
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|
10-K
|
|
000-26820
|
|
02/19/15
|
|
10.31
|
|
|
10.35
|
|
Fifth Amendment to Lease between NEA Galtier, LLC and the Company, dated as of March 31, 2014
|
|
10-K
|
|
000-26820
|
|
02/19/15
|
|
10.32
|
|
|
|
|
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|
|
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|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
|
|
|
|
|
|
Form
|
|
File No.
|
|
Filing
Date
|
|
Exhibit/
Annex
|
|
Filed
Herewith
|
10.36
|
|
Lease Agreement between North Pad Office, LLC and the Company, dated as of April 21, 2016
|
|
8-K
|
|
000-26820
|
|
04/27/16
|
|
10.10
|
|
|
10.37
|
|
Intellectual Property Agreement between Intel Corporation and the Company, dated May 2, 2012
|
|
8-K
|
|
000-26820
|
|
05/03/12
|
|
10.1
|
|
|
10.38
|
|
Amended and Restated Credit Agreement between Wells Fargo Bank, National Association and the Company, dated January 7, 2016
|
|
8-K
|
|
000-26820
|
|
01/11/16
|
|
10.1
|
|
|
10.39
|
|
Revolving Line of Credit Note between Wells Fargo Bank, National Association and the Company, dated January 7, 2016
|
|
8-K
|
|
000-26820
|
|
01/11/16
|
|
10.2
|
|
|
21.1
|
|
Subsidiaries of the Company
|
|
|
|
|
|
|
|
|
|
X
|
23.1
|
|
Consent of Peterson Sullivan LLP, Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
X
|
24.1
|
|
Power of Attorney for directors and officers (included on the signature page of this report)
|
|
|
|
|
|
|
|
|
|
X
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Mr. Ungaro, Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Mr. Henry, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
X
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer and the Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
X
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
|
|
|
|
|
|
X
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
|
|
|
|
|
|
X
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
|
|
|
|
X
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
|
|
|
|
X
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Management contract or compensatory plan or arrangement.
|
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.
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
ASSETS
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
222,962
|
|
|
$
|
266,660
|
|
Restricted cash
|
|
—
|
|
|
1,651
|
|
Short-term investments
|
|
—
|
|
|
14,925
|
|
Accounts and other receivables, net
|
|
197,941
|
|
|
124,719
|
|
Inventory
|
|
88,254
|
|
|
113,655
|
|
Deferred tax assets, net
|
|
19,117
|
|
|
38,628
|
|
Prepaid expenses and other current assets
|
|
20,006
|
|
|
21,048
|
|
Total current assets
|
|
548,280
|
|
|
581,286
|
|
|
|
|
|
|
Long-term restricted cash
|
|
1,655
|
|
|
1,655
|
|
Long-term investment in sales-type lease, net
|
|
31,050
|
|
|
18,317
|
|
Property and equipment, net
|
|
30,620
|
|
|
31,079
|
|
Service spares, net
|
|
3,023
|
|
|
3,090
|
|
Goodwill
|
|
14,182
|
|
|
14,182
|
|
Intangible assets other than goodwill, net
|
|
1,637
|
|
|
2,525
|
|
Deferred tax assets, net
|
|
66,496
|
|
|
26,016
|
|
Other non-current assets
|
|
17,629
|
|
|
16,025
|
|
TOTAL ASSETS
|
|
$
|
714,572
|
|
|
$
|
694,175
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
45,504
|
|
|
$
|
27,837
|
|
Accrued payroll and related expenses
|
|
17,199
|
|
|
27,452
|
|
Other accrued liabilities
|
|
10,303
|
|
|
24,079
|
|
Deferred revenue
|
|
83,129
|
|
|
86,731
|
|
Total current liabilities
|
|
156,135
|
|
|
166,099
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
27,258
|
|
|
33,306
|
|
Other non-current liabilities
|
|
5,703
|
|
|
2,260
|
|
TOTAL LIABILITIES
|
|
189,096
|
|
|
201,665
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
Preferred stock — Authorized and undesignated, 5,000,000 shares; no shares issued or outstanding
|
|
—
|
|
|
—
|
|
Common stock and additional paid-in capital, par value $.01 per share — Authorized, 75,000,000 shares; issued and outstanding 40,757,458 and 40,693,707 shares, respectively
|
|
622,604
|
|
|
610,279
|
|
Accumulated other comprehensive income
|
|
2,782
|
|
|
7,642
|
|
Accumulated deficit
|
|
(99,910
|
)
|
|
(125,411
|
)
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
525,476
|
|
|
492,510
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
714,572
|
|
|
$
|
694,175
|
|
See accompanying notes
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
|
Product
|
|
$
|
499,432
|
|
|
$
|
601,294
|
|
|
$
|
460,748
|
|
Service
|
|
130,377
|
|
|
123,395
|
|
|
100,858
|
|
Total revenue
|
|
629,809
|
|
|
724,689
|
|
|
561,606
|
|
Cost of revenue:
|
|
|
|
|
|
|
Cost of product revenue
|
|
332,016
|
|
|
426,821
|
|
|
321,554
|
|
Cost of service revenue
|
|
77,578
|
|
|
72,185
|
|
|
55,638
|
|
Total cost of revenue
|
|
409,594
|
|
|
499,006
|
|
|
377,192
|
|
Gross profit
|
|
220,215
|
|
|
225,683
|
|
|
184,414
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development, net
|
|
112,130
|
|
|
96,563
|
|
|
94,048
|
|
Sales and marketing
|
|
64,893
|
|
|
60,150
|
|
|
57,785
|
|
General and administrative
|
|
34,053
|
|
|
27,966
|
|
|
23,381
|
|
Total operating expenses
|
|
211,076
|
|
|
184,679
|
|
|
175,214
|
|
Income from operations
|
|
9,139
|
|
|
41,004
|
|
|
9,200
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(1,365
|
)
|
|
365
|
|
|
(9
|
)
|
Interest income, net
|
|
2,147
|
|
|
1,408
|
|
|
506
|
|
Income before income taxes
|
|
9,921
|
|
|
42,777
|
|
|
9,697
|
|
Income tax benefit (expense)
|
|
694
|
|
|
(15,240
|
)
|
|
52,626
|
|
Net income
|
|
$
|
10,615
|
|
|
$
|
27,537
|
|
|
$
|
62,323
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.27
|
|
|
$
|
0.70
|
|
|
$
|
1.61
|
|
Diluted net income per common share
|
|
$
|
0.26
|
|
|
$
|
0.68
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
39,833
|
|
|
39,257
|
|
|
38,634
|
|
Diluted weighted average shares outstanding
|
|
41,012
|
|
|
40,691
|
|
|
40,435
|
|
See accompanying notes
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net income
|
|
$
|
10,615
|
|
|
$
|
27,537
|
|
|
$
|
62,323
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale investments
|
|
8
|
|
|
(20
|
)
|
|
12
|
|
Foreign currency translation adjustments
|
|
426
|
|
|
(394
|
)
|
|
(1,188
|
)
|
Unrealized gain on cash flow hedges
|
|
8,030
|
|
|
5,251
|
|
|
8,475
|
|
Reclassification adjustments on cash flow hedges included in net income
|
|
(13,324
|
)
|
|
(3,698
|
)
|
|
(1,649
|
)
|
Other comprehensive income (loss)
|
|
(4,860
|
)
|
|
1,139
|
|
|
5,650
|
|
Comprehensive income
|
|
$
|
5,755
|
|
|
$
|
28,676
|
|
|
$
|
67,973
|
|
See accompanying notes
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
and Additional
Paid In Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Accumulated
Deficit
|
|
Total
|
|
|
Number
of Shares
|
|
Amount
|
|
BALANCE, December 31, 2013
|
|
40,470
|
|
|
$
|
586,243
|
|
|
$
|
853
|
|
|
$
|
(211,509
|
)
|
|
$
|
375,587
|
|
Issuance of shares under employee stock purchase plan
|
|
21
|
|
|
611
|
|
|
|
|
|
|
611
|
|
Exercise of stock options
|
|
411
|
|
|
3,086
|
|
|
|
|
|
|
3,086
|
|
Restricted shares issued for compensation, net of forfeitures and taxes
|
|
(80
|
)
|
|
(1,914
|
)
|
|
|
|
(1,853
|
)
|
|
(3,767
|
)
|
Share-based compensation
|
|
—
|
|
|
10,364
|
|
|
|
|
|
|
10,364
|
|
Other comprehensive income
|
|
|
|
|
|
5,650
|
|
|
|
|
5,650
|
|
Net income
|
|
|
|
|
|
|
|
62,323
|
|
|
62,323
|
|
BALANCE, December 31, 2014
|
|
40,822
|
|
|
$
|
598,390
|
|
|
$
|
6,503
|
|
|
$
|
(151,039
|
)
|
|
$
|
453,854
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under employee stock purchase plan
|
|
27
|
|
|
711
|
|
|
|
|
|
|
711
|
|
Exercise of stock options
|
|
229
|
|
|
2,289
|
|
|
|
|
|
|
2,289
|
|
Restricted shares issued for compensation, net of forfeitures and taxes
|
|
(384
|
)
|
|
(2,464
|
)
|
|
|
|
(1,909
|
)
|
|
(4,373
|
)
|
Share-based compensation
|
|
—
|
|
|
11,353
|
|
|
|
|
|
|
11,353
|
|
Other comprehensive income
|
|
|
|
|
|
1,139
|
|
|
|
|
1,139
|
|
Net income
|
|
|
|
|
|
|
|
27,537
|
|
|
27,537
|
|
BALANCE, December 31, 2015
|
|
40,694
|
|
|
$
|
610,279
|
|
|
$
|
7,642
|
|
|
$
|
(125,411
|
)
|
|
$
|
492,510
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under employee stock purchase plan
|
|
27
|
|
|
718
|
|
|
|
|
|
|
718
|
|
Exercise of stock options
|
|
169
|
|
|
2,121
|
|
|
|
|
|
|
2,121
|
|
Restricted shares issued for compensation, net of forfeitures and taxes
|
|
(133
|
)
|
|
(1,665
|
)
|
|
|
|
(1,714
|
)
|
|
(3,379
|
)
|
Share-based compensation
|
|
—
|
|
|
11,151
|
|
|
|
|
|
|
11,151
|
|
Other comprehensive loss
|
|
|
|
|
|
(4,860
|
)
|
|
|
|
(4,860
|
)
|
Cumulative-effect adjustment resulting from adoption of ASU 2016-09
|
|
|
|
|
|
|
|
16,600
|
|
|
16,600
|
|
Net income
|
|
|
|
|
|
|
|
10,615
|
|
|
10,615
|
|
BALANCE, December 31, 2016
|
|
40,757
|
|
|
$
|
622,604
|
|
|
$
|
2,782
|
|
|
$
|
(99,910
|
)
|
|
$
|
525,476
|
|
See accompanying notes
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
10,615
|
|
|
$
|
27,537
|
|
|
$
|
62,323
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
14,684
|
|
|
17,017
|
|
|
16,324
|
|
Share-based compensation expense
|
|
11,151
|
|
|
11,353
|
|
|
10,364
|
|
Deferred income taxes
|
|
(1,861
|
)
|
|
12,103
|
|
|
(53,204
|
)
|
Other
|
|
2,850
|
|
|
1,945
|
|
|
4,159
|
|
Cash provided (used) due to changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts and other receivables
|
|
(78,396
|
)
|
|
36,665
|
|
|
17,450
|
|
Long-term investment in sales-type lease, net
|
|
(17,224
|
)
|
|
11,510
|
|
|
(32,889
|
)
|
Inventory
|
|
15,343
|
|
|
21,292
|
|
|
(54,147
|
)
|
Prepaid expenses and other assets
|
|
2,265
|
|
|
(3,972
|
)
|
|
(9,349
|
)
|
Accounts payable
|
|
16,903
|
|
|
(19,849
|
)
|
|
14,504
|
|
Accrued payroll and related expenses and other accrued liabilities
|
|
(21,073
|
)
|
|
23,841
|
|
|
(5,237
|
)
|
Deferred revenue
|
|
(7,570
|
)
|
|
8,314
|
|
|
(28,407
|
)
|
Net cash provided by (used in) operating activities
|
|
(52,313
|
)
|
|
147,756
|
|
|
(58,109
|
)
|
Investing activities:
|
|
|
|
|
|
|
Sales and maturities of available-for-sale investments
|
|
30,990
|
|
|
16,229
|
|
|
53,608
|
|
Purchases of available-for-sale investments
|
|
(16,159
|
)
|
|
(14,991
|
)
|
|
(56,064
|
)
|
Decrease (increase) in restricted cash
|
|
1,670
|
|
|
13,445
|
|
|
(3,106
|
)
|
Purchases of property and equipment
|
|
(7,503
|
)
|
|
(7,467
|
)
|
|
(17,193
|
)
|
Net cash provided by (used in) investing activities
|
|
8,998
|
|
|
7,216
|
|
|
(22,755
|
)
|
Financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of common stock through employee stock purchase plan
|
|
718
|
|
|
711
|
|
|
611
|
|
Purchase of employee restricted shares to fund related statutory tax withholding
|
|
(3,379
|
)
|
|
(4,373
|
)
|
|
(3,767
|
)
|
Proceeds from exercise of options
|
|
2,121
|
|
|
2,289
|
|
|
3,086
|
|
Net cash used in financing activities
|
|
(540
|
)
|
|
(1,373
|
)
|
|
(70
|
)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
157
|
|
|
428
|
|
|
934
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(43,698
|
)
|
|
154,027
|
|
|
(80,000
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
Beginning of period
|
|
266,660
|
|
|
112,633
|
|
|
192,633
|
|
End of period
|
|
$
|
222,962
|
|
|
$
|
266,660
|
|
|
$
|
112,633
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
31
|
|
|
$
|
4
|
|
|
$
|
5
|
|
Cash paid for income taxes
|
|
2,441
|
|
|
3,890
|
|
|
2,935
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Inventory transfers to property and equipment and service spares
|
|
$
|
5,292
|
|
|
$
|
8,177
|
|
|
$
|
3,313
|
|
See accompanying notes
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF BUSINESS
Cray Inc., or Cray, or the Company, designs, develops, manufactures, markets and services the high-end of the high performance computing, or HPC, market, primarily categories of systems commonly known as supercomputers, and provides data analytics, artificial intelligence and storage solutions. The Company also provides software, system maintenance and support services and engineering services related to supercomputer systems and data analytics, artificial intelligence and storage solutions. Cray’s supercomputer systems address challenging scientific, engineering, commercial and national security computing problems. The Company’s customers include foreign and domestic governments and government-funded entities, academic institutions and commercial entities.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation. There has been no impact on previously reported net income or shareholders’ equity from such reclassifications.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of highly liquid financial instruments that are readily convertible to cash and have maturities of three months or less at the time of acquisition. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. As of
December 31, 2015
, the Company had
$1.7 million
in short-term restricted cash. As of
December 31, 2016 and 2015
, the Company had
$1.7 million
in long-term restricted cash. The restricted cash is associated with certain letters of credit outstanding to secure customer prepayments.
Investments
The Company’s investments consist primarily of commercial paper, corporate debt, and other debt securities. Debt securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, recorded in accumulated other comprehensive income, a component of shareholders’ equity. The realized gains and losses for available-for-sale securities are included in other income and expense in the Consolidated Statements of Operations. Realized gains and losses are calculated based on the specific identification method.
The Company monitors its investment portfolio for impairment on a periodic basis. When the carrying value of an investment in debt securities exceeds its fair value and the decline in value is determined to be an other-than-temporary decline, and when the Company does not intend to sell the debt security and it is not more likely than not that the Company will be required to sell the debt securities prior to recovery of its amortized cost basis, the Company records an impairment charge in the amount of the credit loss and the balance, if any, to other comprehensive income (loss).
Investments that mature between
three months
and
one year
from the purchase date are initially classified as short-term investments in the Consolidated Balance Sheet. Investments that mature beyond
one
year from the purchase date are initially classified as long-term investments in the Consolidated Balance Sheet.
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
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
contract is initially reported in “Accumulated other comprehensive income,” a component of shareholders’ equity, with a corresponding asset or liability recorded based on the fair value of the foreign currency exchange contract. When the hedged transaction is recognized, any unrecognized gains or losses on the hedged transaction are reclassified into results of operations in the same period. Any hedge ineffectiveness is recorded to operations in the current period. The Company measures hedge effectiveness by comparing changes in fair values of the foreign currency exchange contract and expected cash flows based on changes in the spot prices of the underlying currencies. Cash flows from foreign currency exchange contracts accounted for as cash flow hedges are classified in the same category as the cash flows from the items being hedged. Unrealized gains or losses related to foreign currency exchange contracts that are not designated as cash flow hedges for the purposes of hedge accounting treatment are recorded in other income (expense) in the Consolidated Statements of Operations and are generally offset by foreign currency adjustments on related receivables. The Company does not use derivative financial instruments for speculative purposes.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, available-for-sale investments, accounts receivable, short-term and long-term restricted cash and foreign currency exchange contracts.
The Company maintains cash and cash equivalents, available-for-sale securities and foreign currency exchange contracts with various financial institutions. As part of its risk management process, the Company performs periodic evaluations of the relative credit standing of the financial institutions. The Company has not sustained any credit losses from instruments held at financial institutions. The Company utilizes foreign currency exchange contracts to protect against the effects of foreign currency fluctuations. Such contracts involve the risk of non-performance by the counterparty, which could result in a material loss.
The Company currently derives a significant portion of its revenue from sales of products and services to the U.S. Government. See
Note 17 — Segment Information
for additional information. Given the type of customers, the Company does not believe its accounts receivable represent significant credit risk.
The Company currently has a long-term investment in a sales-type lease it entered into with one of its customers. See
Note 7 — Sales-type Lease
for additional information. Given the credit standing of the customer, the Company does not believe that this investment represents a significant credit risk.
Other Concentration
The Company obtains certain components from single-source suppliers due to technology, availability, price, quality or other considerations. The loss of a single-source supplier, the single-source supplier’s inability to deliver the required components or intellectual property due to natural disaster or other reasons, the deterioration of the relationship with a single-source supplier, or any unilateral modification of contract terms under which the Company is supplied components by a single-source supplier could have a significant adverse effect on the Company’s revenue and gross margins.
Accounts Receivable
Accounts receivable are stated at principal amounts and are primarily comprised of amounts contractually due from customers for products and services and amounts due from government research and development contracts. The Company provides an allowance for doubtful accounts based on an evaluation of customer past due account balances. In determining whether to record an allowance for a specific customer, the Company considers a number of factors, including prior payment history and financial information for the customer.
Fair Values of Financial Instruments
The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company’s financial instruments primarily consist of debt securities, time deposits, money market funds, and foreign currency derivatives. See
Note 3 — Fair Value Measurement
for a further discussion on fair value of financial instruments.
Inventories
Inventories are valued at the lower of cost or market, with cost computed on a first-in, first-out basis (FIFO). The Company regularly evaluates the technological usefulness and anticipated future demand for various inventory components and the expected use of the inventory. When the Company determines it is not likely the cost of inventory items will be recovered through future sales, the Company writes-down the related inventory to its estimated market value.
In connection with certain of its sales agreements, the Company may receive used equipment from a customer. This inventory generally will be recorded at no value based on the expectation that the Company will not be able to resell or otherwise use the
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
equipment. In the event that the Company has a specific contractual plan for resale at the date the inventory is acquired, the inventory is recorded at its estimated fair value.
Property and Equipment and Intangible Assets, Net
Property and equipment are recorded at cost less accumulated depreciation and amortization. Additions and improvements are capitalized and maintenance and repairs are expensed as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets, ranging from
eighteen months
to
seven years
for furniture and fixtures,
three years
for computer equipment, and
eight
to
twenty-five years
for buildings and land improvements. Leasehold improvements are depreciated over the life of the lease or asset, whichever is shorter.
The Company amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from
two
to
ten years
.
Service Spares
Service spares are valued at the lower of cost or market and represent inventory used to support service and maintenance agreements with customers. As inventory is utilized, replaced items are returned to the Company and are either repaired or scrapped. Costs incurred to repair inventory to a usable state are charged to expense as incurred. Service spares are recorded at cost and amortized over the estimated service life of the related product platform (generally
four years
).
Impairment of Long-Lived Assets and Intangibles
The Company evaluates property, plant and equipment and intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, the carrying value of the asset is reduced to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.
Goodwill
Goodwill is not amortized but is tested for impairment at least annually. The Company reviews goodwill for impairment annually at the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. The goodwill impairment test consists of a two-step process, if necessary. However, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if based on the qualitative assessment the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed with performing the two-step process.
In step one, the Company determines the fair value of each reporting unit and compares it to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.
The Company performed its qualitative assessment during the fourth fiscal quarter of
2016
and concluded that it was more likely than not that the fair values of its reporting units were greater than their carrying amounts. After reaching this conclusion, the two-step impairment test was unnecessary and no further testing was performed. The qualitative factors that were considered included, but were not limited to, general economic conditions, outlook for the HPC and big data markets, recent and forecasted financial performance and the price of the Company’s common stock.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting and allocates the purchase price to the tangible and intangible assets acquired and the liabilities assumed based upon their estimated fair values at the acquisition date. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. The Company uses estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date. During the
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
measurement period, which may be up to one year from the acquisition date, any refinements made to the fair value of the assets and liabilities assumed are recorded with retrospective effect.
The fair values of intangible assets acquired are estimated using a discounted cash flow approach with Level 3 inputs. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company uses risk-adjusted cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes the level and timing of cash flows appropriately reflects market participant assumptions.
Revenue Recognition
The Company recognizes revenue, including transactions under sales-type leases, when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until the products have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where applicable, a customer acceptance has been obtained. The sales price is not considered to be fixed or determinable until all material contingencies related to the sales have been resolved. The Company records revenue in the Consolidated Statements of Operations net of any sales, use, value added or certain excise taxes imposed by governmental authorities on specific sales transactions. In addition to the aforementioned general policy, the following are the Company’s statements of policy with regard to multiple-element arrangements and specific revenue recognition policies for each major category of revenue.
Multiple-Element Arrangements.
The Company commonly enters into revenue arrangements that include multiple deliverables of its product and service offerings due to the needs of its customers. Products may be delivered in phases over time periods which can be as long as
five years
. Maintenance services generally begin upon acceptance of the first equipment delivery and future deliveries of equipment generally have an associated maintenance period. The Company considers the maintenance period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which may include a warranty period and accordingly allocates a portion of the arrangement consideration as a separate deliverable which is recognized as service revenue over the entire service period. Other services such as training and engineering services can be delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement is separated into more than one unit of accounting if the following criteria are met:
|
|
•
|
The delivered item(s) has value to the customer on a standalone basis; and
|
|
|
•
|
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.
|
If these criteria are met for each element, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price. If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered.
The Company follows a selling price hierarchy in determining the best estimate of the selling price of each deliverable. Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to determine vendor specific objective evidence, or VSOE. The Company determines VSOE based on normal pricing and discounting practices for the product or service when sold separately.
When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company attempts to establish the selling price of each remaining element based on third-party evidence, or TPE. The Company’s inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract terms which can be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. TPE is determined based on the Company’s prices or competitor prices for similar deliverables when sold separately. However, the Company is often unable to determine TPE, as the Company’s offerings usually contain a significant level of customization and differentiation from those of competitors and the Company is often unable to reliably determine what similar competitor products’ selling prices are on a standalone basis.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price, or ESP, in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. In determining ESP, the Company uses the cost to provide the product or service plus a margin, or considers other factors. When using cost plus a margin, the Company considers the total cost of the product or service, including customer-specific and geographic factors. The Company also considers the historical margins of the product or service on previous contracts and several factors including any changes to pricing methodologies, competitiveness of products and services and cost drivers that would cause future margins to differ from historical margins.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Products
. The Company most often recognizes revenue from sales of products upon customer acceptance of the system. Where formal acceptance is not required, the Company recognizes revenue upon delivery or installation. When the product is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to product revenue based on estimates of selling price.
Services
. Maintenance services are provided under separate maintenance contracts with customers. These contracts generally provide for maintenance services for
one year
, although some are for multi-year periods, often with prepayments for the term of the contract. The Company considers the maintenance period to commence upon acceptance of the product, or installation of the product where a formal acceptance is not required, which may include a warranty period. When service is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance contracts that are billed in advance of revenue recognition are recorded as deferred revenue. Maintenance revenue is recognized ratably over the term of the maintenance contract.
Revenue from engineering services is recognized as services are performed.
Project Revenue
. Revenue from design and build contracts is recognized under the percentage-of-completion, or POC, method. Under the POC method, revenue is recognized based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in income in the period in which the circumstances that gave rise to the revision become known by management. The Company performs ongoing profitability analyses of its contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.
The Company records revenue from certain research and development contracts which include milestones using the milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive if management believes there is substantive uncertainty that it will be achieved and the milestone consideration meets all of the following criteria:
|
|
•
|
It is commensurate with either of the following:
|
|
|
•
|
The Company’s performance to achieve the milestone; or
|
|
|
•
|
The enhancement of value of the delivered item or items as a result of a specific outcome resulting from the Company’s performance to achieve the milestone.
|
|
|
•
|
It relates solely to past performance.
|
|
|
•
|
It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
|
The individual milestones are determined to be substantive or non-substantive in their entirety and milestone consideration is not bifurcated.
Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work performed.
Nonmonetary Transactions
. The Company values and records nonmonetary transactions at the fair value of the asset surrendered unless the fair value of the asset received is more clearly evident, in which case the fair value of the asset received is used.
Sales-type leases
When the Company leases a system to a customer, the accounting involves specific determinations, which often involve complex provisions and significant judgments. The four criteria of the accounting standard that the Company uses in the determination of whether a lease is a sales-type lease or an operating lease are: (a) a review of the lease term to determine if it is equal to or greater than 75% of the economic life of the system; (b) a review of the minimum lease payments to determine if they are equal to or greater than 90% of the fair value of the system; (c) a determination of whether or not the lease transfers ownership to the lessee at the end of the lease term; and (d) a determination of whether or not the lease contains a bargain purchase option. If the lease transaction meets one of the four criteria, then it is recorded as a sales-type lease; otherwise it is an operating lease. Additionally, the Company assesses whether collectibility of the lease payments is reasonably assured and whether there are any significant uncertainties related to costs that it has yet to incur with respect to the lease.
The Company considers the economic lives of most of its products to range from
three
to
four
years. There is no significant after-market for the Company’s used products and the Company believes that the economic lives are representative of the periods
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
during which its products are expected to be economically usable, with normal service, for the purposes for which they were intended. Residual values are not significant.
The discount rate implicit in the sales-type lease is used to calculate the present value of minimum lease payments, which the Company records as a lease receivable. The minimum lease payment consists of the gross lease payments net of executory costs and contingencies, if any. While revenue is recognized at inception of the lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest income. Unearned interest income is recorded at inception of the lease and amortized over the lease term using the effective interest method.
Foreign Currency Translation
The Company uses the U.S. dollar predominantly as its functional currency. Assets and liabilities of foreign subsidiaries that have a functional currency denominated in non-U.S. dollars are translated into U.S. dollars at year-end exchange rates, and revenue and expenses of these foreign subsidiaries are translated at average rates prevailing during the year. Translation adjustments are included in “Accumulated other comprehensive income,” a separate component of shareholders’ equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in “Other income (expense), net” in the accompanying Consolidated Statements of Operations. Net transaction losses were
$1.0 million
for
2016
and net transaction gains were
$1.6 million
and
$2.1 million
for
2015
and
2014
, respectively.
Research and Development
Research and development expenses include costs incurred in the development and production of hardware and software, costs incurred to enhance and support existing product features, costs incurred to support and improve development processes, and costs related to future product development. Research and development costs are expensed as incurred, and may be offset by co-funding from third parties. The Company may also enter into arrangements whereby it makes advance, non-refundable payments to a vendor to perform certain research and development services. These payments are deferred and recognized over the vendor’s estimated performance period.
Amounts to be received under co-funding arrangements with the U.S. government or others are based on either contractual milestones or costs incurred. These co-funding milestone payments are recognized in operations as performance is estimated to be completed and are measured as milestone achievements occur or as costs are incurred. These estimates are reviewed on a periodic basis and are subject to change, including in the near term. If an estimate is changed, net research and development expense could be impacted significantly.
The Company does not record a receivable from the U.S. government prior to completing the requirements necessary to bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget restrictions and milestones may be subject to completion risk, and as a result, there may be periods in which research and development costs are expensed as incurred for which no reimbursement is recorded, as milestones have not been completed or the U.S. government has not funded an agreement. Accordingly, there can be substantial variability in the amount of net research and development expenses from quarter to quarter and year to year.
The Company classifies amounts to be received from funded research and development projects as either revenue or a reduction to research and development expense based on the specific facts and circumstances of the contractual arrangement, considering total costs expected to be incurred compared to total expected funding and the nature of the research and development contractual arrangement. In the event that a particular arrangement is determined to represent revenue, the corresponding research and development costs are classified as cost of revenue.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or settled. A valuation allowance for deferred tax assets is provided when the Company estimates that it is more likely than not that all or a portion of the deferred tax assets may not be realized through future operations. This assessment is based upon consideration of available positive and negative evidence, which includes, among other things, recent results of operations and expected future profitability. The Company considers its actual historical results over several years to have stronger weight than other more subjective indicators, including forecasts, when considering whether to establish or reduce a valuation allowance on deferred tax assets. The Company has significant difficulty projecting future results due to the nature of the business and the industry in which it operates.
The Company’s deferred tax assets increased by
$16.6 million
as a result of the adoption of Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. No changes were required to previously recorded valuation allowances at the time of adoption. ASU 2016-09 will result in increased volatility in the Company’s effective tax rate.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of
December 31, 2016
, the Company had approximately
$94.3 million
of net deferred tax assets before application of a valuation allowance. As of
December 31, 2016
, net deferred tax assets after reduction by the valuation allowance of
$8.7 million
were
$85.6 million
. During the year ended December 31, 2014, the Company reduced substantially all of the remaining valuation allowance held against the Company’s U.S. deferred tax assets. The assessment of the Company’s ability to utilize its deferred tax assets included an assessment of all known business risks and industry trends as well as forecasted domestic and international earnings over a number of years. The Company’s ability to forecast results significantly into the future is limited due to the rapid rate of technological and competitive change in the industry in which it operates.
The Company continues to provide a valuation allowance against specific U.S. deferred tax assets and a valuation allowance against deferred tax assets arising in a limited number of foreign jurisdictions as the realization of such assets is not considered to be more likely than not at this time. In a future period, the Company’s assessment of the realizability of its deferred tax assets and therefore the appropriateness of the valuation allowance could change based on an assessment of all available evidence, both positive and negative in that future period. If the Company’s conclusion about the realizability of its deferred tax assets and therefore the appropriateness of the valuation allowance changes in a future period, the Company could record a substantial tax provision or benefit in its Consolidated Statements of Operations when that occurs. The Company recognizes the income tax benefit from a tax position only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of the Company’s position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively.
Share-Based Compensation
The Company measures compensation cost for share-based payment awards at fair value and recognizes it as compensation expense over the service period for awards expected to vest. Share-based compensation expense is recognized for all share-based payment awards, net of an estimated forfeiture rate. Compensation cost is only recognized for those shares expected to vest on a straight-line basis over the requisite service period of the award.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The Company utilizes the Black-Scholes options pricing model to value the stock options granted under its options plans. In this model, the assumptions utilized relate to stock price volatility, stock option term and forfeiture rates that are based upon both historical factors as well as management’s judgment.
The fair value of restricted stock and restricted stock units is determined based on the number of shares or units granted and the quoted price of the Company’s common stock at the date of grant.
The Company grants performance vesting restricted stock and performance vesting restricted stock units to executives as one of the ways to align compensation with shareholder interests. Vesting of these awards is contingent upon achievement of certain performance conditions. Compensation expense for these awards is only recorded when vesting is deemed to be “probable.”
Awards are evaluated for probability of vesting each reporting period.
Shipping and Handling Costs
Costs related to shipping and handling are included in “Cost of product revenue” and “Cost of service revenue” in the accompanying Consolidated Statements of Operations.
Advertising Costs
Sales and marketing expenses in the accompanying Consolidated Statements of Operations included advertising expenses of
$3.2 million
,
$2.3 million
, and
$2.9 million
in
2016
,
2015
, and
2014
, respectively. The Company incurs advertising costs for representation at certain trade shows, promotional events and sales lead generation, as well as design and printing costs for promotional materials. The Company expenses all advertising costs as incurred.
Earnings Per Share, or EPS
Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares, excluding unvested restricted stock outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of common and potential common shares outstanding during the period, which includes the additional dilution related to conversion of stock options, unvested restricted stock and unvested restricted stock units as computed under the treasury stock method.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the years ended
December 31, 2016, 2015 and 2014
, the added shares from these items included in the calculation of diluted shares and EPS totaled approximately
1.2 million
,
1.4 million
, and
1.8 million
, respectively. Potentially dilutive shares of
1.2 million
,
0.9 million
, and
0.6 million
, respectively, have been excluded from the denominator in the computation of diluted EPS for the years ended
December 31, 2016, 2015 and 2014
, respectively, because they were antidilutive. An additional
1.2 million
,
1.2 million
and
0.8 million
performance vesting restricted stock and performance vesting restricted stock units were excluded from the computation of diluted EPS for the years ended
December 31, 2016, 2015 and 2014
, respectively, because the conditions for vesting had not been met as of the balance sheet date.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income, a component of Shareholders’ equity, consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Accumulated unrealized net loss on available-for-sale investments
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
Accumulated currency translation adjustments
|
|
2,101
|
|
|
1,675
|
|
Accumulated unrealized net gain on cash flow hedges
|
|
681
|
|
|
5,975
|
|
Accumulated other comprehensive income
|
|
$
|
2,782
|
|
|
$
|
7,642
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606, or ASU 2014-09, to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Adoption of ASU 2014-09 was initially required for fiscal and interim reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09.
In August 2015, FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date: Topic 606, or ASU 2015-14, that deferred the effective date of ASU 2014-09 by one year. Application of the new revenue standard is permitted for fiscal and interim reporting periods beginning after December 15, 2016 and required for fiscal and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-09. The Company will be required to make additional disclosures under the new guidance. However, at this time, the Company does not expect adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory: Topic 330, or ASU 2015-11. Topic 330 currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 requires that inventory measured using either the first-in-first-out (FIFO) or average cost method be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company will adopt ASU 2015-11 as required in its 2017 interim and annual reporting periods. The Company does not expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes: Topic 740, or ASU 2015-17. Current GAAP requires the deferred taxes for each jurisdiction to be presented as a net current asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction. Adoption of ASU 2015-17 is required for fiscal reporting periods
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
beginning after December 15, 2016, including interim reporting periods within those fiscal years, and either prospective or retrospective application is permitted. Early adoption of ASU 2015-17 is permitted. At the time of adoption, all of the Company’s deferred tax assets and liabilities, along with any related valuation allowance, will be classified as noncurrent on its Consolidated Balance Sheet. The Company will adopt ASU 2015-17 in its 2017 interim and annual reporting periods.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities: Topic 825, or ASU 2016-01. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. Adoption of ASU 2016-01 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. The Company does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.
In February 2016, FASB issued Accounting Standards Update No. 2016-02, Leases: Topic 842, or ASU 2016-02, that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Under the new guidance, leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statements of Operations. Lessor accounting is largely unchanged under ASU 2016-02. Adoption of ASU 2016-02 is required for fiscal reporting periods beginning after December 15, 2018, including interim reporting periods within those fiscal years with early adoption being permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. The updated guidance simplifies and changes how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows. Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years with early adoption being permitted. The Company early-adopted ASU 2016-09 in the first quarter of 2016.
At the time of adoption of ASU 2016-09, the Company recognized
$16.6 million
in deferred tax assets for all excess tax benefits that had not been previously recognized because the related tax deduction had not reduced taxes payable. This was accomplished through a cumulative-effect adjustment to accumulated deficit. All excess tax benefits and all tax deficiencies generated in the current and future periods will be recorded as income tax benefit or expense in the Company’s Consolidated Statements of Operations in the reporting period in which they occur. This will result in increased volatility in the Company’s effective tax rate. The Company has determined that none of the other provisions of ASU 2016-09 will have a significant impact on its consolidated financial statements.
In August 2016, FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. The updated guidance clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. Adoption of ASU 2016-15 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being permitted. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
In November 2016, FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, or ASU 2016-18, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The amended guidance requires that amounts that are deemed to be restricted cash and restricted cash equivalents be included in the cash and cash-equivalent balances in the statement of cash flows. A reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. The guidance also requires that changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. An entity with a material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. Adoption of ASU 2016-18 is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years with early adoption being permitted. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.
In January 2017, FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
NOTE 3 FAIR VALUE MEASUREMENTS
Under FASB Accounting Standards Codification Topic 820,
Fair Value Measurements and Disclosures
, based on the observability of the inputs used in the valuation techniques used to determine the fair value of certain financial assets and liabilities, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value on a recurring basis as of
December 31, 2016 and 2015
, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
as of
December 31,
2016
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
224,617
|
|
|
$
|
224,617
|
|
|
$
|
—
|
|
Foreign currency exchange contracts (1)
|
|
11,250
|
|
|
—
|
|
|
11,250
|
|
Assets measured at fair value at December 31, 2016
|
|
$
|
235,867
|
|
|
$
|
224,617
|
|
|
$
|
11,250
|
|
Liabilities:
|
|
|
|
|
|
|
Foreign currency exchange contracts (2)
|
|
41
|
|
|
—
|
|
|
41
|
|
Liabilities measured at fair value at December 31, 2016
|
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
as of
December 31,
2015
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
269,966
|
|
|
$
|
269,966
|
|
|
$
|
—
|
|
Available-for-sale investments (3)
|
|
14,925
|
|
|
14,925
|
|
|
—
|
|
Foreign currency exchange contracts (1)
|
|
11,602
|
|
|
—
|
|
|
11,602
|
|
Assets measured at fair value at December 31, 2015
|
|
$
|
296,493
|
|
|
$
|
284,891
|
|
|
$
|
11,602
|
|
Liabilities:
|
|
|
|
|
|
|
Foreign currency exchange contracts (2)
|
|
3
|
|
|
—
|
|
|
3
|
|
Liabilities measured at fair value at December 31, 2015
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
_______________________________
|
|
(1)
|
Included in “Prepaid expenses and other current assets” and “Other non-current assets” on the Company’s Consolidated Balance Sheets.
|
|
|
(2)
|
Included in “Other accrued liabilities” and “Other non-current liabilities” on the Company’s Consolidated Balance Sheets.
|
|
|
(3)
|
Included in “Short-term investments” on the Company’s Consolidated Balance Sheets.
|
Foreign Currency Derivatives
The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales transactions that are payable in foreign currencies.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of
December 31, 2016 and 2015
, the Company had outstanding foreign currency exchange contracts that were designated and accounted for as cash flow hedges of anticipated future cash receipts on sales contracts payable in foreign currencies. The outstanding notional amounts were approximately (in millions):
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
British Pounds (GBP)
|
—
|
|
|
39.2
|
|
Euros (EUR)
|
1.5
|
|
|
6.0
|
|
Swiss Francs (CHF)
|
3.6
|
|
|
33.0
|
|
Canadian Dollars (CAD)
|
54.4
|
|
|
—
|
|
The Company had hedged foreign currency exposure related to these designated cash flow hedges of approximately
$46.9 million
and
$107.3 million
as of
December 31, 2016
and
December 31, 2015
, respectively.
As of
December 31, 2016 and 2015
, the Company had outstanding foreign currency exchange contracts that had been dedesignated for the purposes of hedge accounting treatment. The outstanding notional amounts were approximately (in millions):
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
British Pounds (GBP)
|
33.8
|
|
|
31.5
|
|
Euros (EUR)
|
8.0
|
|
|
3.8
|
|
Swiss Francs (CHF)
|
—
|
|
|
0.3
|
|
Japanese Yen (JPY)
|
2,464.7
|
|
|
274.0
|
|
Canadian Dollars (CAD)
|
32.4
|
|
|
—
|
|
The foreign currency exposure related to these contracts was approximately
$107.5 million
as of
December 31, 2016
and
$55.6 million
as of
December 31, 2015
. Unrealized gains or losses related to these dedesignated contracts are recorded in other income (expense) in the Consolidated Statements of Operations and are generally offset by foreign currency adjustments on related receivables. These foreign currency exchange contracts are considered to be economic hedges.
Cash receipts associated with the hedged contracts are expected to be received from 2017 through 2022, during which time the revenue on the associated sales contracts is expected to be recognized, or in the case of receivables denominated in a foreign currency, the receivables balances will be collected. Any gain or loss on hedged foreign currency will be recognized
at the time of customer acceptance, or
in the case of receivables denominated in a foreign currency,
each period during which hedged receivables denominated in a foreign currency are outstanding.
As of
December 31, 2016 and 2015
, the fair value of outstanding foreign currency exchange contracts totaled a net gain of
$11.2 million
and
$11.6 million
, respectively.
Fair values of derivative instruments, consisting of foreign currency exchange contracts, designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Balance Sheet Location
|
|
2016
|
|
2015
|
Prepaid expenses and other current assets
|
|
$
|
71
|
|
|
$
|
3,956
|
|
Other non-current assets
|
|
367
|
|
|
5,183
|
|
Other accrued liabilities
|
|
(9
|
)
|
|
—
|
|
Other non-current liabilities
|
|
(5
|
)
|
|
(2
|
)
|
Total fair value of derivative instruments designated as cash flow hedges
|
|
$
|
424
|
|
|
$
|
9,137
|
|
As of
December 31, 2016 and 2015
, unrecognized gains, net of tax, of
$0.7 million
and
$6.0 million
, respectively, were included in “Accumulated other comprehensive income” on the Company’s Consolidated Balance Sheets.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair values of derivative instruments, consisting of foreign currency exchange contracts, not designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Balance Sheet Location
|
|
2016
|
|
2015
|
Prepaid expenses and other current assets
|
|
$
|
5,344
|
|
|
$
|
1,807
|
|
Other non-current assets
|
|
5,468
|
|
|
656
|
|
Other accrued liabilities
|
|
(27
|
)
|
|
(1
|
)
|
Total fair value of derivative instruments not designated as cash flow hedges
|
|
$
|
10,785
|
|
|
$
|
2,462
|
|
NOTE 4 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, 2016, 2015 and 2014
(in thousands). The gross reclassification adjustments increased product revenue for all years presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Gross of Tax Reclassifications
|
|
$
|
22,207
|
|
|
$
|
6,163
|
|
|
$
|
2,748
|
|
Net of Tax Reclassifications
|
|
$
|
13,324
|
|
|
$
|
3,698
|
|
|
$
|
1,649
|
|
The following tables show the changes in Accumulated Other Comprehensive Income by component for the years ended
December 31, 2016 and 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Unrealized Loss on Investments
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gain on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income
|
Beginning balance
|
$
|
(8
|
)
|
|
$
|
1,675
|
|
|
$
|
5,975
|
|
|
$
|
7,642
|
|
Current-period change, net of tax
|
8
|
|
|
426
|
|
|
(5,294
|
)
|
|
(4,860
|
)
|
Ending balance
|
$
|
—
|
|
|
$
|
2,101
|
|
|
$
|
681
|
|
|
$
|
2,782
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) associated with current-period change
|
$
|
6
|
|
|
$
|
(152
|
)
|
|
$
|
(2,425
|
)
|
|
$
|
(2,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Unrealized Gain (Loss) on Investments
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gain on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income
|
Beginning balance
|
$
|
12
|
|
|
$
|
2,069
|
|
|
$
|
4,422
|
|
|
$
|
6,503
|
|
Current-period change, net of tax
|
(20
|
)
|
|
(394
|
)
|
|
1,553
|
|
|
1,139
|
|
Ending balance
|
$
|
(8
|
)
|
|
$
|
1,675
|
|
|
$
|
5,975
|
|
|
$
|
7,642
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) associated with current-period change
|
$
|
(13
|
)
|
|
$
|
(335
|
)
|
|
$
|
1,005
|
|
|
$
|
657
|
|
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5 INVESTMENTS
The Company’s investments in debt securities with maturities at purchase greater than three months are classified as “available-for-sale.” Changes in fair value are reflected in other comprehensive income (loss). The carrying amount of the Company’s investments in available-for-sale securities are shown in the table below (in thousands):
|
|
|
|
|
|
|
|
December 31, 2015
|
Short-term available-for-sale securities cost
|
|
$
|
14,939
|
|
Short-term available-for-sale securities unrealized loss
|
|
(14
|
)
|
Short-term available-for-sale securities fair value
|
|
$
|
14,925
|
|
The Company’s debt securities were investment grade and carried a long-term rating of A2/A or higher.
NOTE 6 ACCOUNTS AND OTHER RECEIVABLES, NET
A summary of net accounts and other receivables follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Trade accounts receivable
|
|
$
|
156,705
|
|
|
$
|
83,750
|
|
Unbilled receivables
|
|
17,264
|
|
|
7,685
|
|
Advance billings
|
|
1,915
|
|
|
11,637
|
|
Short-term investment in sales-type lease
|
|
8,683
|
|
|
10,004
|
|
Other receivables
|
|
13,395
|
|
|
11,662
|
|
|
|
197,962
|
|
|
124,738
|
|
Allowance for doubtful accounts
|
|
(21
|
)
|
|
(19
|
)
|
Accounts and other receivables, net
|
|
$
|
197,941
|
|
|
$
|
124,719
|
|
Unbilled receivables represent amounts where the Company has recognized revenue in advance of the contractual billing terms. Advance billings represent billings made based on contractual terms for which revenue has not been recognized.
As of
December 31, 2016 and 2015
, accounts receivable included
$104.6 million
and
$44.2 million
, respectively, due from the U.S. Government. Of these amounts,
$1.4 million
and
$2.2 million
were unbilled as of
December 31, 2016 and 2015
, respectively, based upon contractual billing arrangements with these customers. As of
December 31, 2016
,
two
non-U.S. Government customers accounted for
24%
of total accounts and other receivables. As of
December 31, 2015
,
one
non-U.S. Government customer accounted for
18%
of total accounts and other receivables.
NOTE 7 SALES-TYPE LEASE
As of
December 31, 2016 and 2015
, the Company had a sales-type lease with one of its customers. Under the terms of the original agreement, the Company provided a high performance computing solution to the customer for a term of four years, beginning at the customer’s acceptance of the system. In the second quarter of 2016, the Company delivered a second high performance computing solution and extended the original agreement, which will now end in September 2020. The lease extension, and delivery of the second high performance computing solution, has been accounted for as a separate sale and is not considered a lease modification. The lease is designated in British Pounds and the Company has entered into certain foreign currency exchange contracts that act as an economic hedge for the foreign currency exposure associated with this arrangement.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table shows the components of the net investment in the sales-type lease as of
December 31, 2016 and 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2016
|
|
2015
|
Total minimum lease payments to be received
|
$
|
52,224
|
|
|
$
|
36,863
|
|
Less: executory costs
|
(10,139
|
)
|
|
(7,434
|
)
|
Net minimum lease payments receivable
|
42,085
|
|
|
29,429
|
|
Less: unearned income
|
(2,352
|
)
|
|
(1,108
|
)
|
Net investment in sales-type lease
|
39,733
|
|
|
28,321
|
|
Less: long-term investment in sales-type lease
|
(31,050
|
)
|
|
(18,317
|
)
|
Investment in sales-type lease included in accounts and other receivables
|
$
|
8,683
|
|
|
$
|
10,004
|
|
As of
December 31, 2016
, minimum lease payments for each of the succeeding four fiscal years were as follows (in thousands):
|
|
|
|
|
2017
|
$
|
13,681
|
|
2018
|
13,857
|
|
2019
|
14,115
|
|
2020
|
10,571
|
|
Total minimum lease payments to be received
|
$
|
52,224
|
|
NOTE 8 INVENTORY
A summary of inventory follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2016
|
|
2015
|
Components and subassemblies
|
|
$
|
31,695
|
|
|
$
|
20,806
|
|
Work in process
|
|
39,894
|
|
|
43,071
|
|
Finished goods
|
|
16,665
|
|
|
49,778
|
|
|
|
$
|
88,254
|
|
|
$
|
113,655
|
|
As of
December 31, 2016 and 2015
,
$10.5 million
and
$49.5 million
, respectively, of finished goods inventory was located at customer sites pending acceptance. At
December 31, 2016
,
two
customers accounted for
$11.9 million
of finished goods inventory and at
December 31, 2015
,
three
customers accounted for
$41.7 million
of finished goods inventory.
During
2016
,
2015
and
2014
, the Company wrote-off
$4.8 million
,
$0.5 million
and
$2.3 million
, respectively, of excess and obsolete inventory.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 PROPERTY AND EQUIPMENT, NET
A summary of property and equipment follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Land
|
|
$
|
498
|
|
|
$
|
275
|
|
Buildings
|
|
20,679
|
|
|
20,612
|
|
Furniture and equipment
|
|
11,740
|
|
|
14,190
|
|
Computer equipment
|
|
54,541
|
|
|
65,957
|
|
Leasehold improvements
|
|
2,976
|
|
|
1,098
|
|
|
|
90,434
|
|
|
102,132
|
|
Accumulated depreciation and amortization
|
|
(59,814
|
)
|
|
(71,053
|
)
|
Property and equipment, net
|
|
$
|
30,620
|
|
|
$
|
31,079
|
|
Depreciation expense on property and equipment for
2016, 2015 and 2014
was
$12.5 million
,
$13.3 million
and
$12.8 million
, respectively.
NOTE 10 SERVICE SPARES, NET
A summary of service spares follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Service spares
|
|
$
|
6,503
|
|
|
$
|
15,082
|
|
Accumulated depreciation
|
|
(3,480
|
)
|
|
(11,992
|
)
|
Service spares, net
|
|
$
|
3,023
|
|
|
$
|
3,090
|
|
Depreciation expense on service spares for
2016, 2015 and 2014
was
$1.5 million
,
$1.1 million
and
$1.0 million
, respectively.
NOTE 11 DEFERRED REVENUE
A summary of deferred revenue follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2016
|
|
2015
|
Deferred product revenue
|
|
$
|
14,274
|
|
|
$
|
22,215
|
|
Deferred service revenue
|
|
96,113
|
|
|
97,822
|
|
Total deferred revenue
|
|
110,387
|
|
|
120,037
|
|
Less long-term deferred revenue
|
|
(27,258
|
)
|
|
(33,306
|
)
|
Deferred revenue in current liabilities
|
|
$
|
83,129
|
|
|
$
|
86,731
|
|
As of
December 31, 2016 and 2015
, the U.S. Government accounted for
$60.3 million
and
$57.7 million
, respectively, of total deferred revenue. As of
December 31, 2016 and 2015
,
no
non-U.S. Government customers accounted for more than
10%
of total deferred revenue.
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Company has recorded rent expense under leases for buildings or office space, which were accounted for as operating leases, in
2016, 2015 and 2014
of
$8.4 million
,
$5.9 million
, and
$5.2 million
, respectively. The 2016 rent expense includes a
$2.3 million
lease termination fee for the Company’s St. Paul facility.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Minimum contractual commitments as of
December 31, 2016
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Development
Agreements
|
2017
|
|
$
|
6,585
|
|
|
$
|
16,002
|
|
2018
|
|
6,908
|
|
|
2,531
|
|
2019
|
|
6,475
|
|
|
40
|
|
2020
|
|
5,857
|
|
|
15
|
|
2021
|
|
5,910
|
|
|
—
|
|
Thereafter
|
|
26,720
|
|
|
—
|
|
Minimum contractual commitments
|
|
$
|
58,455
|
|
|
$
|
18,588
|
|
In its normal course of operations, the Company engages in development arrangements under which it hires outside engineering resources to augment its existing internal staff in order to complete research and development projects, or parts thereof. For the years ended
December 31, 2016, 2015 and 2014
, the Company incurred
$15.6 million
,
$14.3 million
and
$12.2 million
, respectively, for such arrangements.
Litigation
From time to time, the Company is subject to various legal proceedings that arise in the ordinary course of business. Other than as outlined below, none of these legal proceedings are deemed to be material to the Company’s business.
The Company is subject to patent lawsuits brought by Raytheon. The first suit was brought by Raytheon on September 25, 2015 in the Eastern District of Texas (Civil Action No. 2:15-cv-1554) asserting infringement of
four
patents owned by Raytheon.
Two
of the asserted patents relate to computer hardware alleged to be encompassed by Cray’s current and past products, and the
two
remaining asserted patents relate to features alleged to be performed by certain third-party software that Cray optionally includes as part of its product offerings. A second suit was brought by Raytheon on April 22, 2016 in the Eastern District of Texas (Civil Action No. 2:16-cv-423) asserting infringement of
five
patents owned by Raytheon. In this second suit, all
five
asserted patents relate to features alleged to be performed by certain third-party software that Cray optionally includes as part of its product offerings. Trial in the first action is currently scheduled to commence in March 2017 and trial in the second action is currently scheduled to commence in October 2017. The Company is vigorously defending these actions. The probable outcome of either litigation cannot be determined, nor can the Company estimate a range of potential loss. Based on its review of the matters to date, the Company believes that it has valid defenses and claims in each of the
two
lawsuits. As a result, the Company considers the likelihood of a material loss related to these matters to be remote.
NOTE 13 INCOME TAXES
Income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax assets and liabilities, which represent consequences of events that have been recognized differently in the financial statements under GAAP than for tax purposes.
Most of the Company’s deferred tax assets result from net operating loss carryforwards and research and development tax credits. As of
December 31, 2016
, the Company had U.S. federal net operating loss carryforwards of approximately
$90.2 million
and U.S. federal research and development tax credit carryforwards of approximately
$25.2 million
. Upon the adoption of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in March of 2016, the Company recognized
$16.6 million
in deferred tax benefits from approximately
$47.4 million
of federal net operating losses attributable to share-based income tax deductions that exceeded amounts that had been recognized for financial reporting purposes. These deferred tax benefits were recorded as a cumulative-effect adjustment to accumulated deficit. The federal net operating loss carryforwards will expire from 2019 through 2036, and the federal research and development tax credits will expire from 2021 through 2036 if not utilized. Utilization of
$25.6 million
of the Company’s federal net operating loss carryforwards generated prior to May 10, 2001 is limited under Section 382 of the Internal Revenue Code to
$4.3 million
per year. As of
December 31, 2016
, the Company had approximately
$6.2 million
of foreign net operating loss carryforwards in various jurisdictions. Most of the Company’s foreign net operating losses can be carried forward indefinitely, with certain amounts expiring from 2017 to 2026.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income before income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
2,648
|
|
|
$
|
38,362
|
|
|
$
|
5,710
|
|
International
|
|
7,273
|
|
|
4,415
|
|
|
3,987
|
|
Total
|
|
$
|
9,921
|
|
|
$
|
42,777
|
|
|
$
|
9,697
|
|
The tax provision (benefit) for income taxes related to operations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current provision (benefit):
|
|
|
|
|
|
|
Federal
|
|
$
|
3
|
|
|
$
|
725
|
|
|
$
|
230
|
|
State
|
|
(279
|
)
|
|
1,389
|
|
|
(392
|
)
|
Foreign
|
|
1,443
|
|
|
1,023
|
|
|
740
|
|
Total current provision
|
|
1,167
|
|
|
3,137
|
|
|
578
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
Federal
|
|
(2,127
|
)
|
|
12,198
|
|
|
(53,242
|
)
|
State
|
|
416
|
|
|
(52
|
)
|
|
(885
|
)
|
Foreign
|
|
(150
|
)
|
|
(43
|
)
|
|
923
|
|
Total deferred provision (benefit)
|
|
(1,861
|
)
|
|
12,103
|
|
|
(53,204
|
)
|
Total provision (benefit) for income taxes
|
|
$
|
(694
|
)
|
|
$
|
15,240
|
|
|
$
|
(52,626
|
)
|
The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Income tax provision at statutory rate
|
|
$
|
3,472
|
|
|
$
|
14,972
|
|
|
$
|
3,394
|
|
State taxes, net of federal benefit
|
|
89
|
|
|
897
|
|
|
(217
|
)
|
Foreign income taxes
|
|
(407
|
)
|
|
(12
|
)
|
|
284
|
|
Additional deductions from share-based compensation
|
|
(1,815
|
)
|
|
—
|
|
|
—
|
|
Deemed dividends for U.S. income tax purposes
|
|
329
|
|
|
407
|
|
|
492
|
|
Nondeductible expenses
|
|
231
|
|
|
283
|
|
|
337
|
|
Disallowed compensation
|
|
331
|
|
|
455
|
|
|
(116
|
)
|
Audit settlement
|
|
(297
|
)
|
|
—
|
|
|
—
|
|
Research and development tax credit
|
|
(2,470
|
)
|
|
(1,733
|
)
|
|
(1,140
|
)
|
Effect of change in valuation allowance on deferred tax assets
|
|
(157
|
)
|
|
(29
|
)
|
|
(55,660
|
)
|
Effective income tax provision (benefit)
|
|
$
|
(694
|
)
|
|
$
|
15,240
|
|
|
$
|
(52,626
|
)
|
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Significant components of the Company’s deferred income tax assets and liabilities follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
Deferred Income Tax Assets
|
|
|
|
|
Inventory
|
|
$
|
4,127
|
|
|
$
|
3,930
|
|
Accrued compensation
|
|
511
|
|
|
1,213
|
|
Deferred revenue
|
|
14,742
|
|
|
18,372
|
|
Net operating loss carryforwards
|
|
—
|
|
|
2,636
|
|
Research and development credit carryforwards
|
|
—
|
|
|
16,264
|
|
Other
|
|
5,402
|
|
|
4,303
|
|
Gross current deferred tax assets
|
|
24,782
|
|
|
46,718
|
|
Valuation allowance
|
|
(819
|
)
|
|
(2,995
|
)
|
Current deferred tax assets
|
|
23,963
|
|
|
43,723
|
|
Deferred Income Tax Liabilities
|
|
|
|
|
Other
|
|
(4,846
|
)
|
|
(5,095
|
)
|
Current deferred tax liabilities
|
|
(4,846
|
)
|
|
(5,095
|
)
|
Net current deferred tax assets
|
|
$
|
19,117
|
|
|
$
|
38,628
|
|
Long-Term:
|
|
|
|
|
Deferred Income Tax Assets
|
|
|
|
|
Property and equipment
|
|
$
|
8,188
|
|
|
$
|
7,510
|
|
Research and development credit carryforwards
|
|
28,241
|
|
|
9,528
|
|
Net operating loss carryforwards
|
|
38,348
|
|
|
14,523
|
|
Goodwill
|
|
106
|
|
|
125
|
|
Share-based compensation
|
|
7,016
|
|
|
5,976
|
|
Other
|
|
7,537
|
|
|
4,084
|
|
Gross long-term deferred tax assets
|
|
89,436
|
|
|
41,746
|
|
Valuation allowance
|
|
(7,908
|
)
|
|
(6,492
|
)
|
Long-term deferred tax assets
|
|
81,528
|
|
|
35,254
|
|
Deferred Income Tax Liabilities
|
|
|
|
|
Investment in sales-type lease, net
|
|
(13,728
|
)
|
|
(7,611
|
)
|
Intangible assets
|
|
(421
|
)
|
|
(512
|
)
|
Other
|
|
(883
|
)
|
|
(1,277
|
)
|
Long-term deferred tax liabilities
|
|
(15,032
|
)
|
|
(9,400
|
)
|
Net long-term deferred tax asset
|
|
$
|
66,496
|
|
|
$
|
25,854
|
|
For the year ended December 31, 2015, long-term deferred income tax liabilities in the amount of
$0.2 million
have been included in other non-current liabilities on the Company’s Consolidated Balance Sheet.
The Company recorded an income tax benefit of
$0.7 million
during the year ended December 31, 2016, income tax expense of
$15.2 million
during the year ended December 31, 2015 and an income tax benefit of
$52.6 million
during the year ended
December 31, 2014
. The difference between the income tax provision at the statutory rate and the Company’s effective income tax benefit for the year ended
December 31, 2016
was the result of research and development tax credits and additional tax deductions from share-based compensation, sometimes referred to as excess tax benefits, partially offset by state taxes, non-deductible expenses and other permanent items. Excess tax benefits arise when tax deductions recognized by the Company with respect to share-based compensation exceed the compensation cost attributable to share-based compensation that was recognized in the Company’s consolidated financial statements. The difference between the income tax provision at the statutory rate and the Company’s effective income tax provision for the year ended
December 31, 2015
was the result of state taxes, non-deductible expenses and other permanent items, partially offset by research and development tax credits. The tax benefit recorded by the Company during the year ended
December 31, 2014
was primarily attributable to a partial reduction, in the amount of
$55.7 million
, of the remaining valuation allowance that was held against the Company’s U.S. deferred tax assets.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s decision to partially reduce, in the amount of
$55.7 million
, the valuation allowance held against the Company’s U.S. deferred tax assets during the year ended December 31, 2014 was based upon an evaluation of all available positive and negative evidence, known business risks and industry trends. The Company considers its actual results over several years to have stronger weight than other more subjective indicators, including forecasts, when considering whether or not to establish or reduce a valuation allowance on deferred tax assets and believes that its ability to forecast results significantly into the future is limited due to the rapid rate of technological and competitive change in the industry in which it operates. As of December 31, 2014 the Company had generated U.S. pre-tax income in each of the last three years and cumulative U.S. pre-tax income of
$184.8 million
(
$51.1 million
excluding the impact of the sale of the Company’s interconnect hardware development program) over the last three years. In addition to the Company’s cumulative income position, the assessment of the Company’s ability to utilize its U.S. deferred tax assets included an assessment of forecasted domestic and international earnings over a number of years, which included the impact of several major contracts that were finalized during the fourth quarter of 2014.
The Company’s conclusion about the realizability of its deferred tax assets, and therefore the appropriateness of the valuation allowance, is reviewed quarterly and could change in future periods depending on the Company’s future assessment of all available evidence in support of the likelihood of realization of its deferred tax assets. If the Company’s conclusion about the realizability of its deferred tax assets and therefore the appropriateness of its valuation allowance changes in a future period, it could record a substantial tax provision or benefit in the Consolidated Statements of Operations when that occurs.
The valuation allowance on deferred tax assets decreased by
$0.8 million
,
$0.7 million
and
$67.7 million
in
2016, 2015 and 2014
, respectively. The decrease in the valuation allowance for the year ended December 31, 2014 included a reduction, in the amount of
$55.7 million
, of the valuation allowance held against the Company’s U.S. deferred tax assets based upon an assessment of all positive and negative evidence relating to future years.
As of
December 31, 2016
, undistributed earnings, in the approximate amount of
$14.5 million
, relating to the Company’s foreign subsidiaries are considered to be permanently reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities associated with this hypothetical calculation. As of
December 31, 2016
, the Company’s foreign subsidiaries held cash in the amount of
$14.3 million
.
The following table summarizes changes in the amount of the Company’s unrecognized tax benefits for uncertain tax positions for the three years ended
December 31, 2016, 2015 and 2014
(in thousands):
|
|
|
|
|
Balance at December 31, 2013
|
$
|
202
|
|
Increase related to prior year income tax positions
|
5,059
|
|
Increase related to current year income tax positions
|
369
|
|
Balance at December 31, 2014
|
$
|
5,630
|
|
Increase related to prior year income tax positions
|
151
|
|
Increase related to current year income tax positions
|
433
|
|
Balance at December 31, 2015
|
$
|
6,214
|
|
Increase related to prior year income tax positions
|
53
|
|
Decrease related to prior year income tax positions
|
(365
|
)
|
Increase related to current year income tax positions
|
565
|
|
Balance at December 31, 2016
|
$
|
6,467
|
|
The balance of unrecognized tax benefits as of
December 31, 2016
was
$6.5 million
of tax benefits that, if recognized, would affect the effective tax rate. It is not anticipated that the balance of unrecognized tax benefits will significantly change over the next twelve months.
The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company defines its major tax jurisdictions to include Australia, Germany, the United Kingdom and the United States. The Company is no longer subject to income tax examinations with respect to Australia for periods before 2011 and for periods before 2015 in Germany and the United Kingdom, respectively. With respect to the U.S. federal and various state jurisdictions the Company is no longer subject to income tax examinations with respect to periods before 2013, although in such jurisdictions net operating loss and tax credit carryforwards generated in a year are subject to examination and adjustment for at least three years following the year in which such losses or credits are actually used to offset taxable income.
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
2016, 2015 and 2014
.
NOTE 14 CREDIT FACILITIES
As of
December 31, 2016
, the Company had a
$50.0 million
revolving line of credit, or Credit Facility, with Wells Fargo Bank, National Association, designed to be used for general corporate purposes, including working capital requirements and capital expenditures. The Credit Facility also supports the issuance of letters of credit. The Credit Facility is secured by a first priority lien in all of the Company’s accounts receivable and other rights to payment, general intangibles, inventory and equipment.
Any borrowings under the Credit Facility bear interest at either a fluctuating rate equal to the daily one month LIBOR rate plus a margin of
1.25%
or a fixed interest rate for one, three or six months equal to the LIBOR rate for the applicable period plus a margin of
1.25%
. The Company is also required to pay the lender customary letter of credit fees, and a commitment fee of
0.18%
per annum in respect of the unutilized commitment amount under the Credit Facility. The Credit Facility requires that the Company maintain certain financial ratios and restricts its ability to incur additional indebtedness, pay dividends or distributions, create liens on assets, and engage in certain other activities. The Company was in compliance with all of its financial covenants as of the end of each quarter for the year ended
December 31, 2016
. The Credit Facility matures in December 2017.
The Company made
no
draws and had
no
outstanding cash borrowings on the credit facility as of
December 31, 2016
.
As of
December 31, 2016
, the Company had
$3.3 million
in USD equivalent value in outstanding letters of credit and
$1.7 million
in restricted cash associated with certain letters of credit to secure customer prepayments and other customer related obligations.
NOTE 15 SHAREHOLDERS’ EQUITY
Preferred Stock:
The Company has
5,000,000
shares of undesignated preferred stock authorized, and
no
shares of preferred stock outstanding.
Common Stock:
The Company has
75,000,000
authorized shares of common stock with a par value of
$0.01
per share.
Stock Plans:
As of
December 31, 2016
, the Company had
one
active equity incentive plan that provides shares available for option, restricted stock and restricted stock unit grants to employees, directors, executives and others.
Stock Options:
In determining the fair value of stock options, the Company uses the Black-Scholes option pricing model. The following key weighted average assumptions were employed in the calculation for the indicated years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
|
1.12
|
%
|
|
1.31
|
%
|
|
1.22
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Volatility
|
|
50.92
|
%
|
|
50.55
|
%
|
|
52.43
|
%
|
Expected life (in years)
|
|
4.0
|
|
|
4.0
|
|
|
4.0
|
|
Weighted average Black-Scholes value of options granted
|
|
$
|
13.16
|
|
|
$
|
11.23
|
|
|
$
|
11.16
|
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is based on the assumption that options will be exercised, on average, about
two
years after vesting occurs. The Company recognizes compensation expense for only the portion of options that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates. The estimated forfeiture rates applied to the Company’s stock option grants for the years ended
December 31, 2016, 2015 and 2014
were
8.0%
,
8.0%
, and
8.3%
, respectively. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. The Company’s stock price volatility, option lives and expected forfeiture rates involve management’s best estimates at the time of such determination, which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting period or requisite service period of the option. The Company typically issues stock options with a
four
-year vesting period (the requisite service period) and amortizes the fair value of stock options (share-based compensation cost) ratably over the requisite service period. Options to purchase shares expire no later than
ten
years after the date of grant.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the Company’s stock option activity and related information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining
Contractual
Term (Years)
|
Outstanding at January 1, 2014
|
|
2,078,069
|
|
|
$
|
9.29
|
|
|
|
Granted
|
|
323,900
|
|
|
26.92
|
|
|
|
Exercised
|
|
(411,352
|
)
|
|
7.50
|
|
|
|
Canceled and forfeited
|
|
(59,627
|
)
|
|
18.45
|
|
|
|
Outstanding at December 31, 2014
|
|
1,930,990
|
|
|
12.34
|
|
|
|
Granted
|
|
307,450
|
|
|
27.86
|
|
|
|
Exercised
|
|
(229,118
|
)
|
|
9.99
|
|
|
|
Canceled and forfeited
|
|
(60,847
|
)
|
|
20.00
|
|
|
|
Outstanding at December 31, 2015
|
|
1,948,475
|
|
|
14.83
|
|
|
|
Granted
|
|
240,075
|
|
|
32.65
|
|
|
|
Exercised
|
|
(168,825
|
)
|
|
12.57
|
|
|
|
Canceled and forfeited
|
|
(30,588
|
)
|
|
26.60
|
|
|
|
Outstanding at December 31, 2016
|
|
1,989,137
|
|
|
16.99
|
|
|
5.8
|
Exercisable at December 31, 2016
|
|
1,486,211
|
|
|
12.98
|
|
|
4.8
|
Available for grant at December 31, 2016
|
|
3,600,599
|
|
|
|
|
|
Outstanding and exercisable options by price range as of
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Exercisable Options
|
Range of Exercise
Prices per Share
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
$ 0.00 - $ 10.00
|
|
771,511
|
|
|
3.1
|
|
$
|
5.58
|
|
|
771,511
|
|
|
$
|
5.58
|
|
$ 10.01 - $ 20.00
|
|
390,595
|
|
|
5.9
|
|
$
|
15.22
|
|
|
364,408
|
|
|
$
|
14.90
|
|
$ 20.01 - $ 30.00
|
|
560,639
|
|
|
7.8
|
|
$
|
26.44
|
|
|
304,918
|
|
|
$
|
26.18
|
|
$ 30.01 - $ 42.40
|
|
266,392
|
|
|
9.3
|
|
$
|
32.73
|
|
|
45,374
|
|
|
$
|
34.68
|
|
$ 0.00 - $ 42.40
|
|
1,989,137
|
|
|
5.8
|
|
$
|
16.99
|
|
|
1,486,211
|
|
|
$
|
12.98
|
|
As of
December 31, 2016
, there was
$13.8 million
of aggregate intrinsic value of outstanding stock options, including
$13.8 million
of aggregate intrinsic value of exercisable stock options. Intrinsic value represents the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of
2016
and the exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received by the option holders if all option holders had exercised their options on
December 31, 2016
. This amount changes, based on the fair market value of the Company’s stock. Total intrinsic value of options exercised was
$4.0 million
,
$5.0 million
, and
$10.2 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively.
Restricted Stock:
During
2016
,
2015
and
2014
, the Company issued an aggregate of
9,893
,
45,175
, and
463,734
shares of restricted stock, respectively, to certain directors, executives and other employees. The grant date fair value of these grants was approximately
$0.3 million
,
$1.4 million
, and
$13.3 million
for
2016
,
2015
and
2014
, respectively. Share-based compensation expense is recorded over the vesting period, which is generally
one
year for non-employee directors and
four
years for officers and employees of the Company.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at January 1, 2014
|
1,127,700
|
|
|
$
|
12.05
|
|
|
1,094,000
|
|
|
$
|
15.94
|
|
|
2,221,700
|
|
|
$
|
13.97
|
|
Granted
|
463,734
|
|
|
28.74
|
|
|
—
|
|
|
—
|
|
|
463,734
|
|
|
28.74
|
|
Forfeited
|
(134,653
|
)
|
|
15.39
|
|
|
(277,000
|
)
|
|
17.49
|
|
|
(411,653
|
)
|
|
16.80
|
|
Vested
|
(423,179
|
)
|
|
11.14
|
|
|
—
|
|
|
—
|
|
|
(423,179
|
)
|
|
11.14
|
|
Outstanding at December 31, 2014
|
1,033,602
|
|
|
19.48
|
|
|
817,000
|
|
|
15.41
|
|
|
1,850,602
|
|
|
17.68
|
|
Granted
|
45,175
|
|
|
30.44
|
|
|
—
|
|
|
—
|
|
|
45,175
|
|
|
30.44
|
|
Forfeited
|
(48,998
|
)
|
|
24.00
|
|
|
(219,000
|
)
|
|
15.60
|
|
|
(267,998
|
)
|
|
17.14
|
|
Vested
|
(513,336
|
)
|
|
15.34
|
|
|
(12,500
|
)
|
|
28.20
|
|
|
(525,836
|
)
|
|
15.64
|
|
Outstanding at December 31, 2015
|
516,443
|
|
|
24.12
|
|
|
585,500
|
|
|
15.07
|
|
|
1,101,943
|
|
|
19.31
|
|
Granted
|
9,893
|
|
|
34.86
|
|
|
—
|
|
|
—
|
|
|
9,893
|
|
|
34.86
|
|
Forfeited
|
(18,685
|
)
|
|
24.73
|
|
|
(72,000
|
)
|
|
15.57
|
|
|
(90,685
|
)
|
|
17.46
|
|
Vested
|
(250,849
|
)
|
|
22.14
|
|
|
—
|
|
|
—
|
|
|
(250,849
|
)
|
|
22.14
|
|
Outstanding at December 31, 2016
|
256,802
|
|
|
26.43
|
|
|
513,500
|
|
|
15.00
|
|
|
770,302
|
|
|
18.81
|
|
The estimated forfeiture rates applied to the Company’s service vesting restricted stock grants during the years ended
December 31, 2016
,
2015
and
2014
were
8.0%
,
8.0%
and
6.3%
, respectively. The aggregate fair value of restricted shares vested during
2016
,
2015
and
2014
was
$7.7 million
,
$14.2 million
, and
$11.9 million
, respectively. Performance vesting restricted shares totaling
476,000
will expire unvested at the time of filing this Form 10-K as the criteria for vesting was not satisfied during the performance period. This will also have the impact of reducing the number of shares of outstanding Common Stock by
476,000
shares. The remaining performance vesting restricted shares are eligible to vest in 2017. No compensation cost has been recorded for these grants.
Restricted Stock Units:
During
2016
and
2015
, the Company issued an aggregate of
244,160
and
984,850
restricted stock and performance vesting restricted stock units, respectively, to certain executives and other employees. The grant date fair value of these grants was approximately
$8.0 million
and
$29.5 million
for
2016
and
2015
, respectively. There were
no
restricted stock units issued or outstanding as of
December 31, 2014
. Restricted stock units have similar vesting characteristics as restricted stock but are not outstanding shares and do not have any voting or dividend rights. The Company records share-based compensation expense over the vesting period. At the time of vesting, a share of common stock representing each restricted stock unit vested will be issued by the Company.
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
|
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at January 1, 2015
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
285,550
|
|
|
$
|
29.78
|
|
|
699,300
|
|
|
$
|
30.04
|
|
|
984,850
|
|
|
$
|
29.97
|
|
Forfeited
|
|
(12,500
|
)
|
|
$
|
30.48
|
|
|
(66,600
|
)
|
|
$
|
30.04
|
|
|
(79,100
|
)
|
|
$
|
30.11
|
|
Vested
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2015
|
|
273,050
|
|
|
$
|
29.75
|
|
|
632,700
|
|
|
$
|
30.04
|
|
|
905,750
|
|
|
$
|
29.95
|
|
Granted
|
|
220,575
|
|
|
$
|
31.89
|
|
|
23,585
|
|
|
$
|
42.65
|
|
|
244,160
|
|
|
$
|
32.93
|
|
Forfeited
|
|
(7,700
|
)
|
|
$
|
29.44
|
|
|
—
|
|
|
$
|
—
|
|
|
(7,700
|
)
|
|
$
|
29.44
|
|
Vested
|
|
(60,204
|
)
|
|
$
|
29.57
|
|
|
—
|
|
|
$
|
—
|
|
|
(60,204
|
)
|
|
$
|
29.57
|
|
Outstanding at December 31, 2016
|
|
425,721
|
|
|
$
|
30.89
|
|
|
656,285
|
|
|
$
|
30.49
|
|
|
1,082,006
|
|
|
$
|
30.65
|
|
The estimated forfeiture rates applied to the Company’s service vesting restricted stock unit grants during the years ended
December 31, 2016
and
2015
were
8.0%
and
8.0%
, respectively. The aggregate fair value of restricted stock units vested during
2016
was
$1.9 million
. The performance vesting restricted stock units are subject to performance measures that are currently not considered “probable” of attainment and as such, no compensation cost has been recorded for these units. The performance vesting restricted stock units are eligible to vest between
2017
and
2020
.
Share-based Compensation Expense:
Including performance-based equity awards, the Company had
$43.1 million
of total unrecognized compensation cost related to unvested stock options, unvested restricted stock and unvested restricted stock units as of
December 31, 2016
. Excluding the
$27.7 million
of unrecognized compensation cost related to unvested restricted stock and unvested restricted stock units that are subject to performance measures that are currently not considered “probable” of attainment, unrecognized compensation cost is
$15.4 million
. No compensation expense is recognized for unvested restricted stock or unvested restricted stock units subject to performance measures that are not considered “probable” of attainment. Unrecognized compensation cost related to unvested stock options, unvested non-performance-based restricted stock and unvested non-performance-based restricted stock units is expected to be recognized over a weighted average period of
2.5
years.
The following table sets forth the gross share-based compensation cost resulting from stock options, unvested restricted stock and unvested restricted stock units that were recorded in the Company’s Consolidated Statements of Operations for the indicated years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Cost of product revenue
|
|
$
|
320
|
|
|
$
|
254
|
|
|
$
|
229
|
|
Cost of service revenue
|
|
211
|
|
|
276
|
|
|
255
|
|
Research and development
|
|
3,113
|
|
|
3,770
|
|
|
2,721
|
|
Sales and marketing
|
|
3,710
|
|
|
3,047
|
|
|
3,152
|
|
General and administrative
|
|
3,797
|
|
|
4,006
|
|
|
4,007
|
|
Total share-based compensation expense
|
|
$
|
11,151
|
|
|
$
|
11,353
|
|
|
$
|
10,364
|
|
Employee Stock Purchase Plan (ESPP):
Under the Company’s non-compensatory employee stock purchase plan, the maximum number of shares of the Company’s common stock that employees could acquire under the ESPP is
1,750,000
shares. Eligible employees are permitted to acquire shares of the Company’s common stock through payroll deductions not exceeding
15%
of base wages. The purchase price per share under the ESPP is
95%
of the closing market price on the fourth business day after the end of each offering period. As of
December 31, 2016, 2015 and 2014
, an aggregate of
1,098,085
,
1,070,343
and
1,043,228
shares, respectively, had been issued under the ESPP.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16 BENEFIT PLANS
401(k) Plan
For the three years ended
December 31, 2016
, the Company’s retirement plan covered substantially all U.S. employees and provided for voluntary salary deferral contributions on a pre-tax basis in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company matches a portion of employee contributions. The
2016, 2015 and 2014
Company match expense was
$2.9 million
,
$2.6 million
and
$1.6 million
, respectively.
Pension Plan
The Company’s German subsidiary maintains a defined benefit pension plan. At
December 31, 2016
, the excess of plan assets over the projected benefit obligation of
$2.0 million
was
$0.2 million
. At
December 31, 2015
, the excess of plan assets over the projected benefit obligation of
$2.1 million
was
$0.2 million
. Plan assets are invested in insurance policies payable to employees. Net pension expense was not material for any period. Contributions to the plan are not expected to be significant to the financial position of the Company.
NOTE 17 SEGMENT INFORMATION
The Company has the following reportable segments: Supercomputing, Storage and Data Management, Maintenance and Support, and Engineering Services and Other. The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, who is the Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance. The segments are determined based on several factors, including the Company’s internal operating structure, the manner in which the Company’s operations are managed, client base, similar economic characteristics and the availability of separate financial information.
Supercomputing
Supercomputing includes a suite of highly advanced, tightly integrated and cluster supercomputer systems which are used by large research and engineering centers in universities, government laboratories, and commercial institutions. Supercomputing also includes the ongoing maintenance of these systems as well as system analysts.
Storage and Data Management
Storage and Data Management includes Cray Data Warp and Sonexion as well as other third-party storage products and their ongoing maintenance and system analysts.
Maintenance and Support
Maintenance and Support provides ongoing maintenance of Cray supercomputers, big data storage and analytics systems, as well as system analysts.
Engineering Services and Other
Included within Engineering Services and Other are the Company’s analytics business and Custom Engineering.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents revenues and gross margin for the Company’s operating segments for the indicated years ended
December 31
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
|
Supercomputing
|
|
$
|
510,403
|
|
|
$
|
581,733
|
|
|
$
|
459,729
|
|
Storage and Data Management
|
|
89,438
|
|
|
112,862
|
|
|
84,412
|
|
Maintenance and Support
|
|
107,795
|
|
|
97,091
|
|
|
86,573
|
|
Engineering Services and Other
|
|
29,968
|
|
|
30,094
|
|
|
17,465
|
|
Elimination of inter-segment revenue
|
|
(107,795
|
)
|
|
(97,091
|
)
|
|
(86,573
|
)
|
Total revenue
|
|
$
|
629,809
|
|
|
$
|
724,689
|
|
|
$
|
561,606
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
Supercomputing
|
|
$
|
173,245
|
|
|
$
|
177,048
|
|
|
$
|
146,565
|
|
Storage and Data Management
|
|
34,125
|
|
|
37,181
|
|
|
31,572
|
|
Maintenance and Support
|
|
43,147
|
|
|
41,487
|
|
|
38,819
|
|
Engineering Services and Other
|
|
12,845
|
|
|
11,454
|
|
|
6,277
|
|
Elimination of inter-segment gross profit
|
|
(43,147
|
)
|
|
(41,487
|
)
|
|
(38,819
|
)
|
Total gross profit
|
|
$
|
220,215
|
|
|
$
|
225,683
|
|
|
$
|
184,414
|
|
Revenue and cost of revenue is the only discrete financial information the Company prepares for its segments. Other financial results or assets are not separated by segment.
The Company’s geographic operations outside the United States include sales and service offices in Europe and the Middle East, South America, Asia Pacific and Canada. The following data represents the Company’s revenue and long-lived assets for the United States and all other countries (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
All
Other
Countries
|
|
Total
|
For the year ended December 31, 2016:
|
|
|
|
|
|
|
Product revenue
|
|
$
|
251,317
|
|
|
$
|
248,115
|
|
|
$
|
499,432
|
|
Service revenue
|
|
$
|
88,208
|
|
|
$
|
42,169
|
|
|
$
|
130,377
|
|
Long-lived assets
|
|
$
|
39,933
|
|
|
$
|
36,555
|
|
|
$
|
76,488
|
|
For the year ended December 31, 2015:
|
|
|
|
|
|
|
Product revenue
|
|
$
|
373,494
|
|
|
$
|
227,800
|
|
|
$
|
601,294
|
|
Service revenue
|
|
$
|
88,956
|
|
|
$
|
34,439
|
|
|
$
|
123,395
|
|
Long-lived assets
|
|
$
|
39,014
|
|
|
$
|
23,238
|
|
|
$
|
62,252
|
|
For the year ended December 31, 2014:
|
|
|
|
|
|
|
Product revenue
|
|
$
|
253,930
|
|
|
$
|
206,818
|
|
|
$
|
460,748
|
|
Service revenue
|
|
$
|
72,434
|
|
|
$
|
28,424
|
|
|
$
|
100,858
|
|
Long-lived assets
|
|
$
|
41,378
|
|
|
$
|
36,206
|
|
|
$
|
77,584
|
|
Long-lived assets as of
December 31, 2016, 2015 and 2014
, included
$31.1 million
,
$18.3 million
and
$31.1 million
, respectively, of long-term investment in sales-type lease which was held by the Company’s United Kingdom subsidiary.
Revenue attributed to foreign countries is derived from sales to customers located outside the United States. Revenue derived from the U.S. Government totaled approximately
$296.9 million
,
$338.5 million
and
$272.0 million
in
2016, 2015 and 2014
, respectively. In
2016
,
one
non-U.S. Government customer accounted for
10%
of total revenue. In
2015
and
2014
,
no
non-U.S. Government customers accounted for more than
10%
of total revenue. In general, concentrations of revenue by customer encompass all segments. In
2016
, the United Kingdom accounted for
17%
of total revenue. In
2015
,
no
foreign countries accounted for more than
10%
of total revenue. In
2014
, the United Kingdom and Germany accounted for a combined
23%
of total revenue.
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 18 RESEARCH AND DEVELOPMENT
Details for the Company’s net research and development expenses for the indicated years ended
December 31
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Gross research and development expenses
|
|
$
|
130,006
|
|
|
$
|
126,060
|
|
|
$
|
104,797
|
|
Less: Amounts included in cost of revenue
|
|
(12,621
|
)
|
|
(16,515
|
)
|
|
(7,713
|
)
|
Less: Reimbursed research and development (excludes amounts in revenue)
|
|
(5,255
|
)
|
|
(12,982
|
)
|
|
(3,036
|
)
|
Net research and development expenses
|
|
$
|
112,130
|
|
|
$
|
96,563
|
|
|
$
|
94,048
|
|
NOTE 19 INTEREST INCOME (EXPENSE)
The detail of interest income (expense) for the indicated years ended
December 31
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Interest income
|
|
$
|
2,120
|
|
|
$
|
1,465
|
|
|
$
|
643
|
|
Interest expense
|
|
27
|
|
|
(57
|
)
|
|
(137
|
)
|
Net interest income
|
|
$
|
2,147
|
|
|
$
|
1,408
|
|
|
$
|
506
|
|
Interest income is earned by the Company on cash and cash equivalents, investment balances and the investment in sales-type lease.
NOTE 20 QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly financial information for the two years ended
December 31, 2016
. In the opinion of management, this information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof.
The operating results are not necessarily indicative of results for any future periods. Quarter-to-quarter comparisons should not be relied upon as indicators of future performance. The Company’s business is driven by a few significant contracts and, as a result, the Company’s operating results are subject to very large quarterly fluctuations. The Company’s earnings per share for the full year may not equal the sum of the four quarterly earnings per share amounts because of common share activity during the year.
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
For the Quarter Ended
|
|
3/31
|
|
6/30
|
|
9/30
|
|
12/31
|
|
3/31
|
|
6/30
|
|
9/30
|
|
12/31
|
Revenue
|
|
$
|
105,549
|
|
|
$
|
100,235
|
|
|
$
|
77,451
|
|
|
$
|
346,574
|
|
|
$
|
79,644
|
|
|
$
|
186,161
|
|
|
$
|
191,413
|
|
|
$
|
267,471
|
|
Cost of revenue
|
|
65,587
|
|
|
64,074
|
|
|
53,850
|
|
|
226,083
|
|
|
55,608
|
|
|
136,576
|
|
|
125,531
|
|
|
181,291
|
|
Gross profit
|
|
39,962
|
|
|
36,161
|
|
|
23,601
|
|
|
120,491
|
|
|
24,036
|
|
|
49,585
|
|
|
65,882
|
|
|
86,180
|
|
Research and development, net
|
|
25,840
|
|
|
27,399
|
|
|
29,084
|
|
|
29,807
|
|
|
22,187
|
|
|
20,106
|
|
|
24,989
|
|
|
29,281
|
|
Sales and marketing
|
|
16,001
|
|
|
15,380
|
|
|
15,010
|
|
|
18,502
|
|
|
12,552
|
|
|
13,412
|
|
|
16,132
|
|
|
18,054
|
|
General and administrative
|
|
7,338
|
|
|
9,019
|
|
|
7,968
|
|
|
9,728
|
|
|
6,140
|
|
|
6,435
|
|
|
6,729
|
|
|
8,662
|
|
Net income (loss)
|
|
(5,013
|
)
|
|
(13,126
|
)
|
|
(23,021
|
)
|
|
51,775
|
|
|
(9,394
|
)
|
|
5,781
|
|
|
10,855
|
|
|
20,295
|
|
Net income (loss) per common share, basic
|
|
$
|
(0.13
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
1.30
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.15
|
|
|
$
|
0.28
|
|
|
$
|
0.51
|
|
Net income (loss) per common share, diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
1.27
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.14
|
|
|
$
|
0.27
|
|
|
$
|
0.50
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Cray Inc.
We have audited the accompanying consolidated balance sheets of Cray Inc. and Subsidiaries (“the Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2016. Our audits also included the financial statement schedule listed in the index at item 15(a)(2). The Company’s management is responsible for these consolidated financial statements and schedule. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cray Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 10, 2017, expressed an unqualified opinion.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
February 10, 2017
Schedule II — Valuation and Qualifying Accounts(1)
December 31, 2016
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
Charge to Expense
|
|
Deductions
(2)
|
|
Balance at
End of
Period
|
Year ended December 31, 2014:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
157
|
|
|
$
|
22
|
|
|
$
|
(82
|
)
|
|
$
|
97
|
|
Year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
(78
|
)
|
|
$
|
19
|
|
Year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
19
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
|
(1)
|
The Company does not have any warranty liabilities.
|
|
|
(2)
|
Deductions represent uncollectible accounts written off, net of recoveries.
|
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