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4-Traders Homepage  >  Equities  >  Nasdaq  >  Cray Inc.    CRAY

CRAY INC. (CRAY)

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CRAY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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02/10/2017 | 10:40pm CET
Forward-Looking Statements
The information set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below includes "forward-looking statements"
as described in the section "Forward-Looking Statements" preceding Part I of
this annual report on Form 10-K, and is subject to the safe harbor created by
Section 27A of the Securities Act and Section 21E of the Exchange Act. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us and
described in Item 1A. Risk Factors in Part I and other sections of this annual
report on Form 10-K and our other filings with the Securities and Exchange
Commission. The following discussion should also be read in conjunction with the
Consolidated Financial Statements and accompanying Notes thereto.
Overview and Executive Summary
We design, develop, manufacture, market and service the high-end of the HPC
market, primarily categories of systems commonly known as supercomputers and
provide data analytics, artificial intelligence and storage solutions leveraging
more than four decades of delivering the world's most advanced compute systems.
We also provide software, system maintenance and support services and
engineering services related to supercomputer systems and our data analytics,
artificial intelligence and storage solutions. Our customers include domestic
and foreign government and government-funded entities, academic institutions and
commercial entities. Our key target markets are the supercomputing portion of
the HPC market and the expanding big data markets. We provide customer-focused
solutions based on three main models: (1) tightly integrated supercomputing
and/or storage solutions, complete with highly tuned software, that stress
capability, scalability, sustained performance and reliability at scale; (2)
flexible commodity-based "cluster" supercomputing and storage solutions based
upon utilizing best-of-breed components and working with our customers to define
solutions that meet specific needs; and (3) integrated solutions that combine
industry standard tools for large-scale analytics and artificial intelligence
applications, as well as innovative graph analysis tools, and specialized
computing platforms. All of our solutions also emphasize total cost of
ownership, scalable price-performance and data center flexibility as key
features. Our continuing strategy is to gain market share in the supercomputer
market segment, extend our technology leadership and differentiation, maintain
our focus on execution and profitability and grow by continuing to expand our
share and addressable market in areas where we can leverage our experience and
technology, such as in high performance storage systems and powerful analytic
tools for large volumes of data, popularly referred to as "big data." We also
meet diverse customer requirements by combining supercomputing, cluster
supercomputing, and big data described above, into unique solutions offerings
that work in a workflow-driven datacenter environment.
Summary of 2016 Results
Total revenue decreased by $94.9 million in 2016 compared to 2015, from $724.7
million to $629.8 million. Product revenue decreased by $101.9 million and
service revenue increased by $7.0 million over the same period. The year over
year decrease in product revenue was primarily driven by a slowdown in the HPC
market that resulted in fewer opportunities in our traditional markets. In
addition, the year over year comparison was impacted by two large systems that
were accepted in the first quarter of 2015, accounting for approximately $40.0
million in revenue, for which we had previously anticipated acceptance to occur
in the fourth quarter of 2014. The year over year increase in service revenue
was primarily driven by increased maintenance revenue which benefited from a
larger installed system base as a result of product revenue growth in recent
years.
Product gross profit margin increased from 29% in 2015 to 34% in 2016. The year
over year increase in product gross margin percentage was driven by lower memory
costs, partially offset by concessions and penalties and an increase in
write-offs for excess and obsolete inventory. Gross profit margin from services
decreased from 42% in 2015 to 40% in 2016 primarily due to $3.0 million of costs
incurred to replace a high-value third-party component in a customer system that
is under a service contract, higher headcount and compensation expense, and
higher third-party costs. These amounts were partially offset by a decrease in
incentive compensation expense.
We recorded income from operations of $9.1 million in 2016 compared to income
from operations of $41.0 million in 2015. The decrease in income from operations
was primarily attributable to lower revenue, mostly offset by an improved gross
margin percentage, and a $26.4 million increase in operating expenses resulting
primarily from increased spending on research and development.
Net income decreased from $27.5 million in 2015 to $10.6 million in 2016,
primarily driven by the decrease in operating income discussed above, partially
offset by a $15.9 million decrease in income tax expense.
Net cash used in operations during 2016 was $52.3 million, as compared to net
cash provided by operations of $147.8 million in 2015. Net cash used in
operations during 2016 was primarily driven by a $78.4 million increase in our
accounts receivable balance from December 31, 2015 to December 31, 2016. Cash
receipts generally lag customer acceptances and we anticipate

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significant cash receipts in the first quarter of 2017 for a number of large
customer acceptances in the fourth quarter of 2016. Working capital decreased by
$23.0 million from $415.2 million at December 31, 2015 to $392.1 million at
December 31, 2016.
Market Overview and Challenges
Significant trends in the HPC industry include:
•     supercomputing with many-core commodity processors driving increasing
      scalability requirements;


•     increased micro-architectural diversity, including increased usage of

many-core processors and accelerators, as the rate of increases in per-core

performance slows;



• data I/O and capacity needs growing much faster than computational needs;


•     technology innovations in memory and storage allowing for faster data
      access such as NVRAM, SSDs and flash devices;

• the commoditization of HPC hardware, particularly processors and system

      interconnects;


•     the growing concentration of very large suppliers of key computing and
      storage components in the industry;

• the growing commoditization of software, including plentiful building

blocks and more capable open source software;

• electrical power requirements becoming a design constraint and driver in

total cost of ownership determinations;

• increasing use of analytics technologies (Hadoop, Spark, NoSQL and Graph)

      in both the HPC and big data markets;


•     the rise of artificial intelligence along with machine learning and deep
      learning technologies which utilize HPC technologies for performance and
      scale;

• cloud computing as a solution for loosely-coupled HPC applications; and


•     significant variability in market demand from quarter-to-quarter and
      year-to-year.


Several of these trends have resulted in the expansion and acceptance of
loosely-coupled cluster systems using processors manufactured by Intel, AMD and
others combined with commercially available, commodity networking and other
components, particularly in the middle and lower segments of the HPC market.
These systems may offer higher theoretical peak performance for equivalent cost,
and "price/peak performance" is sometimes the dominant factor in HPC
procurements. Vendors of such systems often put pricing pressure on us,
resulting in lower margins in competitive procurements.
In the market for the largest, and most scalable systems, those often costing in
excess of $3 million, the use of generally available network components can
result in increasing data transfer bottlenecks as these components do not
balance processor power with network communication and system software
capability. With increasing processor core counts due to new many-core
processors, these unbalanced systems will typically have lower productivity,
especially in larger systems running more complex applications. We and others
augment standard microprocessors with other processor types, such as graphics
processing units and many-core attached processors, in order to increase
computational power, further complicating programming models. In addition, with
increasing scale, bandwidth and processor core counts, large computer systems
use progressively higher amounts of power to operate and require special cooling
capabilities.
To position ourselves to meet the market's demanding needs, we concentrate our
research and development efforts on technologies that enable our supercomputers
to perform at scale - that is, to continue to increase actual performance as
systems grow ever larger in size - and in areas where we can leverage our core
expertise in other markets whose applications demand these tightly coupled
architectures. We also have demonstrated expertise in system software and
several processor technologies. We expect to be in a comparatively advantageous
position as larger many-core processors become available and as multiple
processing technologies become integrated into single systems in heterogeneous
environments. In addition, we have continued to expand our addressable market by
leveraging our technologies, customer base, the Cray brand and by introducing
complementary products and services to new and existing customers, as
demonstrated by our emphasis on strategic initiatives, such as "big data"
analytics, artificial intelligence and storage and data management.
In analytics, we are developing and delivering high performance data discovery
and advanced analytics solutions. These solutions compete with open source
software, running on commodity cluster systems. Although these competitive
systems have low acquisition costs, the total cost of ownership, or TCO, is
driven up by management, power and efficiency challenges. We concentrate our
efforts on developing solutions that minimize the TCO, delivering faster
time-to-solution and advanced capabilities that are key drivers for many of our
data analytics customers. We support open source technologies such as Hadoop and
Spark to design large-scale data analytics stacks that simplify analyses of
scientific and commercial applications.


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In storage, we are developing and delivering high value products for the high
performance storage market. Our storage products are primarily positioned to
enable tight integration of storage to computing solutions and/or utilize
parallel file processing technologies and facilitate storage across multiple
data tiers. We support open source parallel file systems and protocols such as
Lustre and we are a founding member of the OpenSFS (Open Scalable File System)
consortia for Lustre.
We have also expanded our addressable market by providing cluster systems and
solutions to the supercomputing market that allow us to offer flexible platforms
to incorporate best of breed components to allow customers to optimize the
system to fit their unique requirements.
Key Performance Indicators
Our management monitors and analyzes several key performance indicators in order
to manage our business and evaluate our financial and operating performance,
including:
Revenue.  Product revenue generally constitutes the major portion of our revenue
in any reporting period and, for the reasons discussed in this annual report on
Form 10-K, is subject to significant variability from period to period. In the
short term, we closely review the status of customer proposals, customer
contracts, product shipments, installations and acceptances in order to forecast
revenue and cash receipts. In the longer-term, we monitor the status of the
pipeline of product sales opportunities and product development cycles. We
believe product revenue growth measured over several quarters is a better
indicator of whether we are achieving our objective of increased market share in
the supercomputing market. We have seen a decrease in the high-end of the
supercomputing market in 2016 as compared to the last few years. The Cray XC and
Cray CS products, along with our longer-term product roadmap are efforts to
increase product revenue. We have been increasing our business and product
development efforts in big data analytics, artificial intelligence and
storage and data management. We have also been increasing the size of our sales
force. Service revenue related to our maintenance offerings is subject to less
variations in the short term and may assist, in part, to offset the impact that
the variability in product revenue has on total revenue.
Gross profit margin.  Gross profit margin is impacted by revenue and our cost to
build and deliver our products and services. Our services tend to carry higher
gross profit margins than our products. We monitor the cost of components,
manufacturing, and installation of our products. In assessing our service gross
profit margin, we monitor headcount levels and third-party costs.
Operating expenses.  Our operating expenses are driven primarily by headcount
and compensation expense, contracted third-party research and development
services, and incentive compensation expense. As part of our ongoing expense
management efforts, we continue to monitor headcount levels in specific
geographic and operational areas.
Liquidity and cash flows.  Due to the variability in product revenue, new
contracts, acceptance and payment terms, our cash position also varies
significantly from quarter-to-quarter and within a quarter. We monitor our
expected cash levels, particularly in light of increased inventory purchases for
large system installations and the risk of delays in product shipments, customer
acceptances and, in the long-term, product development. Cash receipts generally
lag customer acceptances.
Results of Operations
Revenue and Gross Profit
Our product and service revenue for the indicated years ended December 31 were
(in thousands, except for percentages):
                                          Year Ended December 31,
                                     2016          2015          2014
Product revenue                   $ 499,432     $ 601,294     $ 460,748
Less: Cost of product revenue       332,016       426,821       321,554
Product gross profit              $ 167,416     $ 174,473     $ 139,194

Product gross profit percentage 34 % 29 % 30 %


Service revenue                   $ 130,377     $ 123,395     $ 100,858

Less: Cost of service revenue 77,578 72,185 55,638 Service gross profit

              $  52,799     $  51,210     $  45,220

Service gross profit percentage 40 % 42 % 45 %

Total revenue                     $ 629,809     $ 724,689     $ 561,606
Less: Total cost of revenue         409,594       499,006       377,192
Total gross profit                $ 220,215     $ 225,683     $ 184,414
Total gross profit percentage            35 %          31 %          33 %



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Product Revenue
Product revenue for 2016 decreased by $101.9 million, or 17%, over 2015,
primarily driven by a slowdown in the HPC market that resulted fewer contract
opportunities in our traditional markets. In addition, the year over year
comparison was impacted by two large systems that were accepted in the first
quarter of 2015, accounting for approximately $40.0 million in revenue, for
which we had previously anticipated acceptance to occur in the fourth quarter of
2014.
Product revenue for 2015 increased by $140.5 million, or 31%, over 2014 due to
customer acceptances of large Cray systems in Saudi Arabia, South Korea, and the
United States, as well as several significant sales to commercial customers in
2015. In addition, in the first quarter of 2015, we had customer acceptances of
two large systems, accounting for approximately $40.0 million in revenue, for
which we had previously anticipated acceptance to occur in the fourth quarter of
2014.
Service Revenue
Service revenue for 2016 increased by $7.0 million from 2015, or 6%. The year
over year increase in service revenue was primarily driven by increased
maintenance revenue which benefited from a larger installed system base as a
result of product revenue growth in recent years.
Service revenue for 2015 increased by $22.5 million from 2014, or 22%. The year
over year increase in service revenue was driven by significant increases in
both engineering services, as a result of milestone completions on certain
projects, and maintenance revenue, which benefited from a larger installed
system base as a result of product revenue growth in recent years.
Cost of Product Revenue and Product Gross Profit
Cost of product revenue for 2016 decreased by $94.8 million compared to 2015,
driven primarily by lower product revenue and an improved product gross margin
percentage. Product gross profit percentage was 34% in 2016 and 29% in 2015. The
year over year increase in product gross margin percentage was driven by lower
memory costs, partially offset by concessions and penalties and an increase in
write-offs for excess and obsolete inventory.
Cost of product revenue for 2015 increased by $105.3 million compared to 2014,
driven by higher product revenue. Product gross profit percentage was 29% in
2015 and 30% in 2014. The product gross profit margin for 2015 was lower than it
has been in recent years and was impacted by higher costs on a few large
contracts that were not anticipated at the time of bidding, driven both by
economic factors and technical issues.
Cost of Service Revenue and Service Gross Profit
Cost of service revenue increased by $5.4 million in 2016 compared to 2015,
driven by a larger installed base of systems which also resulted in higher
service revenue, and $3.0 million of costs incurred to replace a high-value
third-party component in a customer system that is under a service contract.
Service gross profit margin decreased by two percentage points to 40% in 2016
compared to 2015. The service gross profit margin decreased primarily due to
$3.0 million of costs incurred to replace a high-value third-party component
described previously, higher headcount and compensation expense, and higher
third-party costs. These amounts were partially offset by a decrease in
incentive compensation expense.
Cost of service revenue increased by $16.5 million in 2015 compared to 2014,
driven primarily by a larger installed base of systems which also resulted in
higher service revenue. Service gross profit margin decreased by three
percentage points to 42% in 2015 compared to 2014. The service gross profit
margin decreased primarily due to higher headcount and compensation expense,
including significantly higher incentive compensation expense, higher
third-party costs, as well as lower margins on certain engineering services
contracts due to a high percentage of sub-contractor costs in those contracts.

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Operating Expenses
Research and Development
Research and development expenses for the indicated years ended December 31 were
as follows (in thousands, except for percentages):
                                                             Year Ended 

December 31,

                                                        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
Percentage of total revenue                                 18 %          

13 % 17 %



Gross research and development expenses in the table above reflect all research
and development expenditures. Research and development expenses include
personnel expenses, depreciation, allocations for certain overhead expenses,
software, prototype materials and third-party contractor engineering expenses.
In 2016, gross research and development expenses increased by $3.9 million from
2015 levels primarily due to increased investments in the development of new
products. Total compensation costs increased by $1.7 million compared to 2015,
driven by higher average headcount, partially offset by lower incentive
compensation expense. Expenses for outside services increased by $1.3 million
over the same period. Net research and development expenses increased by $15.6
million compared to 2015 as a result of the increase in gross research and
development expenses described above and a decrease in amounts included in cost
of revenue and reimbursed research and development. The decrease in
reimbursements was primarily driven by lower funding in 2016 compared to 2015
and the timing of milestone and project completions.
In 2015, gross research and development expenses increased by $21.3 million from
2014 levels primarily due to increased investments in the development of new
products and higher costs related to our engineering services contracts, which
include pass-through costs to third parties. Total compensation costs for
research and development increased by $17.4 million compared to 2014. We
increased our average headcount which resulted in higher base salaries of $8.8
million. The higher total compensation costs also included the impact of an
increase of $5.2 million in incentive compensation expense as well as an
increase of $1.0 million in share-based compensation expense. Net research and
development expenses increased by only $2.5 million in 2015 compared to 2014
despite such a large increase in gross research and development expenses. This
was a result of an increase in amounts included in cost of revenue and higher
reimbursed research and development, driven by higher funding in 2015 compared
to 2014 and the timing of milestone and project completions.
Other Operating Expenses
Our sales and marketing and general and administrative expenses for the
indicated years ended December 31 were (in thousands, except for percentages):
                                    Year Ended December 31,
                                 2016         2015         2014
Sales and marketing           $ 64,893     $ 60,150     $ 57,785
Percentage of total revenue         10 %          8 %         10 %
General and administrative    $ 34,053     $ 27,966     $ 23,381
Percentage of total revenue          5 %          4 %          4 %


Sales and Marketing.  Sales and marketing expense increased by $4.7 million in
2016 compared to 2015. Total compensation costs for 2016 increased by $3.6
million compared to 2015, driven by higher headcount, partially offset by lower
incentive compensation expense. Marketing program spending also increased by
$0.8 million over the same period.
The $2.4 million increase in sales and marketing expense in 2015 compared to
2014 was primarily due to increased incentive compensation expense.
General and Administrative.  General and administrative expense increased by
$6.1 million in 2016 compared to 2015 primarily due to a $6.0 million increase
in litigation costs associated with our ongoing litigation with Raytheon, which
is described in Note 12 - Commitments and Contingencies in the Notes to
Consolidated Financial Statements in Item 15. Exhibits and Financial

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Statement Schedules in Part IV of this annual report on Form 10-K. We also
incurred a $2.3 million lease termination fee for our St. Paul facility. These
amounts were partially offset by a $2.1 million decrease in incentive
compensation expense. Due to our ongoing litigation with Raytheon, we expect
legal expenses to remain at above historical levels through at least the first
quarter of 2017.
The $4.6 million increase in general and administrative expense in 2015 compared
to 2014 was primarily due to increased headcount, increased incentive
compensation expense and increased outside services. Average headcount increased
to support the growth in the business and resulted in an increase in base
salaries of $0.8 million. Incentive compensation expense increased by $1.5
million and outside services increased by $1.9 million compared to the prior
year.
Other Income (Expense), Net
We recorded $1.4 million and $9,000 of net other expense for the years ended
December 31, 2016 and 2014, respectively, and $0.4 million of net other income
for the year ended December 31, 2015. Net other income and expense includes
gains and losses from foreign currency transactions, investments and disposals
of assets.
Interest Income, Net
Our interest income and interest expense for the indicated years ended December
31 were (in thousands):
                            Year Ended December 31,
                          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, net in 2016 increased as compared to 2015 due to amortization
of unearned income on the sales-type lease that we entered into with a customer
in the first half of 2016. Interest income, net in 2015 increased as compared to
2014 due to amortization of unearned income on the sales-type lease that we
entered into with a customer in the second half of 2014.
Taxes
We recorded income tax benefit (expense) for the indicated years ended December
31 as follows (in thousands):
                                        Year Ended December 31,
                                    2016          2015         2014
Net income before income taxes   $  9,921      $ 42,777     $  9,697
Tax benefit (expense)                 694       (15,240 )     52,626
Net income                       $ 10,615      $ 27,537     $ 62,323
Effective tax rate                     (7 )%         36 %       (543 )%


The difference between the income tax benefit at the federal statutory rate of
35% and our income tax expense at the effective rate of (7)% for the year ended
December 31, 2016 was the result of research and development tax credits and
additional tax deductions from share-based payments, sometimes referred to as
excess tax benefits, partially offset by state taxes, non-deductible expenses
and other permanent items. Excess tax benefits arise when tax deductions that we
recognize with respect to share-based compensation exceed the compensation cost
attributable to share-based compensation that was recognized in our consolidated
financial statements. The difference between the income tax provision at the
federal statutory rate of 35% and our income tax expense at the effective income
tax rate of 36% for the year ended December 31, 2015 was the result of state
taxes, non-deductible expenses and other permanent items, partially offset by
research and development tax credits. The difference between the income tax
provision at the federal statutory rate of 35% and our income tax benefit at the
effective rate of (543)% for the year ended December 31, 2014 was attributable
to our decision to reduce substantially all of the remaining valuation allowance
that was held against our U.S. deferred tax assets.
During the year ended December 31, 2014, we reduced the valuation allowance held
against our U.S. deferred tax assets by $55.7 million based upon an assessment
of all positive and negative evidence relating to future years. We consider our
actual results over several years to have stronger weight than other more
subjective indicators, including forecasts, when considering whether or not to
establish or reduce a valuation allowance on deferred tax assets and believe
that our ability to forecast results significantly into the future is limited
due to the rapid rate of technological and competitive change in the industry in
which we operate. As of December 31, 2014 we had generated U.S. pre-tax income
in each of the last three years and cumulative U.S. pre-tax income of $184.8
million ($51.1 million excluding the impact of the sale of our interconnect
hardware development program)

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over the last three years. In addition to our cumulative income position, the
assessment of our ability to utilize our U.S. deferred tax assets included an
assessment of forecasted domestic and international earnings over a number of
years, which included the impact of several major contracts that were finalized
during the fourth quarter of 2014.
Our conclusion about the realizability of our deferred tax assets, and therefore
the appropriateness of the valuation allowance, is reviewed quarterly and could
change in future periods depending on our future assessment of all available
evidence in support of the likelihood of realization of our deferred tax assets.
If our conclusion about the realizability of our deferred tax assets and
therefore the appropriateness of our valuation allowance changes in a future
period, we could record a substantial tax provision or benefit in our
Consolidated Statements of Operations when that occurs.
As of December 31, 2016, we had U.S. federal net operating loss carryforwards of
approximately $90.2 million and U.S. federal research and development tax credit
carryforwards of approximately $25.2 million. The federal net operating loss
carryforwards will expire between 2019 through 2036, and the research and
development tax credits will expire from 2021 through 2036 if not utilized.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers:
Topic 606, or ASU 2014-09, to supersede nearly all existing revenue recognition
guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues
when promised goods or services are transferred to customers in an amount that
reflects the consideration that is expected to be received for those goods or
services. ASU 2014-09 defines a five step process to achieve this core principle
and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than required under existing GAAP,
including identifying performance obligations in the contract, estimating the
amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation.
Adoption of ASU 2014-09 was initially required for fiscal and interim reporting
periods beginning after December 15, 2016 using either of two methods: (i)
retrospective to each prior reporting period presented with the option to elect
certain practical expedients as defined within ASU 2014-09; or (ii)
retrospective with the cumulative effect of initially applying ASU 2014-09
recognized at the date of initial application and providing certain additional
disclosures as defined per ASU 2014-09.
In August 2015, FASB issued Accounting Standards Update No. 2015-14, Revenue
from Contracts with Customers - Deferral of the Effective Date: Topic 606, or
ASU 2015-14, that deferred the effective date of ASU 2014-09 by one year.
Application of the new revenue standard is permitted for fiscal and interim
reporting periods beginning after December 15, 2016 and required for fiscal and
interim reporting periods beginning after December 15, 2017. We are currently
evaluating the impact of the adoption of ASU 2014-09. We will be required to
make additional disclosures under the new guidance. However, at this time, we do
not expect adoption of ASU 2014-09 to have a material impact on our consolidated
financial statements.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying
the Measurement of Inventory: Topic 330, or ASU 2015-11, to amend Topic 330,
Inventory. Topic 330 currently requires an entity to measure inventory at the
lower of cost or market. Market could be replacement cost, net realizable value,
or net realizable value less an approximately normal profit margin. ASU 2015-11
requires that inventory measured using either the first-in, first-out, or FIFO,
or average cost method be measured at the lower of cost and net realizable
value. Net realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal
and transportation. We will adopt ASU 2015-11 as required in our 2017 interim
and annual reporting periods. We do not expect the adoption of ASU 2015-11 to
have a material impact on our consolidated financial statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, Balance
Sheet Classification of Deferred Taxes: Topic 740, or ASU 2015-17. Current GAAP
requires the deferred taxes for each jurisdiction to be presented as a net
current asset or liability and net noncurrent asset or liability. This requires
a jurisdiction-by-jurisdiction analysis based on the classification of the
assets and liabilities to which the underlying temporary differences relate, or,
in the case of loss or credit carryforwards, based on the period in which the
attribute is expected to be realized. Any valuation allowance is then required
to be allocated on a pro rata basis, by jurisdiction, between current and
noncurrent deferred tax assets. The new guidance requires that all deferred tax
assets and liabilities, along with any related valuation allowance, be
classified as noncurrent on the balance sheet. As a result, each jurisdiction
will now only have one net noncurrent deferred tax asset or liability. The
guidance does not change the existing requirement that only permits offsetting
within a jurisdiction. Adoption of ASU 2015-17 is required for fiscal reporting
periods beginning after December 15, 2016, including interim reporting periods
within those fiscal years, and either prospective or retrospective application
is permitted. Early adoption of ASU 2015-17 is permitted. At the time of
adoption, all of our deferred tax assets and liabilities, along with any related
valuation allowance, will be classified as noncurrent on our Consolidated
Balance Sheet. We will adopt ASU 2015-17 in our 2017 interim and annual
reporting periods.

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In January 2016, FASB issued Accounting Standards Update No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities: Topic
825, or ASU 2016-01. The updated guidance enhances the reporting model for
financial instruments, which includes amendments to address aspects of
recognition, measurement, presentation and disclosure. Adoption of ASU 2016-01
is required for fiscal reporting periods beginning after December 15, 2017,
including interim reporting periods within those fiscal years. We do not expect
the adoption of ASU 2016-01 to have a material impact on our consolidated
financial statements.
In February 2016, FASB issued Accounting Standards Update No. 2016-02, Leases:
Topic 842, or ASU 2016-02, that replaces existing lease guidance. The new
standard is intended to provide enhanced transparency and comparability by
requiring lessees to record right-of-use assets and corresponding lease
liabilities on the balance sheet. Under the new guidance, leases will continue
to be classified as either finance or operating, with classification affecting
the pattern of expense recognition in the Consolidated Statements of Operations.
Lessor accounting is largely unchanged under ASU 2016-02. Adoption of ASU
2016-02 is required for fiscal reporting periods beginning after December 15,
2018, including interim reporting periods within those fiscal years with early
adoption being permitted. The new standard is required to be applied with a
modified retrospective approach to each prior reporting period presented with
various optional practical expedients. We are currently evaluating the potential
impact of the pending adoption of ASU 2016-02 on our consolidated financial
statements.
In March 2016, FASB issued Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting, or ASU 2016-09. The updated guidance simplifies
and changes how companies account for certain aspects of share-based payment
awards to employees, including accounting for income taxes, forfeitures, and
statutory tax withholding requirements, as well as classification of certain
items in the statement of cash flows. Adoption of ASU 2016-09 is required for
fiscal reporting periods beginning after December 15, 2016, including interim
reporting periods within those fiscal years with early adoption being permitted.
We early-adopted ASU 2016-09 at the beginning of the first quarter of 2016.
At the time of adoption of ASU 2016-09, we recognized $16.6 million in deferred
tax assets for all excess tax benefits that had not been previously recognized
because the related tax deduction had not reduced taxes payable. This was
accomplished through a cumulative-effect adjustment to accumulated deficit. All
excess tax benefits and all tax deficiencies generated in the current and future
periods will be recorded as income tax benefit or expense in our Consolidated
Statements of Operations in the reporting period in which they occur. This will
result in increased volatility in our effective tax rate. We have determined
that none of the other provisions of ASU 2016-09 will have a significant impact
on our consolidated financial statements.
In August 2016, FASB issued Accounting Standards Update No. 2016-15, Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments, or ASU 2016-15. The updated guidance clarifies how companies present
and classify certain cash receipts and cash payments in the statement of cash
flows. Adoption of ASU 2016-15 is required for fiscal reporting periods
beginning after December 15, 2017, including interim reporting periods within
those fiscal years with early adoption being permitted. We do not expect the
adoption of ASU 2016-15 to have a material impact on our consolidated financial
statements.
In November 2016, FASB issued Accounting Standards Update No. 2016-18, Statement
of Cash Flows (Topic 230): Restricted Cash, or ASU 2016-18, which amends ASC 230
to add or clarify guidance on the classification and presentation of restricted
cash in the statement of cash flows. The amended guidance requires that amounts
that are deemed to be restricted cash and restricted cash equivalents be
included in the cash and cash-equivalent balances in the statement of cash
flows. A reconciliation between the statement of financial position and the
statement of cash flows must be disclosed when the statement of financial
position includes more than one line item for cash, cash equivalents, restricted
cash, and restricted cash equivalents. The guidance also requires that changes
in restricted cash and restricted cash equivalents that result from transfers
between cash, cash equivalents, and restricted cash and restricted cash
equivalents should not be presented as cash flow activities in the statement of
cash flows. An entity with a material balance of amounts generally described as
restricted cash and restricted cash equivalents must disclose information about
the nature of the restrictions. Adoption of ASU 2016-18 is required for fiscal
reporting periods beginning after December 15, 2017, including interim reporting
periods within those fiscal years with early adoption being permitted. We do not
expect the adoption of ASU 2016-18 to have a material impact on our consolidated
financial statements.
In January 2017, FASB issued Accounting Standards Update No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment
test. ASU 2017-04 also eliminates the requirements for any reporting unit with a
zero or negative carrying amount to perform a qualitative assessment and, if it
fails that qualitative test, to perform Step 2 of the goodwill impairment test.
An entity still has the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is necessary.
Adoption of ASU 2017-04 is required for annual or interim goodwill impairment
tests in fiscal years beginning after December 15, 2019 with early adoption
being permitted for annual or interim goodwill impairment tests performed on
testing dates after January 1, 2017. We do not expect the adoption of ASU
2017-04 to have a material impact on our consolidated financial statements.

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Liquidity and Capital Resources
We generate cash from operations predominantly from the sale of supercomputing
systems and related services. We typically have a small number of significant
contracts that make up the majority of total revenue. We have also entered into
a sales-type lease agreement with a customer, under which we will receive
quarterly payments over the term of the lease, which expires in September 2020.
Material changes in certain of our balance sheet accounts were due to the timing
of product deliveries and customer acceptances, contractually determined
billings, timing and level of inventory purchased for future deliveries, timing
and level of incentive compensation and cash collections. Working capital
requirements, including inventory purchases and normal capital expenditures, are
generally funded with cash from operations.
We previously contemplated expanding our manufacturing capabilities in Chippewa
Falls, Wisconsin in order to increase our manufacturing capacity. This project,
which we estimated would require total capital expenditures in the range of
$25.0 million, is currently suspended. The decision of when and whether to
undertake this project in the future will be dependent on our expectations of
future needs.
Total cash and investments decreased from $284.9 million at December 31, 2015 to
$224.6 million at December 31, 2016, primarily driven by the timing of
collections from customers. As of December 31, 2016, $14.3 million of our total
cash and investments balance was held by foreign subsidiaries. As of
December 31, 2016, we had $1.7 million in restricted cash associated with
certain letters of credit outstanding to secure customer prepayments. As of
December 31, 2016, we had working capital of $392.1 million compared to $415.2
million as of December 31, 2015.
Cash flow information for the indicated years ended December 31 included the
following (in thousands):
                                 2016          2015          2014
Cash provided by (used in):
Operating Activities          $ (52,313 )   $ 147,756     $ (58,109 )
Investing Activities              8,998         7,216       (22,755 )
Financing Activities               (540 )      (1,373 )         (70 )


Operating Activities.  For the year ended December 31, 2016, cash used in
operating activities was primarily driven by a $78.4 million increase in our
accounts receivable balance from December 31, 2015 to December 31, 2016. Cash
receipts generally lag customer acceptances and, because we had a number of
large customer acceptances in the fourth quarter of 2016, we anticipate
significant cash receipts in the first quarter of 2017. For the year ended
December 31, 2015, cash provided by operating activities was primarily driven by
net income of $27.5 million and the positive impact of adding back non-cash
operating items of $42.4 million, customer acceptances of our systems that
resulted in a decrease of $21.3 million in inventory, and collections from
customers that resulted in a decrease of $36.7 million in accounts and other
receivables.
Investing Activities.  For the year ended December 31, 2016, cash provided by
investing activities was principally due to sales and maturities of debt
securities of $31.0 million, partially offset by purchases of debt securities of
$16.2 million and purchases of property and equipment of $7.5 million. For the
year ended December 31, 2015, cash provided by investing activities was
principally due to sales and maturities of debt securities of $16.2 million and
a release of $13.4 million in restricted cash related to a prepayment on a
system from a customer that was released at the time of delivery, partially
offset by purchases of debt securities of $15.0 million and purchases of
property and equipment of $7.5 million.
Financing Activities.  Net cash used in financing activities in 2016, 2015 and
2014 resulted primarily from statutory tax withholding amounts made in exchange
for the forfeiture of common stock by holders of vesting restricted stock,
partially offset by cash received from the issuance of common stock from the
exercise of options and from the issuance of stock through our employee stock
purchase plan.
Over the next twelve months, we expect our significant cash requirements will
relate to operational expenses. Operational expenses consist primarily of
personnel costs, costs of inventory associated with certain large-scale product
deliveries, spare parts, outside engineering expenses, and the acquisition of
property and equipment. In addition, we lease certain equipment and facilities
used in our operations under operating leases in the normal course of business.

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The following table summarizes our contractual cash obligations as of December 31, 2016 (in thousands):

                                                       Amounts Committed by Year
Contractual Obligations          Total          1 Year        Years 2-3       Years 4-5       Thereafter
Development agreements        $   18,588     $   16,002     $     2,571     $        15     $          -
Operating leases                  58,455          6,585          13,383          11,767           26,720
Total contractual cash
obligations                   $   77,043     $   22,587     $    15,954     $    11,782     $     26,720


In the second quarter of 2016, we entered into a new operating lease for
facilities in Bloomington, Minnesota that will principally be staffed with teams
from software development, sales and service. This new lease will replace our
existing lease in St. Paul, Minnesota. The new lease is for a minimum period of
eight years beginning in May 2017. Minimum contractual obligations under the new
lease total $32.6 million. We paid an early termination fee of approximately
$2.3 million to terminate our existing lease in St. Paul, Minnesota which was
recorded as an operating expense in 2016. We received a one-time lease incentive
payment of $2.3 million as part of our new lease agreement to cover the
termination fee, which will be amortized over the term of the new lease. We
anticipate that 2017 spending on leasehold improvements for the new facilities
will be approximately $5.5 million.
As of December 31, 2016, we had a $50.0 million revolving line of credit, or
Credit Facility, with Wells Fargo Bank, National Association, designed to be
used for general corporate purposes, including working capital requirements and
capital expenditures. The Credit Facility also supports the issuance of letters
of credit. The Credit Facility is secured by a first priority lien in all of our
accounts receivable and other rights to payment, general intangibles, inventory
and equipment.
Any borrowings under the Credit Facility bear interest at either a fluctuating
rate equal to the daily one month LIBOR rate plus a margin of 1.25% or a fixed
interest rate for one, three or six months equal to the LIBOR rate for the
applicable period plus a margin of 1.25%. We are also required to pay the lender
customary letter of credit fees, and a commitment fee of 0.18% per annum in
respect of the unutilized commitment amount under the Credit Facility. The
Credit Facility requires that we maintain certain financial ratios and restricts
our ability to incur additional indebtedness, pay dividends or distributions,
create liens on assets, and engage in certain other activities. We were in
compliance with all of our financial covenants as of the end of each quarter for
the year ended December 31, 2016. The Credit Facility matures in December 2017.
We made no draws and had no outstanding cash borrowings on the line of credit as
of December 31, 2016.
As of December 31, 2016, we had $3.3 million in USD equivalent value in
outstanding letters of credit and $1.7 million in restricted cash associated
with certain letters of credit to secure customer prepayments and other customer
related obligations.
In our normal course of operations, we have development arrangements under which
we engage outside engineering resources to work on our research and development
projects. For the year ended December 31, 2016, we incurred $15.6 million for
such arrangements.
At any particular time, our cash position is affected by the timing of cash
receipts for product sales, maintenance contracts, government co-funding for
research and development activities and our payments for inventory, resulting in
significant fluctuations in our cash balance from quarter-to-quarter and within
a quarter. Our principal sources of liquidity are our cash and cash equivalents,
short-term investments and cash from operations. We expect our cash resources to
be adequate for at least the next twelve months.
Beyond the next twelve months, the adequacy of our cash resources will largely
depend on our success in achieving profitable operations and positive operating
cash flows on a sustained basis.
Critical Accounting Policies and Estimates
This discussion, as well as disclosures included elsewhere in this annual report
on Form 10-K, is based upon our financial statements, which have been prepared
in accordance with GAAP. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingencies. In preparing our financial statements in accordance with GAAP,
there are certain accounting policies that are particularly important. These
include revenue recognition, inventory valuation, accounting for income taxes,
research and development expenses and share-based compensation. We believe these
accounting policies and others set forth in Note 2 - Summary of Significant
Accounting Policies of the Notes to Consolidated Financial Statements in
Item 15. Exhibits and Financial Statement Schedules in Part IV of this annual
report on Form 10-K should be reviewed as they are integral to understanding our
results of operations and financial condition. In some cases, these policies
represent required accounting. In other cases, they may represent a choice
between acceptable accounting methods or may require substantial judgment or
estimation.
Additionally, we consider certain judgments and estimates to be significant,
including those relating to the estimated selling price determination used in
revenue recognition, percentage of completion accounting, estimates of
proportional performance on co-funded engineering contracts, collectibility of
receivables, determination of inventory at the lower of cost or market, the
value

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of used equipment returned or to be returned associated with customer contracts,
useful lives for depreciation and amortization, determination of future cash
flows associated with impairment testing of long-lived assets, including
goodwill and other intangibles, determination of the implicit interest rate used
in the sales-type lease calculation, estimated warranty liabilities,
determination of the fair value of stock options and other assessments of fair
value, evaluation of the probability of vesting of performance-based restricted
stock and restricted stock units, calculation of deferred income tax assets,
including estimates of future financial performance in the determination of the
likely recovery of deferred income tax assets, our ability to utilize such
assets, potential income tax assessments, the outcome of any legal proceedings
and other contingencies. We base our estimates on historical experience, current
conditions and on other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ materially from these estimates and
assumptions.
Our management has discussed the selection of significant accounting policies
and the effect of judgments and estimates with the Audit Committee of our Board
of Directors.
Revenue Recognition
We recognize revenue, including transactions under sales-type leases, when it is
realized or realizable and earned. We consider revenue realized or realizable
and earned when we have persuasive evidence of an arrangement, delivery has
occurred, the sales price is fixed or determinable, and collectibility is
reasonably assured. Delivery does not occur until the products have been shipped
or services provided to the customer, the risk of loss has transferred to the
customer, and, where applicable, a customer acceptance has been obtained. The
sales price is not considered to be fixed or determinable until all material
contingencies related to the sales have been resolved. We record revenue in the
Consolidated Statements of Operations net of any sales, use, value added or
certain excise taxes imposed by governmental authorities on specific sales
transactions. In addition to the aforementioned general policy, the following
are our statements of policy with regard to multiple-element arrangements and
specific revenue recognition policies for each major category of revenue.
Multiple-Element Arrangements. We commonly enter into revenue arrangements that
include multiple deliverables of our product and service offerings due to the
needs of our customers. Products may be delivered in phases over time periods
which can be as long as five years. Maintenance services generally begin upon
acceptance of the first equipment delivery and future deliveries of equipment
generally have an associated maintenance period. We consider the maintenance
period to commence upon acceptance of the product, or installation of the
product where a formal acceptance is not required, which may include a warranty
period and accordingly allocate a portion of the arrangement consideration as a
separate deliverable which is recognized as service revenue over the entire
service period. Other services such as training and engineering services can be
delivered as a discrete delivery or over the term of the contract. A
multiple-element arrangement is separated into more than one unit of accounting
if the following criteria are met:
• The delivered item(s) has value to the customer on a standalone basis; and


•         If the arrangement includes a general right of return relative to the

delivered item(s), delivery or performance of the undelivered item(s)

is considered probable and substantially in our control.



If these criteria are met for each element, the arrangement consideration is
allocated to the separate units of accounting based on each unit's relative
selling price. If these criteria are not met, the arrangement is accounted for
as one unit of accounting which would result in revenue being recognized ratably
over the contract term or being deferred until the earlier of when such criteria
are met or when the last undelivered element is delivered.
We follow a selling price hierarchy in determining the best estimate of the
selling price of each deliverable. Certain products and services are sold
separately in standalone arrangements for which we are sometimes able to
determine vendor specific objective evidence, or VSOE. We determine VSOE based
on normal pricing and discounting practices for the product or service when sold
separately.
When we are not able to establish VSOE for all deliverables in an arrangement
with multiple elements, we attempt to establish the selling price of each
remaining element based on third-party evidence, or TPE. Our inability to
establish VSOE is often due to a relatively small sample of customer contracts
that differ in system size and contract terms which can be due to infrequently
selling each element separately, not pricing products within a narrow range, or
only having a limited sales history, such as in the case of certain advanced and
emerging technologies. TPE is determined based on our prices or competitor
prices for similar deliverables when sold separately. However, we are often
unable to determine TPE, as our offerings usually contain a significant level of
customization and differentiation from those of competitors and we are often
unable to reliably determine what similar competitor products' selling prices
are on a standalone basis.
When we are unable to establish selling price using VSOE or TPE, we use
estimated selling price, or ESP, in our allocation of arrangement consideration.
The objective of ESP is to determine the price at which we would transact a sale
if the product or service were sold on a standalone basis. In determining ESP,
we use the cost to provide the product or service plus a margin, or

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consider other factors. When using cost plus a margin, we consider the total
cost of the product or service, including customer-specific and geographic
factors. We also consider the historical margins of the product or service on
previous contracts and several factors including any changes to pricing
methodologies, competitiveness of products and services and cost drivers that
would cause future margins to differ from historical margins.
Products. We most often recognize revenue from sales of products upon delivery
or customer acceptance of the system. Where formal acceptance is not required,
we recognize revenue upon delivery or installation. When the product is part of
a multiple element arrangement, we allocate a portion of the arrangement
consideration to product revenue based on estimates of selling price.
Services. Maintenance services are provided under separate maintenance contracts
with customers. These contracts generally provide for maintenance services for
one year, although some are for multi-year periods, often with prepayments for
the term of the contract. We consider the maintenance period to commence upon
acceptance of the product or installation in situations where a formal
acceptance is not required, which may include a warranty period. When service is
part of a multiple element arrangement, we allocate a portion of the arrangement
consideration to maintenance service revenue based on estimates of selling
price. Maintenance contracts that are billed in advance of revenue recognition
are recorded as deferred revenue. Maintenance revenue is recognized ratably over
the term of the maintenance contract.
Revenue from engineering services is recognized as services are performed.
Project Revenue. Revenue from design and build contracts is recognized under the
percentage-of-completion, or POC method. Under the POC method, revenue is
recognized based on the costs incurred to date as a percentage of the total
estimated costs to fulfill the contract. If circumstances arise that change the
original estimates of revenues, costs, or extent of progress toward completion,
revisions to the estimates are made. These revisions may result in increases or
decreases in estimated revenues or costs, and such revisions are recorded in
income in the period in which the circumstances that gave rise to the revision
become known by management. We perform ongoing profitability analyses of our
contracts accounted for under the POC method in order to determine whether the
latest estimates of revenue, costs and extent of progress require updating. If
at any time these estimates indicate that the contract will be unprofitable, the
entire estimated loss for the remainder of the contract is recorded immediately.
We record revenue from certain research and development contracts which include
milestones using the milestone method if the milestones are determined to be
substantive. A milestone is considered to be substantive if management believes
there is substantive uncertainty that it will be achieved and the milestone
consideration meets all of the following criteria:
• It is commensurate with either of the following:


• Our performance to achieve the milestone; or


•               The enhancement of value of the delivered item or items as a
                result of a specific outcome resulting from our performance to
                achieve the milestone.

• It relates solely to past performance.

• It is reasonable relative to all of the deliverables and payment terms

(including other potential milestone consideration) within the

arrangement.



The individual milestones are determined to be substantive or non-substantive in
their entirety and milestone consideration is not bifurcated.
Revenue from projects is classified as Product Revenue or Service Revenue, based
on the nature of the work performed.
Nonmonetary Transactions. We value and record nonmonetary transactions at the
fair value of the asset surrendered unless the fair value of the asset received
is more clearly evident, in which case the fair value of the asset received is
used.
Inventory Valuation
We record our inventory at the lower of cost or market. We regularly evaluate
the technological usefulness and anticipated future demand for our inventory
components. Due to rapid changes in technology and the increasing demands of our
customers, we are continually developing new products. Additionally, during
periods of product or inventory component upgrades or transitions, we may
acquire significant quantities of inventory to support estimated current and
future production and service requirements. As a result, it is possible that
older inventory items we have purchased may become obsolete, be sold below cost
or be deemed in excess of quantities required for production or service
requirements. When we determine it is not likely we will recover the cost of
inventory items through future sales, we write-down the related inventory to our
estimate of its market value.
Because the products we sell have high average sales prices and because a high
number of our prospective customers receive funding from U.S. or foreign
governments, it is difficult to estimate future sales of our products and the
timing of such sales. It

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also is difficult to determine whether the cost of our inventories will
ultimately be recovered through future sales. While we believe our inventory is
stated at the lower of cost or market and that our estimates and assumptions to
determine any adjustments to the cost of our inventories are reasonable, our
estimates may prove to be inaccurate. We have sold inventory previously reduced
in part or in whole to zero, and we may have future sales of previously
written-down inventory. We also may incur additional expenses to write-down
inventory to its estimated market value. Adjustments to these estimates in the
future may materially impact our operating results.
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and operating loss
and tax credit carryforwards and are measured using the enacted tax rates and
laws that will be in effect when the differences and carryforwards are expected
to be recovered or settled. A valuation allowance for deferred tax assets is
provided when we estimate that it is more likely than not that all or a portion
of the deferred tax assets will not be realized through future operations. This
assessment is based upon consideration of available positive and negative
evidence, which includes, among other things, our recent results of operations
and expected future profitability. We consider our actual historical results
over several years to have stronger weight than other more subjective
indicators, including forecasts, when considering whether to establish or reduce
a valuation allowance on deferred tax assets. We have significant difficulty
projecting future results due to the nature of the business and the industry in
which we operate.
Our deferred tax assets increased by $16.6 million as a result of the adoption
of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting, or ASU 2016-09. No changes were
required to previously recorded valuation allowances at the time of adoption.
ASU 2016-09 will result in increased volatility in our effective tax rate.
As of December 31, 2016, we had approximately $94.3 million of net deferred tax
assets before application of a valuation allowance. As of December 31, 2016, net
deferred tax assets after reduction by the valuation allowance of $8.7 million
were $85.6 million. During the year ended December 31, 2014, we reduced
substantially all of the remaining valuation allowance held against our U.S.
deferred tax assets. The assessment of our ability to utilize our deferred tax
assets included an assessment of all known business risks and industry trends as
well as forecasted domestic and international earnings over a number of years.
Our ability to forecast results significantly into the future is limited due to
the rapid rate of technological and competitive change in the industry in which
we operate.
We continue to provide a valuation allowance against specific U.S. deferred tax
assets and a full valuation allowance against deferred tax assets arising in a
limited number of foreign jurisdictions as the realization of such assets is not
considered to be more likely than not at this time. In a future period our
assessment of the realizability of our deferred tax assets and therefore the
appropriateness of the valuation allowance could change based on an assessment
of all available evidence, both positive and negative in that future period. If
our conclusion about the realizability of our deferred tax assets and therefore
the appropriateness of the valuation allowance changes in a future period we
could record a substantial tax provision or benefit in our Consolidated
Statements of Operations when that occurs. We recognize the income tax benefit
from a tax position only if it is more likely than not that the tax position
will be sustained on examination by the applicable taxing authorities, based on
the technical merits of our position. The tax benefit recognized in the
financial statements from such a position is measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement.
Estimated interest and penalties are recorded as a component of interest expense
and other expense, respectively.
Research and Development Expenses
Research and development expenses include costs incurred in the development and
production of our hardware and software, costs incurred to enhance and support
existing product features, costs incurred to support and improve our development
processes, and costs related to future product development. Research and
development costs are expensed as incurred, and may be offset by co-funding from
third parties. We may also enter into arrangements whereby we make advance,
non-refundable payments to a vendor to perform certain research and development
services. These payments are deferred and recognized over the vendor's estimated
performance period.
Amounts to be received under co-funding arrangements with the U.S. government or
other customers are based on either contractual milestones or costs incurred.
These co-funding milestone payments are recognized in operations as performance
is estimated to be completed and are measured as milestone achievements occur or
as costs are incurred. These estimates are reviewed on a periodic basis and are
subject to change, including in the near term. If an estimate is changed, net
research and development expense could be impacted significantly.
We do not record a receivable from the U.S. government prior to completing the
requirements necessary to bill for a milestone or cost reimbursement. Funding
from the U.S. government is subject to certain budget restrictions and
milestones may be subject

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to completion risk, and as a result, there may be periods in which research and
development costs are expensed as incurred for which no reimbursement is
recorded, as milestones have not been completed or the U.S. government has not
funded an agreement. Accordingly, there can be substantial variability in the
amount of net research and development expenses from quarter to quarter and year
to year.
We classify amounts to be received from funded research and development projects
as either revenue or a reduction to research and development expense based on
the specific facts and circumstances of the contractual arrangement, considering
total costs expected to be incurred compared to total expected funding and the
nature of the research and development contractual arrangement. In the event
that a particular arrangement is determined to represent revenue, the
corresponding costs are classified as cost of revenue.
Share-based Compensation
We measure compensation cost for share-based payment awards at fair value and
recognize it as compensation expense over the service period for awards expected
to vest. We recognize share-based compensation expense for all share-based
payment awards, net of an estimated forfeiture rate. We recognize compensation
cost for only those shares expected to vest on a straight-line basis over the
requisite service period of the award.
Determining the appropriate fair value model and calculating the fair value of
share-based payment awards requires subjective assumptions, including the
expected life of the share-based payment awards and stock price volatility. We
utilize the Black-Scholes options pricing model to value the stock options
granted under our options plans. In this model, we utilize assumptions related
to stock price volatility, stock option term and forfeiture rates that are based
upon both historical factors as well as management's judgment.
The fair value of restricted stock and restricted stock units is determined
based on the number of shares or units granted and the quoted price of our
common stock at the date of grant.
We grant performance vesting restricted stock and performance vesting restricted
stock units to executives as one of the ways to align compensation with
shareholder interests. Vesting of these awards is contingent upon achievement of
certain performance conditions. Compensation expense for these awards is only
recognized when vesting is deemed to be "probable". Awards are evaluated for
probability of vesting during each reporting period.


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02/10 CRAY INC. : Q4 Settles Near-Term Concerns - Now The Real Work Begins
02/09 TECHNOLOGY - TOP GAINERS / LOSERS AS : 00 pm
02/08 Cray's (CRAY) CEO Peter Ungaro on Q4 2016 Results - Earnings Call Transcript
02/08 Cray beats by $0.15, revenue in-line
02/07 Notable earnings after Wednesday?s close
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Financials ($)
Sales 2017 585 M
EBIT 2017 -6,37 M
Net income 2017 -
Debt 2017 -
Yield 2017 -
P/E ratio 2017 -
P/E ratio 2018
Capi. / Sales 2017 1,48x
Capi. / Sales 2018 1,29x
Capitalization 868 M
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Chart CRAY INC.
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Cray Inc. Technical Analysis Chart | CRAY | US2252233042 | 4-Traders
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Technical analysis trends CRAY INC.
Short TermMid-TermLong Term
TrendsBullishNeutralBearish
Technical analysis
Income Statement Evolution
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Consensus
Sell
Buy
Mean consensus OUTPERFORM
Number of Analysts 5
Average target price 25,0 $
Spread / Average Target 17%
Consensus details
Managers
NameTitle
Peter J. Ungaro President, Chief Executive Officer & Director
Stephen C. Kiely Non-Executive Chairman
Wayne J. Kugel Senior VP-Operations & Customer Support
Brian C. Henry Chief Financial Officer & Executive Vice President
Steven Lee Scott Chief Technology Officer & Senior Vice President
More about the company
Sector and Competitors
1st jan.Capitalization (M$)
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