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FORM 10-Q

Washington93-0962605
(State or Other Jurisdiction ofIncorporation or Organization)(I.R.S. EmployerIdentification No.)
901 Fifth Avenue, Suite 1000Seattle, Washington98164
(Address of Principal Executive Office)(Zip Code)
Large accelerated filerýAccelerated filer¨
Non-accelerated filer¨ (Do not check if a smaller reporting company)Smaller reporting company¨
Emerging growth company¨
Page No.
PART I. FINANCIAL INFORMATION4
Item 1. Unaudited Condensed Consolidated Financial Statements:4
Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 20164
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and September 30, 20165
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and September 30, 20166
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and September 30, 20167
Notes to Condensed Consolidated Financial Statements9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations25
Item 3. Quantitative and Qualitative Disclosures About Market Risk39
Item 4. Controls and Procedures40
PART II. OTHER INFORMATION41
Item 1. Legal Proceedings41
Item1A. Risk Factors41
Item 6. Exhibits52
SIGNATURES53
September 30,
2017
December 31,
2016
ASSETS
Current assets:
Cash and cash equivalents$151,886
$222,962
Restricted cash1,900

Short-term investments27,926

Accounts and other receivables, net63,187
197,941
Inventory198,069
88,254
Prepaid expenses and other current assets20,256
20,006
Total current assets463,224
529,163
Long-term restricted cash1,030
1,655
Long-term investment in sales-type lease, net26,384
31,050
Property and equipment, net37,967
30,620
Service spares, net2,395
3,023
Goodwill14,182
14,182
Intangible assets other than goodwill, net4,634
1,637
Deferred tax assets105,132
85,613
Other non-current assets12,117
17,629
TOTAL ASSETS$667,065
$714,572
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$41,640
$45,504
Accrued payroll and related expenses10,623
17,199
Other accrued liabilities6,085
10,303
Deferred revenue68,034
83,129
Total current liabilities126,382
156,135
Long-term deferred revenue31,409
27,258
Other non-current liabilities15,020
5,703
TOTAL LIABILITIES172,811
189,096
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 40,421,143 and 40,757,458 shares, respectively629,671
622,604
Accumulated other comprehensive income1,016
2,782
Accumulated deficit(136,433)(99,910)
TOTAL SHAREHOLDERS’ EQUITY494,254
525,476
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$667,065
$714,572
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Revenue:
Product$45,280
$47,685
$117,939
$188,024
Service34,420
29,766
107,927
95,211
Total revenue79,700
77,451
225,866
283,235
Cost of revenue:
Cost of product revenue35,090
33,552
89,356
125,189
Cost of service revenue16,118
20,298
55,866
58,322
Total cost of revenue51,208
53,850
145,222
183,511
Gross profit28,492
23,601
80,644
99,724
Operating expenses:
Research and development, net26,626
29,084
76,591
82,323
Sales and marketing13,392
15,010
43,292
46,391
General and administrative7,022
7,968
23,024
24,325
Restructuring7,653

7,653

Total operating expenses54,693
52,062
150,560
153,039
Loss from operations(26,201)(28,461)(69,916)(53,315)
Other income (expense), net4,161
(312)5,358
(1,169)
Interest income, net880
544
2,655
1,654
Gain on strategic transaction4,389

4,389

Loss before income taxes(16,771)(28,229)(57,514)(52,830)
Income tax benefit6,539
5,208
21,227
11,670
Net loss$(10,232)$(23,021)$(36,287)$(41,160)
Basic net loss per common share$(0.25)$(0.58)$(0.91)$(1.03)
Diluted net loss per common share$(0.25)$(0.58)$(0.91)$(1.03)
Basic weighted average shares outstanding40,199
39,936
40,082
39,786
Diluted weighted average shares outstanding40,199
39,936
40,082
39,786
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Net loss$(10,232)$(23,021)$(36,287)$(41,160)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale investments(98)
(4)8
Foreign currency translation adjustments(118)58
322
975
Unrealized gain (loss) on cash flow hedges(1,004)566
(2,178)4,285
Reclassification adjustments on cash flow hedges included in net loss56
(114)94
(2,742)
Other comprehensive income (loss)(1,164)510
(1,766)2,526
Comprehensive loss$(11,396)$(22,511)$(38,053)$(38,634)
Nine Months Ended
September 30,
20172016
Operating activities:
Net loss$(36,287)$(41,160)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization12,134
11,063
Share-based compensation expense7,643
8,386
Deferred income taxes(21,419)(10,555)
Gain on strategic transaction(4,389)
Other741
294
Cash provided (used) due to changes in operating assets and liabilities:
Accounts and other receivables137,559
11,910
Long-term investment in sales-type lease, net7,065
(19,887)
Inventory(107,621)(133,622)
Prepaid expenses and other assets(1,411)(3,225)
Accounts payable(3,512)38,135
Accrued payroll and related expenses and other liabilities(3,982)(32,763)
Deferred revenue(25,205)37,935
Net cash used in operating activities(38,684)(133,489)
Investing activities:
Sales/maturities of available-for-sale investments66,610
30,340
Purchases of available-for-sale investments(94,902)(16,159)
Cash received in strategic transaction8,000

Proceeds from sale of equity method investment4,481

Change in restricted cash(1,282)1,670
Purchases of property and equipment(15,647)(3,808)
Net cash provided by (used in) investing activities(32,740)12,043
Financing activities:
Proceeds from issuance of common stock through employee stock purchase plan365
545
Purchase of employee restricted shares to fund related statutory tax withholding
(1,869)(3,284)
Proceeds from exercises of stock options693
2,098
Net cash used in financing activities(811)(641)
Effect of foreign exchange rate changes on cash and cash equivalents1,159
(97)
Net decrease in cash and cash equivalents(71,076)(122,184)
Cash and cash equivalents:
Beginning of period222,962
266,660
End of period$151,886
$144,476
Supplemental disclosure of cash flow information:
Cash paid for interest$
$1
Cash paid for income taxes$1,202
$2,093
Non-cash investing and financing activities:
Inventory transfers to fixed assets and service spares$1,248
$3,510
Strategic transaction:
Non-cash assets acquired:
Receivable from Seagate$1,404
$
Inventory$4,170
$
Property and equipment$2,684
$
Intangible assets$3,350
$
Liabilities assumed:
Deferred revenue$11,700
$
Deferred tax liabilities$3,019
$
Other liabilities$500
$
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.
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 is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
Cash$8,000
Receivable from Seagate1,404
Inventory4,170
Property and equipment2,684
Deferred revenue(11,700)
Deferred tax liabilities(3,019)
Other liabilities(500)
Net tangible assets1,039
Trademarks90
Developed technology1,400
Customer relationships260
Supply agreement1,600
Total net assets acquired$4,389
Intangible Asset ClassFair ValueUseful Life (in Years)
Trademarks$90
5
Developed technology$1,400
3
Customer relationships$260
10
Supply agreement$1,600
4
2017 (less than one year)$228
2018911
2019911
2020794
2021344
202240
Total$3,228
DescriptionFair Value
as of
September 30,
2017
QuotedPrices inActiveMarkets(Level 1)SignificantOtherObservableInputs(Level 2)
Assets:
Cash and cash equivalents and restricted cash$154,816
$154,816
$
Available-for-sale investments (1)27,926
27,926

Foreign currency exchange contracts (2)3,732

3,732
Assets measured at fair value at September 30, 2017$186,474
$182,742
$3,732
Liabilities:
Foreign currency exchange contracts (3)2,530

2,530
Liabilities measured at fair value at September 30, 2017$2,530
$
$2,530
(2)Included in “Prepaid expenses and other current assets” and “Other non-current assets” on the Company’s Condensed Consolidated Balance Sheets.
(3)Included in “Other accrued liabilities” and “Other non-current liabilities” on the Company’s Condensed Consolidated Balance Sheets.
September 30,
2017
December 31, 2016
Euros (EUR)1.5
1.5
Swiss Francs (CHF)
3.6
Japanese Yen (JPY)3,377.6

Canadian Dollars (CAD)56.6
54.4
New Zealand Dollars (NZD)16.2

September 30,
2017
December 31, 2016
British Pounds (GBP)28.4
33.8
Euros (EUR)4.1
8.0
Japanese Yen (JPY)
2,464.7
Canadian Dollars (CAD)0.3
32.4
New Zealand Dollars (NZD)1.6

Swedish Krona (SEK)27.6

Hedge ClassificationBalance Sheet LocationFair Value
as of
September 30,
2017
Fair Value
as of
December 31,
2016
Foreign currency exchange contractsPrepaid expenses and other current assets$330
$71
Foreign currency exchange contractsOther non-current assets
367
Foreign currency exchange contractsOther accrued liabilities(160)(9)
Foreign currency exchange contractsOther non-current liabilities(2,004)(5)
Total fair value of derivative instruments designated as cash flow hedges$(1,834)$424
Hedge ClassificationBalance Sheet LocationFair Value
as of
September 30,
2017
Fair Value
as of
December 31,
2016
Foreign currency exchange contractsPrepaid expenses and other current assets$1,386
$5,344
Foreign currency exchange contractsOther non-current assets2,016
5,468
Foreign currency exchange contractsOther accrued liabilities(366)(27)
Foreign currency exchange contractsOther non-current liabilities

Total fair value of derivative instruments not designated as cash flow hedges$3,036
$10,785
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Gross of tax reclassifications$(93)$191
$(157)$4,569
Net of tax reclassifications$(56)$114
$(94)$2,742
Three Months Ended September 30, 2017
Unrealized Gain (Loss) on InvestmentsForeign Currency Translation AdjustmentsUnrealized Loss on Cash Flow HedgesAccumulated Other Comprehensive Income
Beginning balance$94
$2,541
$(455)$2,180
Current-period change, net of tax(98)(118)(948)(1,164)
Ending balance$(4)$2,423
$(1,403)$1,016
Income tax expense (benefit) associated with current-period change$(66)$148
$(632)$(550)
Three Months Ended September 30, 2016
Unrealized Gain on InvestmentsForeign Currency Translation AdjustmentsUnrealized Gain on Cash Flow HedgesAccumulated Other Comprehensive Income
Beginning balance$
$2,592
$7,066
$9,658
Current-period change, net of tax
58
452
510
Ending balance$
$2,650
$7,518
$10,168
Income tax expense (benefit) associated with current-period change$
$41
$301
$342
Nine Months Ended September 30, 2017
Unrealized Loss on InvestmentsForeign Currency Translation AdjustmentsUnrealized Gain (Loss) on Cash Flow HedgesAccumulated Other Comprehensive Income
Beginning balance$
$2,101
$681
$2,782
Current-period change, net of tax(4)322
(2,084)(1,766)
Ending balance$(4)$2,423
$(1,403)$1,016
Income tax expense (benefit) associated with current-period change$(3)$343
$(1,389)$(1,049)
Nine Months Ended September 30, 2016
Unrealized Loss on InvestmentsForeign Currency Translation AdjustmentsUnrealized Gain on Cash Flow HedgesAccumulated Other Comprehensive Income
Beginning balance$(8)$1,675
$5,975
$7,642
Current-period change, net of tax8
975
1,543
2,526
Ending balance$
$2,650
$7,518
$10,168
Income tax expense (benefit) associated with current-period change$6
$(40)$1,035
$1,001
September 30,
2017
December 31, 2016
Trade accounts receivable$36,180
$156,705
Unbilled receivables7,666
17,264
Advance billings5,090
1,915
Short-term investment in sales-type lease9,555
8,683
Other receivables4,724
13,395
63,215
197,962
Allowance for doubtful accounts(28)(21)
Accounts and other receivables, net$63,187
$197,941
September 30,
2017
December 31, 2016
Total minimum lease payments to be received$45,417
$52,224
Less: executory costs(7,837)(10,139)
Net minimum lease payments receivable37,580
42,085
Less: unearned income(1,641)(2,352)
Net investment in sales-type lease35,939
39,733
Less: long-term investment in sales-type lease(26,384)(31,050)
Investment in sales-type lease included in accounts and other receivables$9,555
$8,683
2017 (less than 1 year)$3,499
201815,071
201915,350
202011,497
Total minimum lease payments to be received$45,417
September 30,
2017
December 31, 2016
Components and subassemblies$42,107
$31,695
Work in process88,967
39,894
Finished goods66,995
16,665
Total$198,069
$88,254
September 30,
2017
December 31, 2016
Deferred product revenue$13,052
$14,274
Deferred service revenue86,391
96,113
Total deferred revenue99,443
110,387
Less: long-term deferred revenue(31,409)(27,258)
Deferred revenue in current liabilities$68,034
$83,129
Three Months Ended
September 30,
Nine Months Ended
September 30,
201620172016
Risk-free interest rate0.96%1.61%1.12%
Expected dividend yield—%—%—%
Volatility50.95%54.20%50.86%
Expected life4.0 years4.0 years4.0 years
Weighted average Black-Scholes value of options granted$12.69$7.75$13.23
OptionsWeightedAverageExercisePriceWeightedAverageRemainingContractualTerm
Outstanding at December 31, 20161,989,137
$16.99
Grants304,500
$17.98
Exercises(80,757)$8.54
Canceled and forfeited(57,766)$28.86
Outstanding at September 30, 20172,155,114
$17.13
5.5
Exercisable at September 30, 20171,590,128
$14.91
4.3
Available for grant at September 30, 20173,014,293
Service Vesting Restricted SharesPerformance Vesting Restricted SharesTotal Restricted Shares
SharesWeightedAverageGrant DateFair ValueSharesWeighted
Average
Grant Date
Fair Value
SharesWeighted Average Grant Date Fair Value
Outstanding at December 31, 2016256,802
$26.43
513,500
$15.00
770,302
$18.81
Granted44,002
$17.55

$
44,002
$17.55
Forfeited(23,909)$30.93
(476,000)$14.88
(499,909)$15.65
Vested(153,717)$25.24

$
(153,717)$25.24
Outstanding at September 30, 2017123,178
$23.87
37,500
$16.52
160,678
$22.15
Service Vesting Restricted Stock UnitsPerformance Vesting Restricted Stock UnitsTotal Restricted Stock Units
UnitsWeightedAverageGrant DateFair ValueUnitsWeighted
Average
Grant Date
Fair Value
UnitsWeighted Average Grant Date Fair Value
Outstanding at December 31, 2016425,721
$30.89
656,285
$30.49
1,082,006
$30.65
Granted714,950
$18.29
26,000
$20.25
740,950
$18.36
Forfeited(54,474)$29.14
(133,200)$30.04
(187,674)$29.78
Vested(120,935)$30.65

$
(120,935)$30.65
Outstanding at September 30, 2017965,262
$21.69
549,085
$30.12
1,514,347
$24.74
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Cost of product revenue$73
$78
$189
$243
Cost of service revenue59
59
194
195
Research and development, net798
834
2,596
2,365
Sales and marketing650
907
1,850
2,614
General and administrative1,005
861
2,814
2,969
Total$2,585
$2,739
$7,643
$8,386
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Revenue:
Supercomputing$47,918
$60,730
$142,933
$216,125
Storage and Data Management11,046
12,330
42,335
50,755
Maintenance and Support31,701
26,292
92,483
79,862
Engineering Services and Other20,736
4,391
40,598
16,355
Elimination of inter-segment revenue(31,701)(26,292)(92,483)(79,862)
Total revenue$79,700
$77,451
$225,866
$283,235
Gross Profit:
Supercomputing$18,807
$18,322
$50,630
$74,893
Storage and Data Management3,345
3,917
15,564
18,091
Maintenance and Support16,501
8,447
45,078
30,530
Engineering Services and Other6,340
1,362
14,450
6,740
Elimination of inter-segment gross profit(16,501)(8,447)(45,078)(30,530)
Total gross profit$28,492
$23,601
$80,644
$99,724
United StatesOther CountriesTotal
201720162017201620172016
Three months ended September 30,
Product revenue$38,007
$45,412
$7,273
$2,273
$45,280
$47,685
Service revenue23,298
19,335
11,122
10,431
34,420
29,766
Total revenue$61,305
$64,747
$18,395
$12,704
$79,700
$77,451
United StatesOther CountriesTotal
201720162017201620172016
Nine months ended September 30,
Product revenue$90,148
$101,347
$27,791
$86,677
$117,939
$188,024
Service revenue74,500
64,080
33,427
31,131
107,927
95,211
Total revenue$164,648
$165,427
$61,218
$117,808
$225,866
$283,235
supercomputing with many-core commodity processors driving increasing scalability requirements;
increased micro-architectural diversity, including increased usage of many-core processors and accelerators, as the rate of increases in per-core performance slows;
data I/O and capacity needs growing much faster than computational needs;
the commoditization of HPC hardware, particularly processors and system interconnects;
the growing concentration of very large suppliers of key computing, memory and storage components in the industry;
the growing commoditization of software, including plentiful building blocks and more capable open source software;
electrical power requirements becoming a design constraint and driver in total cost of ownership determinations;
the rise of artificial intelligence along with machine learning and deep learning technologies which utilize HPC technologies for performance and scale;
the recent decrease in demand for supercomputers and the significant variability in market demand from quarter-to-quarter and year-to-year.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Product revenue$45,280
$47,685
$117,939
$188,024
Less: Cost of product revenue35,090
33,552
89,356
125,189
Product gross profit$10,190
$14,133
$28,583
$62,835
Product gross profit margin23%30%24%33%
Service revenue$34,420
$29,766
$107,927
$95,211
Less: Cost of service revenue16,118
20,298
55,866
58,322
Service gross profit$18,302
$9,468
$52,061
$36,889
Service gross profit margin53%32%48%39%
Total revenue$79,700
$77,451
$225,866
$283,235
Less: Total cost of revenue51,208
53,850
145,222
183,511
Total gross profit$28,492
$23,601
$80,644
$99,724
Total gross profit margin36%30%36%35%
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Gross research and development expenses$32,836
$32,427
$104,637
$94,403
Less: Amounts included in cost of revenue(927)(2,241)(8,486)(8,967)
Less: Reimbursed research and development (excludes amounts in cost of revenue)(5,283)(1,102)(19,560)(3,113)
Net research and development expenses$26,626
$29,084
$76,591
$82,323
Percentage of total revenue33%38%34%29%
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Sales and marketing$13,392
$15,010
$43,292
$46,391
Percentage of total revenue17%19%19%16%
General and administrative$7,022
$7,968
$23,024
$24,325
Percentage of total revenue9%10%10%9%
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017201620172016
Interest income$941
$548
$2,732
$1,597
Interest expense(61)(4)(77)57
Interest income, net$880
$544
$2,655
$1,654
Nine Months Ended
September 30,
20172016
Cash provided by (used in):
Operating Activities$(38,684)$(133,489)
Investing Activities$(32,740)$12,043
Financing Activities$(811)$(641)
Amounts Committed by Year
Contractual ObligationsTotal2017(Less than1 Year)2018-20192020-2021Thereafter
Development agreements$22,042
$7,485
$14,542
$15
$
Operating leases55,688
1,865
14,251
12,518
27,054
Total contractual cash obligations$77,730
$9,350
$28,793
$12,533
$27,054
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.
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 is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
our ability to secure sufficient orders at high enough gross margins for our Cray XC and Cray CS systems as well as upgrades and successor systems, such as our next generation “Shasta” system;
successfully delivering and obtaining sufficient customer acceptances of our Cray XC and Cray CS systems, including attached storage systems;
our ability to successfully integrate the ClusterStor product line and business associated sales channel and our ability to successfully generate revenue and profitability from sales of our storage and analytics and data management products, as well as upgrades and successor systems;
our ability to successfully and timely design for, procure and integrate competitive processors for our Cray XC and Cray CS systems and upgrades and successor systems;
our expense levels, including research and development expense net of any government funding;
delays in delivery of upgraded or new systems, longer than expected customer acceptance cycles or penalties resulting from system acceptance issues;
our ability to efficiently scale our internal processes to meet necessary peak requirements and growth in our business;
the level of revenue recognized in any given period, which is affected by the very high average sales prices and limited number of significant system sales and resulting potential acceptances in any quarter, the timing of product orders and acceptances by customers and contractual provisions affecting the timing and amount of revenue recognition;
our ability to continue to broaden our customer base beyond our traditional customers;
revenue delays or losses due to customers postponing purchases as a result of delays in available budgets or waiting times related to the availability of future upgraded or new systems, including those containing new processors;
the level of product gross profit contribution in any given period due to volume, competition or product mix, particularly with the introduction of flexible commodity-based supercomputers, competitive factors, strategic transactions, product life cycle, currency fluctuations, acceptance penalties and component costs;
maintaining and successfully completing our product development projects on schedule and within budgetary limitations;
our ability to resolve and the costs incurred in connection with any actual or alleged issues with our products, including third-party components of such products, such as those that relate to product defects or intellectual property rights;
whether or when the segments of the high-end of the supercomputing market that we target, which are currently experiencing a slow-down, rebound and resume growing;
the timing and level of government funding and resources available for product acquisitions and research and development contracts, which have been, and may continue to be, adversely affected by the current global economic and fiscal uncertainties, increased governmental budgetary limitations and disruptions in the operations of the United States and other governments;
currency fluctuations, international conflicts or economic crises, including the ongoing economic challenges in the United States, Japan and Europe, and fluctuations in oil prices that can affect the resources available to potential customers to purchase products;
new tariffs or taxes imposed on components and products sourced or manufactured outside of the United States;
price fluctuations or product shortages in the processors and other commodity electronics and memory markets;
the availability of adequate customer facilities to install and operate new Cray systems;
general economic trends, including changes in levels of customer capital spending; and
our customers’ ability to make future payments in accordance with contractual terms of their purchase or sales-type lease agreements.
the level of product differentiation in our Cray XC systems and successor systems, such as our next generation Shasta system. We need to compete successfully against HPC systems from both large, established companies and smaller companies and demonstrate the value of our balanced, tightly integrated systems to our customers in a variety of markets;
our ability to meet all customer requirements for acceptance. Even once a system has been delivered, we sometimes do not meet all of the contract requirements for customer acceptance and ongoing reliability of our systems within the provided-for acceptance period, which has resulted in contract penalties and delays in our ability to recognize revenue from system deliveries. Most often these penalties have adversely affected revenue and gross profit at the time of revenue recognition through the provision of additional equipment and services and/or service credits to satisfy delivery delays and performance shortfalls. The risk of contract penalties is increased when we bid for new business prior to us or our suppliers completing development of new products and when we must estimate future system performance and costs, such as has been required with our Cray XC systems and our Sonexion storage systems, and will be frequently required for subsequent systems, such as our next generation Shasta system;
our ability to source competitive, key components in appropriate quantities (to have enough to sell without ending up with excess inventory that can lead to obsolescence charges), in a timely fashion and with acceptable costs and terms and conditions and that meet the performance criteria required; and
whether potential customers delay purchases of our products because they decide to wait for successor systems or upgrades that we or our suppliers have announced or they believe will be available in the future.
if a supplier does not provide components or systems that meet our or their specifications in sufficient quantities and with acceptable performance, price or quality on time or deliver when required, or delays future components or systems beyond anticipated delivery dates, then sales, production, delivery, acceptance and revenue from our systems could be delayed and/or reduced and we could be subject to costly repair and/or delay costs and penalties even once delivered and accepted, which is currently happening and has happened multiple times in the past and has at times significantly lowered our revenue for a particular quarter or year;
if our relationship with a key supplier, such as Intel, is adversely affected, for example, due to competitive pressures or changes in company strategies and priorities, our ability to obtain components on competitive financial terms could be adversely affected;
if a supplier cannot provide a competitive key component, for example, due to inadequate performance or a prohibitive price, or eliminates key features from components, such as with the processors we design into our systems, our systems may be less competitive than systems using components with greater capabilities;
if an interruption of supply of our components, services or capabilities occurs because a supplier changes its technology roadmap, suffers damage to its manufacturing facilities, decides to no longer provide those products or services, increases the price of those products or services significantly or imposes reduced delivery allocations on its customers, it could take us a considerable period of time to identify and qualify alternative suppliers, to redesign our products as necessary and to begin to manufacture the redesigned components or otherwise obtain those services or capabilities. In some cases, such as with key integrated circuits and memory parts or processors, we may not be able to redesign such components or find alternate sources that we could use in any realistic timeframe;
if a supplier plans future processors that are made available in a way that encourages customers to delay purchases of our products because they decide to wait for successor systems or upgrades they believe will be available in the future or to purchase products with the future processors from our competitors who are willing to take greater risk on delivery;
if Cray systems at customer sites develop significant issues with third-party components, as has occurred, the cost to Cray to repair or replace the components or otherwise address such issue may be material. If we are unable to effectively address such problem or a problem causes customer disruption, our relationship with our customers may also be harmed;
if a supplier of a component is subject to a claim that the component infringes a third-party’s intellectual property rights, as has happened with multiple suppliers, our ability to obtain necessary components could be adversely affected or our cost to obtain such components could increase significantly;
if a key supplier is acquired or has a significant business change, as has occurred in the past, the production and sales of our systems and services may be delayed or adversely affected, or our development programs may be delayed or may be impossible to complete.
if a supplier providing us with key research and development and design services or core technology components with respect to integrated circuit design, network communication capabilities or software is late, fails to provide us with effective functionality or loses key internal talent, our development programs may be delayed or prove to be impossible to complete;
if a supplier provides us with hardware or software that contains bugs or other errors or defects, or is different from what we expected, our development projects and production systems may be adversely affected through reduced performance or capabilities, additional design testing and verification efforts, re-spins of integrated circuits and/or development of replacement components, and the production and sales of our systems could be delayed and systems installed at customer sites could require significant, expensive field component replacements or result in penalties;
some of our key component and service suppliers are small companies with limited financial and other resources, and consequently may be more likely to experience financial and operational difficulties than larger, well-established companies, which increases the risk that they will be unable to deliver products as needed; and
uncertainties relating to priorities of the new administration or adverse decisions by the new administration to reduce or eliminate budgets for governmental agencies or departments that purchase or fund the purchase of our products and services;
Congressional and executive branch decisions in addressing budget concerns and current policy;
disruptions in the operations of the U.S. government, including impacts of the new administration and possible government “shutdowns”;
the downgrading of U.S. government debt or the possibility of such action;
the political climate in the United States focusing on cutting or limiting budgets and its effect on government budgets;
budgetary considerations, including Congressional delays in completing appropriation bills as has occurred in the past;
domestic crises, such as costs of addressing the damage associated with storms this year in the United States and its territories;
political efforts to limit the activities of U.S. intelligence community agencies, including proposed state legislation that would limit or even criminalize doing business with the U.S. National Security Agency for certain companies doing business with state governments; and
international political developments, such as the downgrading of European debt or the United Kingdom’s departure from the European Union.
discontinue manufacturing, using or selling particular products subject to infringement claims;
develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible; and/or
license technology from third-parties, which license may not be available on commercially reasonable terms, or at all.
difficulties in successfully integrating the operations, systems, technologies, products, sales channels, manufacturing processes, offerings and personnel of the acquired company or companies, assets and/or business;
insufficient revenue, margin or other benefits to offset increased expenses or other negative impacts associated with acquisitions or strategic transactions;
diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions or strategic transactions, including other customers of an acquired business;
potential difficulties in completing projects associated with in-process research and development intangibles;
difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
the potential to invest significant time and resources into a potential acquisition or strategic transaction that does not ultimately complete or close.
issue equity securities or grant equity incentives to acquired employees that would dilute our current shareholders’ percentage ownership;
assume or incur liabilities, including potentially unknown or underestimated liabilities;
record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges;
incur large and immediate write-offs and restructuring and other related expenses; or
recruiting sales and technical support personnel internationally with the skills to sell and support our products and the potentially high cost related to employee separations;
complying with governmental regulations, including obtaining required import or export approval for our products;
risks and costs associated with employee-favorable labor laws in many foreign jurisdictions;
financial risks such as longer payment cycles and difficulties in collecting accounts receivable;
difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;
other factors beyond our control such as natural disasters, terrorism, civil unrest, war and infectious disease.
removal of a director only in limited circumstances and only upon the affirmative vote of not less than two-thirds of the shares entitled to vote to elect directors;
the ability of our Board of Directors to issue up to 5,000,000 shares of preferred stock, without shareholder approval, with rights senior to those of the common stock;
the right of shareholders to call a special meeting of the shareholders only upon demand by the holders of not less than 30% of the shares entitled to vote at such a meeting;
the affirmative vote of not less than two-thirds of the outstanding shares entitled to vote on an amendment, unless the amendment was approved by a majority of our continuing directors, who are defined as directors who have either served as a director since August 31, 1995, or were nominated to be a director by the continuing directors;
special voting requirements for mergers and other business combinations, unless the proposed transaction was approved by a majority of continuing directors;
special procedures to bring matters before our shareholders at our annual shareholders’ meeting; and

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