This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or if they prove incorrect, could cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “continue,” “estimates,” “projects,” “predicts”, “likely”, “forecast” and “potential” and similar expressions, but the absence of these words does not mean that a statement is not forward-looking. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, and examples of forward-looking statements include any projections of earnings, revenue or other results of operations or financial results; any statements of the plans, strategies, objectives and beliefs of our management; any statements concerning proposed new products, technologies or services;services such as our next generation “Shasta” system; any statements regarding potential new markets or applications for our products;products or our ability to sell into any market or to any customer; any statements regarding the effects of the acquisition of Seagate’s ClusterStor line of business; any statements regarding technological developments or trends; any statements regarding future research and development or co-funding for such efforts; any statements regarding future expansions of our facilities and offices; any statements regarding future market and economic conditions; any statements regarding the expected vesting of our performance-based equity awards; and any statements of assumptions underlying any of the foregoing. These forward-looking statements are subject to the safe harbor created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (theor the Exchange Act).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 III and other sections of this report and our other filings with the U.S. Securities and Exchange Commission, (SEC).or SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. We assume no obligation to update these forward-looking statements, whether as a result of new information, future events, or otherwise, except as otherwise required by law.

Our focus is on the first Cray supercomputer in 1976, our technologies have helped solve today’s problems and made tomorrow’s questions possible. We exist to provide the right tools to the world’s visionaries to help them solve questions they need answered.

We provide solutions based on four main models: (1) tightly integrated supercomputing designed throughout for scalability and sustained performance; (2) customizable cluster supercomputing based on highest-performance, industry-standard components; (3) robust high-performance storage solutions; and (4) integrated solutions for graph analysis, large-scale analytics, and AI applications.

Close customer partnerships are fundamental to our business. The questions driving our customers’ work inform our product direction and, in turn, our products combined with our customer engagement enable users to ask the next, more complex questions.questions to investigate, discover, and further their efforts. To ensurefacilitate customer success, we also provide customized service from installation to 24x7 onsiteon-site support. Our customers include domestic and foreign governmentgovernments and government-funded entities, academic institutions, and commercial companies.

Our continuing strategy is to gain market share by extending our technology leadership and differentiation, andas well as expanding our share and addressable market in areas where we can leverage our experience and technology, such as in AI applications and data analytics. Underpinning this strategy is our focus on understanding our customers’ needs and building products that continually extend their capabilities.

We were incorporated in the State of Washington in December 1987 under the name Tera Computer Company. We changed our corporate name to Cray Inc. in connection with our acquisition of the Cray Research, Inc. operating assets from Silicon Graphics, Inc. in 2000. Our corporate headquarters are located at 901 Fifth Avenue, Suite 1000, Seattle, Washington 98164. Our telephone number is (206) 701-2000 and our website address is www.cray.com. The contents of our website are not incorporated by reference into this annual report on Form 10-K or our other SEC reports and filings.

The $6.1$4.9 million increasedecrease in general and administrative expense in 20162017 compared to 20152016 was primarily due to a $6.0 million increase in legal costs associated with our ongoing litigation with Raytheon. We also incurred a $2.3 million lease termination fee for our St. Paul facility that was expensed in 2016. These amounts were partially offset by2016 and a $2.1$2.0 million decrease in incentive compensation expenselegal costs, from $7.5 million in 2016 compared to 2015.$5.5 million in 2017, related to our ongoing litigation with Raytheon.

We recorded $5.0$0.6 million and $0.4$5.0 million of net other income for the years ended December 31, 20172018 and 2015,2017, respectively, and $1.4 million of net other expense for the year ended December 31, 2016. Net other income and expense includes gains and losses from foreign currency transactions, investments and disposals of assets. Net other income for 2017 included a $3.3 million gain from the sale of an investment in a private company.

Our interest income and interest expense for the indicated years ended December 31 were (in thousands):

Interest income is earned on cash and cash equivalents, investment balances and the investment in sales-type lease.

The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, made significant changes to existing U.S. tax law, including, but not limited to, a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, imposition of a one-time tax on deferred foreign income (“Repatriation Transition Tax”), adoption of a participation exemption system with respect to the taxation of future dividends received from foreign corporations, and repeal of the corporate alternative minimum tax system. Other significant changes in the Tax Cuts and Jobs Act include taxing payments made to foreign related parties that are deemed to be excessive, imposing a minimum tax on certain foreign earnings, requiring (beginning after December 31, 2021) the capitalization and subsequent amortization of certain research and development related expenses, and placing additional limits on the use of net operating losses and the deductibility of certain executive compensation.

Amounts we recorded duringDuring the year ended December 31, 2017, directly attributable to the enactment of the Tax Cuts and Jobs Act includedwe recorded a reduction, in the amount of $28.9 million, in the carrying value of our U.S. deferred tax assets as a result of a reduction in the U.S. federal corporate income tax rate to 21%, the estimated impact, and provisional tax expense, in the amount of $0.3 million, associated withattributable to the Repatriation TransactionTransition Tax and the estimated impact,provisional tax expense, in the amount of $0.3 million, associated withas a result of our decision to no longer consider the undistributed earnings of our foreign subsidiaries to be permanently reinvested outside of the U.S. Estimated amounts have been recorded on a provisional basis in accordance with Securities and Exchange Commission Staff Accounting Bulletin 118 and may be adjusted, during a one-year measurement period, when we have had sufficient time to obtain, prepare and analyze historical tax returns, financial statements and related accounts that is required to finalize our accounting with respect to those items.

Cash flow information for the indicated years ended December 31 included the following (in thousands):

Over the next twelve months, we expect our significant cash requirements will relate to operational expenses. Operational expenses consist primarily of personnel costs, costs of inventory associated with certain large-scale product deliveries, spare parts, outside engineering expenses, and the acquisition of property and equipment. In addition, we lease certain equipment and facilities used in our operations under operating leases in the normal course of business.

The following table summarizes our contractual cash obligations as of December 31, 20172018 (in thousands):

We made no draws and had no outstanding cash borrowings on the line of credit as of December 31, 2017.2018.

As of December 31, 2017,2018, we had $15.0$17.3 million in total restricted cash. We had $13.9 million in USD equivalent value in outstanding letters of credit, and $3.0 million in restricted cash associated with certain lettersthe majority of credit to secure customer prepayments and other customer related obligations.which was supported by the Wells Fargo Credit Facility, as of December 31, 2018.

In our normal course of operations, we have development arrangements under which we engage outside engineering resources to work on our research and development projects. For the year ended December 31, 2017,2018, we incurred $17.5$24.7 million for such arrangements.

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.

Additionally, we consider certain judgments and estimates to be significant, including those relating to the estimated sellingallocation of transaction price determination usedto each performance obligation in revenue recognition, percentage of completion accounting, estimates of proportional performance on co-funded engineering contracts, collectibility of receivables, determination of inventory at the lower of cost or net realizable value, the value of used equipment returned or to be returned associated with customer contracts, useful lives for depreciation and amortization, determination of future cash flows associated with impairment testing of long-lived assets, including goodwill and other intangibles, determination of the implicit interest rate used in the sales-type lease calculation, estimated warranty liabilities, determination of the fair value of stock options and other assessments of fair value, evaluation of the probability of vesting of performance-based restricted stock and restricted stock units, calculation of deferred income tax assets, including estimates of future financial performance in the determination of the likely recovery of deferred income tax assets, our ability to utilize such assets, potential income tax assessments, the outcome of any legal proceedings and other contingencies. We base our estimates on historical experience, current conditions and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions.

Our management has discussed the selection of significant accounting policies and the effect of judgments and estimates with the Audit Committee of our Board of Directors.

We record our inventory at the lower of cost or net realizable value, with cost computed on a first-in, first-out basis (FIFO). We regularly evaluate the technological usefulness and anticipated future demand for our inventory components. Due to rapid changes in technology and the increasing demands of our customers, we are continually developing new products. Additionally, during periods of product or inventory component upgrades or transitions, we may acquire significant quantities of inventory to support estimated current and future production and service requirements. As a result, it is possible that older inventory items we have purchased may become obsolete, be sold below cost or be deemed in excess of quantities required for production or service requirements. When we determine it is not likely we will recover the cost of inventory items through future sales, we write-down the related inventory to our estimate of its net realizable value. Prior to the adoption of ASU 2015-11 at the beginning of the first quarter of 2017, inventory was valued at the lower of cost or market. The adoption of ASU 2015-11 did not have a material impact on our consolidated financial statements.

Because the products we sell have high average sales prices and because a high number of our prospective customers receive funding from U.S. or foreign governments, it is difficult to estimate future sales of our products and the timing of such sales. It also is difficult to determine whether the cost of our inventories will ultimately be recovered through future sales. While we believe our inventory is stated at the lower of cost or net realizable value and that our estimates and assumptions to determine any adjustments to the cost of our inventories are reasonable, our estimates may prove to be inaccurate. We have sold inventory previously reduced in part or in whole to zero, and we may have future sales of previously written-down inventory. We also may incur additional expenses to write-down inventory to its estimated net realizable value. Adjustments to these estimates in the future may materially impact our operating results.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or settled.

A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not that all or a portion of the deferred tax assets will not be realized through future operations. This assessment is based upon consideration of all available positive and negative evidence, which includes, among other things, our recent results of operations, forecasted domestic and international earnings over a number of years, all known business risks and industry trends, and applicable tax planning strategies that should, if implemented, enable us to utilize our deferred tax assets before they expire. We consider our actual historical results over several years to have stronger weight than other more subjective indicators, including forecasts, when considering whether to establish or reduce a valuation allowance on deferred tax assets. We have significant difficulty projecting future results due to the nature of the business and the industry in which we operate.

As of December 31, 2018, we continued to provide a full valuation allowance against our U.S. federal deferred tax assets and against the majority of our state and foreign deferred tax assets at December 31, 2017 as the realization of such assets is not considered to be more likely than not at this time. In a future period our assessment of the realizability of our deferred tax assets and therefore the appropriateness of the valuation allowance could change based on an assessment of all available evidence, both positive and negative in that future period. If our conclusion about the realizability of our deferred tax assets and therefore the appropriateness of the valuation allowance changes in a future period we could record a substantial tax benefit in our Consolidated Statement of Operations when that occurs. We recognize the income tax benefit from a tax position only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of our position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

As of December 31, 2017,2018, we had approximately $84.0$102.9 million of net deferred tax assets before application of a valuation allowance. As of December 31, 2017,2018, net deferred tax assets after reduction by the valuation allowance of $82.9$101.6 million were $1.1$1.3 million. Included in our deferred tax assets is a deferred tax asset of $15.2$21.7 million related to federal net operating loss carryforwards that will expire between 2019 and 2037 and a deferred tax asset of $36.0$39.9 million related to federal research and development tax credits. Approximately $14.8 million of the deferred tax asset related to our federal net operating losses will expire between 2019 and 2037; the remainder can be carried forward indefinitely. The deferred tax asset related to federal research and development tax credits that will expire between 2021 and 2037.2038.

Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively.

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,

Amounts to be received under co-funding arrangements with the U.S. government, or other customers or suppliers are based on either contractual milestones or costs incurred. These co-funding milestone payments are recognized in operationsas a reduction of research and development expense as performance is estimated to be completed and are measured as milestone achievements occur or as costs are incurred. These estimates are reviewed on a periodic basis and are subject to change, including in the near term. If an estimate is changed, net research and development expense could be impacted significantly.

We do not record a receivable from the U.S. government prior to completing the requirements necessary to bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget restrictions and milestones may be subject to completion risk, and as a result, there may beare often 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 are exposed to financial market risks, including changes in interest rates and equity price fluctuations.

As of December 31, 2017,2018, we had entered into foreign currency exchange contracts that were designated as cash flow hedges that hedge approximately $96.3$41.6 million of anticipated cash receipts on specific foreign currency denominated sales contracts. These foreign currency exchange contracts hedge the risk of foreign exchange rate changes between the time that the related contracts were signed and when the cash receipts are expected to be received. As of December 31, 2017,2018, we had entered into foreign currency exchange contracts that had been dedesignated for the purposes of hedge accounting treatment totaling $46.9$40.6 million. Unrealized gains or losses recorded in the Consolidated Statements of Operations related to these contracts are generally offset by foreign currency adjustments on related receivables. These foreign currency exchange contracts are considered to be economic hedges.

Our foreign maintenance contracts are typically paid in local currencies and provide a partial natural hedge against foreign exchange exposure. To the extent that we wish to repatriate any of these funds to the United States, however, we are subject to foreign exchange risks. We do not hold or purchase any currency forward exchange contracts for trading purposes. As of December 31, 2017,2018, a hypothetical 10% unfavorable change in foreign currency exchange rates would impact our annual operating results and cash flows by approximately $0.5$0.7 million.

None.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation and under the supervision of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer/Corporate Controller, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and based on that evaluation, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective.

There have been no changes in our internal controls over financial reporting during the fourth quarter of 20172018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Peterson Sullivan LLP, an independent registered public accounting firm, has expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2017.2018.

Opinion on Internal Control over Financial Reporting

None.

The information required by this Item is contained in the proxy statement for our annual meeting of shareholders scheduled to be held on or around June 12, 2018,11, 2019, and such information is incorporated herein by reference.

The information required by this Item is contained in the proxy statement for our annual meeting of shareholders scheduled to be held on or around June 12, 2018,11, 2019, and such information is incorporated herein by reference.

The information required by this Item is contained in the proxy statement for our annual meeting of shareholders scheduled to be held on or around June 12, 2018,11, 2019, and such information is incorporated herein by reference.

The information required by this Item is contained in the proxy statement for our annual meeting of shareholders scheduled to be held on or around June 12, 2018,11, 2019, and such information is incorporated herein by reference.

The information required by this Item is contained in the proxy statement for our annual meeting of shareholders scheduled to be held on or around June 12, 2018,11, 2019, and such information is incorporated herein by reference.

Schedule II — Valuation and Qualifying Accounts — The financial statement schedule for the years ended December 31, 2018, 2017, 2016 and 20152016 should be read in conjunction with the consolidated financial statements of Cray Inc. filed as part of this annual report on Form 10-K.

Schedules other than that listed above have been omitted since they are either not required, not applicable, or because the information required is included in the consolidated financial statements or the notes thereto.

The Exhibits listed in the Exhibit Index are filed as part of this annual report on Form 10-K. Each management contract or compensatory plan or agreement listed on the Exhibit Index is identified by an asterisk.