10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________ 

FORM 10-Q

______________________________________________

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2014

Or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:              to             

Commission File Number: 0-26820

______________________________________________ 

CRAY INC.

(Exact name of registrant as specified in its charter)

______________________________________________ 

Washington	93-0962605
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
901 Fifth Avenue, Suite 1000 Seattle, Washington	98164
(Address of Principal Executive Office)	(Zip Code)

(206) 701-2000

(Registrant’s telephone number, including area code)

______________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  ý

As of April 22, 2014, there were 40,691,023 shares of Common Stock issued and outstanding.

CRAY INC.

TABLE OF CONTENTS

	Page No.
PART I. FINANCIAL INFORMATION	3
Item 1. Unaudited Condensed Consolidated Financial Statements:	3
Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and March 31, 2013	4
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2014 and March 31, 2013	5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and March 31, 2013	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	26
PART II. OTHER INFORMATION	27
Item1A. Risk Factors	27
Item 6. Exhibits	36
SIGNATURES	37

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and proxy statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge at our website at www.cray.com as soon as reasonably practicable after we electronically file such reports with the SEC.

2

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share data)

	March 31, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	187,691		$	192,633
Restricted cash	18,100			—
Short-term investments	49,916			14,048
Accounts and other receivables, net	58,765			182,527
Inventory	118,194			95,129
Prepaid expenses and other current assets	31,722			20,999
Total current assets	464,388			505,336
Long-term restricted cash	15,100			13,768
Long-term investments	7,817			—
Property and equipment, net	30,624			30,278
Service inventory, net	1,709			1,828
Goodwill	14,182			14,182
Intangible assets other than goodwill, net	5,764			6,362
Deferred tax assets	24,592			19,206
Other non-current assets	11,700			12,406
TOTAL ASSETS	$	575,876		$	603,366
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	35,833		$	34,225
Accrued payroll and related expenses	10,348			22,470
Other accrued liabilities	13,709			22,225
Deferred revenue	89,553			91,488
Total current liabilities	149,443			170,408
Long-term deferred revenue	54,167			50,477
Other non-current liabilities	6,675			6,894
TOTAL LIABILITIES	210,285			227,779
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 40,689,605 and 40,469,854 shares, respectively	589,721			586,243
Accumulated other comprehensive income	572			853
Accumulated deficit	(224,702		)	(211,509		)
TOTAL SHAREHOLDERS’ EQUITY	365,591			375,587
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	575,876		$	603,366

See accompanying notes

3

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share data)

	Three Months Ended March 31,
	2014			2013
Revenue:
Product	$	30,015		$	59,868
Service	25,095			19,679
Total revenue	55,110			79,547
Cost of revenue:
Cost of product revenue	23,972			45,570
Cost of service revenue	13,201			9,827
Total cost of revenue	37,173			55,397
Gross profit	17,937			24,150
Operating expenses:
Research and development, net	22,621			20,226
Sales and marketing	11,776			11,143
General and administrative	5,413			5,485
Total operating expenses	39,810			36,854
Loss from operations	(21,873		)	(12,704		)
Other expense, net	(646		)	(335		)
Interest income, net	61			376
Loss before income taxes	(22,458		)	(12,663		)
Income tax benefit	9,520			5,054
Net loss	$	(12,938	)	$	(7,609	)
Basic net loss per common share	$	(0.34	)	$	(0.20	)
Diluted net loss per common share	$	(0.34	)	$	(0.20	)
Basic weighted average shares outstanding	38,317			37,335
Diluted weighted average shares outstanding	38,317			37,335

See accompanying notes

4

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited and in thousands)

	Three Months Ended March 31,
	2014			2013
Net loss	$	(12,938	)	$	(7,609	)
Other comprehensive income (loss), net of tax:
Unrealized gain on available-for-sale investments	4			49
Foreign currency translation adjustments	23			165
Unrealized gain (loss) on cash flow hedges	(328		)	2,020
Reclassification adjustments on cash flow hedges included in net loss	20			(20		)
Other comprehensive income (loss)	(281		)	2,214
Comprehensive loss	$	(13,219	)	$	(5,395	)

See accompanying notes

5

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

	Three Months Ended March 31,
	2014			2013
Operating activities:
Net loss	$	(12,938	)	$	(7,609	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	3,910			3,429
Accretion and amortization on available for sale investments	53			—
Loss on disposal of fixed assets	204			1
Share-based compensation expense	2,522			1,726
Inventory write-down	382			—
Deferred income taxes	(9,797		)	(3,866		)
Cash provided (used) due to changes in operating assets and liabilities:
Accounts and other receivables	124,120			(45,221		)
Inventory	(24,127		)	9,617
Prepaid expenses and other assets	(5,588		)	(1,200		)
Accounts payable	1,612			(2,103		)
Accrued payroll and related expenses and other accrued liabilities	(20,884		)	(15,498		)
Other non-current liabilities	(218		)	(365		)
Deferred revenue	1,760			(10,639		)
Net cash provided by (used in) operating activities	61,011			(71,728		)
Investing activities:
Sales/maturities of available-for-sale investments	9,000			—
Purchases of available-for-sale investments	(52,732		)	(14,938		)
Increase in restricted cash	(19,432		)	—
Purchases of property and equipment	(3,501		)	(1,868		)
Net cash used in investing activities	(66,665		)	(16,806		)
Financing activities:
Proceeds from issuance of common stock through employee stock purchase plan	169			110
Purchase of employee restricted shares to fund related statutory tax withholding	(453		)	(340		)
Proceeds from exercises of stock options	986			1,373
Net cash provided by financing activities	702			1,143
Effect of foreign exchange rate changes on cash and cash equivalents	10			(219		)
Net decrease in cash and cash equivalents	(4,942		)	(87,610		)
Cash and cash equivalents:
Beginning of period	192,633			253,065
End of period	$	187,691		$	165,455
Supplemental disclosure of cash flow information:
Cash paid for interest	$	5		$	—
Cash paid for income taxes	$	1,232		$	1,682
Non-cash investing and financing activities:
Inventory transfers to fixed assets and service inventory	$	680		$	1,598

See accompanying notes

6

CRAY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1— Basis of Presentation

In these notes, Cray Inc. and its wholly-owned subsidiaries are collectively referred to as the “Company.” In the opinion of management, the accompanying Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Loss, and Statements of Cash Flows have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Management believes that all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The Company’s revenue, results of operations and cash balances are likely to fluctuate significantly from quarter to quarter. These fluctuations are due to such factors as the high average sales prices and limited number of sales of the Company’s products, the timing of purchase orders and product deliveries, the revenue recognition accounting policy of generally not recognizing product revenue until customer acceptance and other contractual provisions have been fulfilled and the timing of payments for product sales, maintenance services, government research and development funding and purchases of inventory. Given the nature of the Company’s business, its revenue, receivables and other related accounts are likely to be concentrated among a relatively small number of customers.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Cray Inc. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until the products have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where applicable, a customer acceptance has been obtained. The sales price is not considered to be fixed or determinable until all material contingencies related to the sales have been resolved. The Company records revenue in the Condensed Consolidated Statements of Operations net of any sales, use, value added or certain excise taxes imposed by governmental authorities on specific sales transactions. In addition to the aforementioned general policy, the following are the Company's statements of policy with regard to multiple-element arrangements and specific revenue recognition policies for each major category of revenue.

Multiple-Element Arrangements. The Company commonly enters into revenue arrangements that include multiple deliverables of its product and service offerings due to the needs of its customers. Products may be delivered in phases over time periods which can be as long as five years. Maintenance services generally begin upon acceptance of the first equipment delivery and future deliveries of equipment generally have an associated maintenance period. The Company considers the maintenance period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which may include a warranty period and accordingly allocates a portion of the arrangement consideration as a separate deliverable which is recognized as service revenue over the entire service period. Other services such as training and engineering services can be delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement is separated into more than one unit of accounting if the following criteria are met:

• The delivered item(s) has value to the customer on a standalone basis; and

• If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.

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If these criteria are met for each element, the arrangement consideration is allocated to the separate units of accounting based on each unit's relative selling price. If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered.

The Company follows a selling price hierarchy in determining the best estimate of the selling price of each deliverable. Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to determine vendor specific objective evidence, or VSOE. The Company determines VSOE based on normal pricing and discounting practices for the product or service when sold separately.

When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company attempts to establish the selling price of each remaining element based on third-party evidence, or TPE. The Company's inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract terms which can be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. TPE is determined based on the Company's prices or competitor prices for similar deliverables when sold separately. However, the Company is often unable to determine TPE, as the Company's offerings contain a significant level of customization and differentiation from those of competitors and the Company is often unable to reliably determine what similar competitor products' selling prices are on a standalone basis.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price, or ESP, in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. In determining ESP, the Company uses the cost to provide the product or service plus a margin, or considers other factors. When using cost plus a margin, the Company considers the total cost of the product or service, including customer-specific and geographic factors. The Company also considers the historical margins of the product or service on previous contracts and several factors including any changes to pricing methodologies, competitiveness of products and services and cost drivers that would cause future margins to differ from historical margins.

Products. The Company most often recognizes revenue from sales of products upon customer acceptance of the system. Where formal acceptance is not required, the Company recognizes revenue upon delivery or installation. When the product is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to product revenue based on estimates of selling price.

Services. Maintenance services are provided under separate maintenance contracts with customers. These contracts generally provide for maintenance services for one year, although some are for multi-year periods, often with prepayments for the term of the contract. The Company considers the maintenance period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which may include a warranty period. When service is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance contracts that are billed in advance of revenue recognition are recorded as deferred revenue. Maintenance revenue is recognized ratably over the term of the maintenance contract.

Revenue from engineering services is recognized as services are performed.

Project Revenue. Revenue from design and build contracts is recognized under the percentage-of-completion (or POC method). Under the POC method, revenue is recognized based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in income in the period in which the circumstances that gave rise to the revision become known by management. The Company performs ongoing profitability analyses of its contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.

The Company records revenue from certain research and development contracts which include milestones using the milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive if management believes there is substantive uncertainty that it will be achieved and the milestone consideration meets all of the following criteria:

• It is commensurate with either of the following:

• The Company's performance to achieve the milestone; or

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

8

• It relates solely to past performance.

• It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

The individual milestones are determined to be substantive or non-substantive in their entirety and milestone consideration is not bifurcated.

Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work performed.

Nonmonetary Transactions. The Company values and records nonmonetary transactions at the fair value of the asset surrendered unless the fair value of the asset received is more clearly evident, in which case the fair value of the asset received is used.

Note 2— Fair Value Measurement

Based on the observability of the inputs used in the valuation techniques used to determine the fair value of certain financial assets and liabilities, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2014, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

Description	Fair Value as of March 31, 2014			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents and restricted cash	$	220,891		$	220,891	$	—
Available-for-sale investments (1)	57,733			57,733		—
Foreign exchange forward contracts (2)	1,160			—		1,160
Assets measured at fair value at March 31, 2014	$	279,784		$	278,624	$	1,160
Liabilities:
Foreign exchange forward contracts (3)	$	(6,734	)	$	—	$	(6,734	)
Liabilities measured at fair value at March 31, 2014	$	(6,734	)	$	—	$	(6,734	)

 ____________________

(1) Included in "Short-term investments" and "Long-term investments" on the Company’s Condensed Consolidated Balance Sheets.

(2) Included in “Prepaid expenses and other 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.

Foreign Currency Derivatives

The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales transactions that are payable in foreign currencies.

As of March 31, 2014, the Company had outstanding forward contracts which were designated as cash flow hedges of anticipated future cash receipts on sales contracts payable in foreign currencies. The outstanding notional amounts were approximately 36.4 millionBritish Pounds, 33.3 millionEuro, 2.3 billionJapanese Yen, $3.9 millionCanadian Dollars and $1.4 millionSingapore Dollars, resulting in hedged foreign currency exposure of approximately $127.8 million. Cash receipts

9

associated with the hedged contracts are expected to be received from 2014 through 2018, during which time the revenue on the associated sales contracts is expected to be recognized.

As of December 31, 2013, the outstanding notional amounts were approximately 36.4 millionBritish Pounds, 53.0 millionEuro, 1.2 billionJapanese Yen, 5.6 millionSwiss Francs, $3.9 millionCanadian Dollars and $3.2 millionSingapore Dollars, resulting in hedged foreign currency exposure of approximately $151.4 million.

Fair Values of Derivative Instruments (in thousands):

Hedge Classification	Balance Sheet Location	Fair Value as of March 31, 2014			Fair Value as of December 31, 2013
Foreign currency contracts	Prepaid expenses and other current assets	$	1,160		$	1,654
Foreign currency contracts	Other non-current assets	—			76
Foreign currency contracts	Other accrued liabilities	(2,669		)	(2,942		)
Foreign currency contracts	Other non-current liabilities	(4,065		)	(4,295		)
Total fair value of derivatives classified as hedging instruments		$	(5,574	)	$	(5,507	)

Note 3— Accumulated Other Comprehensive Income

The following table shows the gross and net of tax reclassification adjustments from accumulated other comprehensive income resulting from hedged foreign currency transactions recorded by the Company for the three months ended March 31, 2014 and 2013 (in thousands). The gross reclassification adjustments decreased product revenue for the three months ended March 31, 2014. The gross reclassification adjustments increased product revenue for the three months ended March 31, 2013.

	Three Months Ended March 31,
	2014			2013
Gross of Tax Reclassifications	$	(33	)	$	33
Net of Tax Reclassifications	$	(20	)	$	20

The following tables show the changes in Accumulated Other Comprehensive Income by component for the three months ended March 31, 2014 and 2013 (in thousands):

Three Months Ended March 31, 2014
	Unrealized Gain on Investments		Foreign Currency Translation Adjustments			Unrealized Loss on Cash Flow Hedges			Accumulated Other Comprehensive Income
Beginning balance	$	—	$	3,257		$	(2,404	)	$	853
Current-period change, net of tax	4		23			(308		)	(281		)
Ending balance	$	4	$	3,280		$	(2,712	)	$	572
Income tax expense (benefit) associated with current-period change	$	2	$	(167	)	$	(205	)	$	(370	)

Three Months Ended March 31, 2013
	Unrealized Gain/(Loss) on Investments			Foreign Currency Translation Adjustments		Unrealized Gain on Cash Flow Hedges		Accumulated Other Comprehensive Income
Beginning balance	$	(46	)	$	4,301	$	926	$	5,181
Current-period change, net of tax	49			165		2,000		2,214
Ending balance	$	3		$	4,466	$	2,926	$	7,395
Income tax expense associated with current-period change	$	33		$	110	$	1,333	1,476

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Note 4— Earnings (Loss) Per Share ("EPS")

Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares, excluding unvested restricted stock, outstanding during the period. Diluted EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common and potential common shares outstanding during the period, which includes the additional dilution related to conversion of stock options, unvested restricted stock and restricted stock units as computed under the treasury stock method.

For the three months ended March 31, 2014 and 2013, outstanding stock options, unvested restricted stock grants and restricted stock units were antidilutive because of the net losses and, as such, their effect has not been included in the calculation of basic or diluted net loss per share. For the three months ended March 31, 2014 and 2013, potential gross common shares of 3.2 million and 4.2 million, respectively, were antidilutive and not included in computing diluted EPS.

Note 5— Investments

The Company’s investments in debt securities with maturities at purchase greater than three months are classified as "available-for-sale."  Changes in fair value are reflected in other comprehensive income (loss).

The carrying amount of the Company’s investments in available-for-sale securities as of March 31, 2014 is shown in the table below (in thousands):

			Unrealized
	Cost		Gains (Losses)			Fair Value
Short-term available-for-sale securities	$	49,889	$	27		$	49,916
Long-term available-for-sale securities	7,838		(21		)	7,817
Total	$	57,727	$	6		$	57,733

The carrying amount of the Company’s investments in available-for-sale securities as of December 31, 2013 is shown in the table below (in thousands):

			Unrealized
	Cost		Gains (Losses)		Fair Value
Short-term available-for-sale securities	$	14,048	$	—	$	14,048
Long-term available-for-sale securities	—		—		—
Total	$	14,048	$	—	$	14,048

Note 6— Accounts and Other Receivables, Net

Net accounts and other receivables consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Trade accounts receivable	$	44,947		$	169,417
Unbilled receivables	11,329			9,075
Advance billings	1,165			2,141
Other receivables	1,430			2,051
	58,871			182,684
Allowance for doubtful accounts	(106		)	(157		)
Accounts and other receivables, net	$	58,765		$	182,527

Unbilled receivables represent amounts where the Company has recognized revenue in advance of the contractual billing terms. Advance billings represent billings made based on contractual terms for which revenue has not been recognized.

As of March 31, 2014 and December 31, 2013, accounts receivable included $12.0 million and $111.9 million, respectively, due from U.S. government agencies and customers primarily serving the U.S. government. Of these amounts, $0.3 million and $0.3 million were unbilled as of March 31, 2014 and December 31, 2013, respectively, based upon contractual billing arrangements with these customers. As of March 31, 2014, three non-U.S. government customers accounted for 37% of

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total accounts and other receivables. As of December 31, 2013, no non-U.S. government customer accounted for more than 10% of total accounts and other receivables.

Note 7— Inventory

Inventory consisted of the following (in thousands):

	March 31, 2014		December 31, 2013
Components and subassemblies	$	39,376	$	46,339
Work in process	15,880		23,618
Finished goods	62,938		25,172
Total	$	118,194	$	95,129

Finished goods inventory of $61.9 million and $24.8 million was located at customer sites pending acceptance as of March 31, 2014 and December 31, 2013, respectively. At March 31, 2014, two customers accounted for $50.7 million, and at December 31, 2013, one customer accounted for $18.0 million of finished goods inventory.

During the three months ended March 31, 2014 the Company wrote off $0.4 million of inventory, primarily related to our CS300 product line. There were no write offs during the three months ended March 31, 2013.

Note 8— Deferred Revenue

Deferred revenue consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Deferred product revenue	$	59,174		$	54,065
Deferred service revenue	84,546			87,900
Total deferred revenue	143,720			141,965
Less long-term deferred revenue	(54,167		)	(50,477		)
Deferred revenue in current liabilities	$	89,553		$	91,488

As of March 31, 2014, two customers accounted for 37% of total deferred revenue. At December 31, 2013, three customers accounted for 47% of total deferred revenue.

Note 9— Share-Based Compensation

The Company accounts for its share-based compensation based on an estimate of fair value of the grant on the date of grant.

The fair value of unvested restricted stock is based on the market price of a share of the Company’s common stock on the date of grant and is amortized over the vesting period.

In determining fair value of stock options, the Company uses the Black-Scholes option pricing model. As no options were granted during the three months ended March 31, 2013, no calculation was performed for that period. The following key weighted average assumptions were employed in the calculation for the three months ended March 31, 2014:

	Three Months Ended March 31, 2014
Risk-free interest rate	1.24%
Expected dividend yield	—%
Volatility	50.40%
Expected life	4.0 years
Weighted average Black-Scholes value of options granted	$11.01

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is

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based on the assumption that options will be exercised, on average, about two years after vesting occurs. The Company recognizes compensation expense for only the portion of options or stock units that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates. The estimated forfeiture rate applied during the three months ended March 31, 2014 was 10.0%. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. The Company’s stock price volatility, option lives and expected forfeiture rates involve management’s best estimates at the time of such determination, which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting period or requisite service period of the option. The Company typically issues stock options with a four year vesting period (the requisite service period) and amortizes the fair value of stock options (stock compensation cost) ratably over the requisite service period. The fair value of unvested restricted stock is based on the market price of a share of the Company’s common stock on the date of grant and is amortized over the vesting period.

The Company also has an employee stock purchase plan (“ESPP”) which allows employees to purchase shares of the Company’s common stock at 95% of fair market value on the fourth business day after the end of each offering period. The ESPP is deemed non-compensatory and therefore is not subject to the fair value provisions.

The following table sets forth the gross share-based compensation cost resulting from stock options and unvested restricted stock grants that were recorded in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014		2013
Cost of product revenue	$	52	$	27
Cost of service revenue	69		62
Research and development, net	761		386
Sales and marketing	751		516
General and administrative	889		735
Total	$	2,522	$	1,726

A summary of the Company’s year-to-date stock option activity and related information follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2013	2,078,069		$	9.29
Grants	44,800		$	27.46
Exercises	(143,258	)	$	6.95
Cancellations	(5,497	)	$	24.54
Outstanding at March 31, 2014	1,974,114		$	9.83	6.9
Exercisable at March 31, 2014	1,201,668		$	6.34	5.9
Available for grant at March 31, 2014	2,985,282

As of March 31, 2014, there was $54.3 million of aggregate intrinsic value of outstanding stock options, including $37.2 million of aggregate intrinsic value of exercisable stock options. Intrinsic value represents the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of its first quarter of 2014 and the exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received by the option holders had all option holders exercised their options on March 31, 2014. During the three months ended March 31, 2014, stock options covering 143,258 shares of common stock with a total intrinsic value of $4.3 million were exercised. During the three months ended March 31, 2013, stock options covering 202,321 shares of common stock with a total intrinsic value of $2.6 million were exercised.

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A summary of the Company’s unvested restricted stock grants and changes during the three months ended March 31, 2014 is as follows:

	Standard Restricted Shares				Performance Vesting Restricted Shares				Total Restricted Shares
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2013	1,127,700		$	12.05	1,094,000		$	15.94	2,221,700		$	13.97
Granted	100,800		$	34.73	—		$	—	100,800		$	34.73
Forfeited	(5,000	)	$	26.01	(10,000	)	$	12.90	(15,000	)	$	17.27
Vested	(36,250	)	$	8.09	—		$	—	(36,250	)	$	8.09
Outstanding at March 31, 2014	1,187,250		$	14.04	1,084,000		$	15.97	2,271,250		$	14.96

The aggregate fair value of restricted stock vested during the three months ended March 31, 2014 and 2013 was $1.1 million and $0.7 million, respectively.

As of March 31, 2014, the Company had $31.2 million of total unrecognized compensation cost related to unvested stock options and unvested restricted stock. This includes $17.0 million for performance vesting restricted stock subject to performance measures which are currently not considered probable to vest and $0.3 million for performance vesting restricted stock subject to performance measures which currently are considered probable to vest. No compensation expense is recorded for performance vesting restricted stock subject to performance measures that are not yet considered probable of attainment.

Unrecognized compensation cost related to unvested stock options and unvested restricted stock grants considered probable to vest is expected to be recognized over a weighted average period of 1.7 years.

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Note 10— Taxes

The Company’s effective tax rates for the three months ended March 31, 2014 and 2013 were as follows:

	Three Months Ended March 31,
	2014	2013
Effective Tax Rates	42%	40%

The effective tax rates for the three months ended March 31, 2014 and 2013 were higher than the U.S. federal statutory rate primarily as a result of state taxes.

The Company continues to provide a partial valuation allowance against its U.S. deferred tax assets and a full valuation allowance against its deferred tax assets in a limited number of foreign jurisdictions as the realization of such assets is not considered to be more likely than not. The Company’s conclusion about the realizability of its deferred tax assets, and therefore the appropriateness of a valuation allowance, is reviewed quarterly. If the Company’s conclusion about the realizability of its deferred tax assets changes in a future period, the Company could record a substantial tax provision or benefit in its Condensed Consolidated Statements of Operations when that occurs.

Note 11— Segment Information

The Company has the following reportable segments: Supercomputing (formerly HPC Systems), Storage and Data Management, and Maintenance and Support. The Company's segment presentation has changed to be consistent with information now provided to its Chief Operating Decision Maker. This information has been modified to include inter-segment revenue and gross profit from Maintenance and Support services in Supercomputing and Storage and Data Management resulting from the sales of products in these segments. The prior period financial information has been reclassified to conform to the current period’s presentation.

The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, who is the Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance. The segments are determined based on several factors, including the Company’s internal operating structure, the manner in which the Company’s operations are managed, client base, similar economic characteristics and the availability of separate financial information.

Supercomputing

Supercomputing includes a suite of highly advanced systems, including the Cray XC30, Cray XE6, Cray XE6m, Cray XK7, Cray XK6m, and the Cray CS300, which are used by single users all the way up through large research and engineering centers in universities, government laboratories, and commercial institutions. Supercomputing also includes the ongoing maintenance of these systems as well as system analysts.

Storage and Data Management

Storage and Data Management offers the Cray Sonexion 1600 and Tiered Adaptive Storage solution as well as other third-party storage products and their ongoing maintenance as well as system analysts.

Maintenance and Support

Maintenance and Support provides ongoing maintenance of Cray supercomputers, big data storage and analytic systems, as well as system analysts.

Engineering Services and Other

Included within Engineering Services and Other is the Company’s YarcData business unit and Custom Engineering.

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The following table presents revenues and gross margin for the Company’s operating segments for the three months ended March 31 (in thousands):

	Three Months Ended March 31,
	2014			2013
Revenue:
Supercomputing	$	43,626		$	61,755
Storage and Data Management	8,065			16,282
Maintenance and Support	21,965			18,213
Engineering Services and Other	3,419			1,510
Elimination of inter-segment revenue	(21,965		)	(18,213		)
Total revenue	$	55,110		$	79,547
Gross Profit:
Supercomputing	$	13,223		$	16,257
Storage and Data Management	2,907			7,157
Maintenance and Support	10,214			9,160
Engineering Services and Other	1,807			736
Elimination of inter-segment gross profit	(10,214		)	(9,160		)
Total gross profit	$	17,937		$	24,150

Revenue and cost of revenue is the only discrete financial information the Company prepares for its segments. Other financial results or assets are not separated by segment.

The Company’s geographic operations outside the United States include sales and service offices in Canada, Brazil, Europe, Japan, Australia, India, South Korea, China, Singapore and Taiwan. The following data represents the Company’s revenue for the United States and all other countries, which is determined based upon a customer’s geographic location (in thousands):

	United States				Other Countries				Total
	2014		2013		2014		2013		2014		2013
Three months ended March 31,
Product revenue	$	10,463	$	31,144	$	19,552	$	28,724	$	30,015	$	59,868
Service revenue	17,744		13,472		7,351		6,207		25,095		19,679
Total revenue	$	28,207	$	44,616	$	26,903	$	34,931	$	55,110	$	79,547

Product and service revenue from U.S. government agencies and customers primarily serving the U.S. government totaled approximately $22.0 million for the three months ended March 31, 2014, compared to approximately $38.6 million for the three months ended March 31, 2013. For the three months ended March 31, 2014, revenue in Japan accounted for 25% of total revenue. For the three months ended March 31, 2013, combined revenue in Switzerland and Japan accounted for 32% of total revenue.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Preliminary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q 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,” “estimates,” “projects,” “predicts” and “potential” and similar expressions, but the absence of these words does not mean that a statement is not forward-looking. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, and examples of forward-looking statements include any projections of earnings, revenue or other

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results of operations or financial results; any statements of the plans, strategies, objectives and beliefs of our management; any statements concerning proposed new products, technologies or services; any statements regarding future research and development or co-funding for such efforts; any statements regarding future economic conditions; 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. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Item 1A. Risk Factors in Part II and other sections of this report and our other filings with the U.S. Securities and Exchange Commission, 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.

Overview

We design, develop, manufacture, market and service the high-end of the high-performance computing, or HPC, market, primarily categories of systems commonly known as supercomputers, and provide storage and analytics solutions, software, system maintenance and support services and engineering services related to supercomputer systems to our customers, which include government agencies, government-funded entities, academic institutions and commercial entities. Our key target markets are the supercomputing portion of the HPC market and the “big data” (including storage and analytics) market. We provide customer-focused solutions based on two models. Firstly, we provide highly integrated supercomputing, storage and data analytics solutions, complete with highly tuned software, that stress capability, scalability, sustained performance and reliability at scale. Secondly, we provide 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. All of our solutions also emphasize total cost of ownership, scalable performance and data center flexibility as key features. Our current strategy is to gain market share in the supercomputer market segment, extend our technology leadership, maintain our focus on execution and profitability and grow by continuing to expand our addressable market in areas where we can leverage our experience and technology, such as in high performance storage systems and powerful analytic tools on large volumes of data, popularly referred to as “big data”.

Summary of First Three Months of 2014 Results

Total revenue decreased $24.4 million for the first three months of 2014 compared to the first three months of 2013, from $79.5 million to $55.1 million, due to lower product revenue. The decrease in product revenue of $29.9 million was primarily attributable to a lower volume of Supercomputing and Storage and Data Management acceptances in the three months ended March 31, 2014 as compared to the first three months of 2013 during which we recognized revenue from multiple product acceptances of systems sold during 2012. Our product revenue is subject to significant quarter-to-quarter fluctuations and can be concentrated in particular quarters, often the fourth quarter. It is dependent on factors such as the timing of new product releases, planned customer acceptances, and the availability of certain key components, among other factors.

Net loss for the first three months of 2014 was $12.9 million compared to net loss of $7.6 million for the same period in 2013. The increase in net loss was primarily attributable to a decrease in gross profit of $6.2 million due to lower revenue and an increase in operating expenses of $3.0 million, due to increased investments in research and development, primarily for our big data solutions. The impact of these items was partially offset by an increase in income tax benefit of $4.5 million for the three months ended March 31, 2014 compared to the prior year period.

Net cash provided by operating activities was $61.0 million for the first three months of 2014 compared to net cash used in operating activities of $71.7 million for the first three months of 2013. Cash provided by operating activities in the first three months of 2014 was primarily driven by a decrease in accounts receivable of $123.8 million, offset by an increase in inventory of $23.1 million, and an increase in investments of $43.7 million.

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 per-core performance increases slows;

• Data needs growing much faster than computational needs;

• Technology innovations in storage allowing for faster data access such as NVRAM and SSDs;

• The commoditization of HPC hardware, particularly processors and interconnect systems;

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• Electrical power requirements becoming a design constraint and driver in total cost of ownership determinations;

• Increasing use of analytics technologies (Hadoop, NoSQL and Graph) in both the HPC and big data markets;

• The growing commoditization of software, including plentiful building blocks and more capable open source software; and

• Cloud computing for cost-effective computing on loosely-coupled HPC applications.

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, low cost, 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 often the dominant factor in HPC procurements. Vendors of such systems often put pricing pressure on us in competitive procurements.

In the market for the largest, and most scalable systems, those often costing significantly 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 capability. With the arrival of increasing processor core counts due to new many-core processors, these unbalanced systems will typically have even lower productivity, especially in larger systems running more complex applications. We 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 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 and customer base, the Cray brand and industry trends by introducing complementary products and services to new and existing customers, as demonstrated by our emphasis on strategic initiatives, such as storage and data management and “big data” analytics.

In storage, we are developing and delivering high value products for the high performance storage and data archiving markets.

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 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, while delivering unmatched time-to-solution and advanced capabilities, a key driver for many of our data analytics customers.

We have also expanded our addressable market with the acquisition of Appro International Inc., or Appro in November 2012. Appro, now operated as Cray Cluster Solutions provides cluster systems and solutions to the supercomputing market that allows us to offer a flexible platform 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 Form 10-Q or in our 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 product shipments, installations and acceptances in order to forecast revenue and cash receipts; longer-term, we monitor the status of the pipeline of product sales opportunities and product development cycles. We believe product revenue growth over several quarters is an indicator of whether we are achieving our objective of increased market share in the supercomputing market. The introduction of the Cray XC30 and Cray CS300 products, along with longer-term product roadmap are efforts to increase product revenue. We are also increasing our business and product development efforts in storage and data management and big data analytics. Maintenance service revenue is more constant in the short term and assists, in part, to offset the impact that the variability in product revenue has on total revenue.

Gross profit margin.  Our product gross profit margin decreased from 24% for the three months ended March 31, 2013 to 20% during the same period in 2014. The decrease was in part due to a higher portion of product revenue being derived from

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our CS300 products, which generally carry a lower gross profit margin. Service gross profit margin decreased from 50% for the three months ended March 31, 2013 to 47% for the same period in 2014.

Operating expenses.    Our operating expenses are driven largely by headcount, contracted third-party research and development services, and incentive compensation expense. As part of our ongoing expense control efforts, we continue to monitor headcount levels in specific geographic and operational areas. Operating costs increased as we made significant investments in research and development and sales and marketing to support our recent growth and position ourselves for growth in the future.

Liquidity and cash flows.   Due to the variability in product revenue, new contracts, 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 and acceptances and, longer-term, in product development.

Results of Operations

Our revenue, results of operations and cash balances are likely to fluctuate significantly from quarter-to-quarter. These fluctuations are due to such factors as the high average sales prices and limited number of sales of our products with variable gross margin levels, the timing of purchase orders and product deliveries, the revenue recognition accounting policy of generally not recognizing product revenue until customer acceptance and other contractual provisions have been fulfilled, the timing of payments for product sales, maintenance services, government research and development funding, the impact of the timing of new products on customer orders, and purchases of inventory during periods of inventory build-up. As a result of these factors, revenue, gross margin, expenses, cash and inventory are expected to vary significantly from quarter-to-quarter and year-to-year.

Revenue and Gross Profit Margins

Our revenue, cost of revenue and gross profit margin for the three months ended March 31, 2014 and 2013, respectively, were (in thousands, except for percentages):

	Three Months Ended March 31,
	2014			2013
Product revenue	$	30,015		$	59,868
Less: Cost of product revenue	23,972			45,570
Product gross profit	$	6,043		$	14,298
Product gross profit margin	20		%	24		%
Service revenue	$	25,095		$	19,679
Less: Cost of service revenue	13,201			9,827
Service gross profit	$	11,894		$	9,852
Service gross profit margin	47		%	50		%
Total revenue	$	55,110		$	79,547
Less: Total cost of revenue	37,173			55,397
Total gross profit	$	17,937		$	24,150
Total gross profit margin	33		%	30		%

Product Revenue

Product revenue of $30.0 million and $59.9 million for the three months ended March 31, 2014 and 2013, respectively, was primarily from sales of the Cray XC30, Cray CS300 and Sonexion storage systems. Product revenue for the three months ended March 31, 2014 was lower than the prior year period primarily due to a lower volume of Supercomputing and Storage and Data Management acceptances in the three months ended March 31, 2014 as compared to the first three months of 2013, during which we recognized revenue from multiple product acceptances of systems sold during 2012.

Service Revenue

Service revenue for three months ended March 31, 2014 was $25.1 million compared to $19.7 million for the same period in 2013. The increase in service revenue was primarily due to higher maintenance revenue from our larger installed system base.

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Cost of Product Revenue and Product Gross Profit

Cost of product revenue decreased by $21.6 million, for the three months ended March 31, 2014 compared to the same period in 2013. For the three months ended March 31, 2014, product gross profit margin decreased 4% points to 20% from the same period in 2013. The decrease is due in part to a higher portion of product revenue being derived from our CS300 products, which generally carry a lower gross profit margin. Product gross profit margins in any one period may not be indicative of future results as product gross profit margins can vary significantly between contracts for many reasons.

Cost of Service Revenue and Service Gross Profit

For the three months ended March 31, 2014, cost of service revenue increased $3.4 million due to higher service revenue. Service gross profit margin decreased by 3% points to 47% compared to the same period in 2013.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2014 and 2013, respectively, were (in thousands, except for percentages):

	Three Months Ended March 31,
	2014			2013
Gross research and development expenses	$	25,078		$	20,980
Less: Amounts included in cost of revenue	(1,457		)	(754		)
Less: Reimbursed research and development (excludes amounts in cost of revenue)	(1,000		)	—
Net research and development expenses	$	22,621		$	20,226
Percentage of total revenue	41		%	25		%

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 outside contracted engineering expenses.

For the three months ended March 31, 2014, gross research and development expenses increased $4.1 million compared to the same period in 2013. These increases in our gross research and development expenses were due to increased research and development spending for our new products.

Net research and development expenses increased by $2.4 million for the three months ended March 31, 2014 compared to the same period in 2013. These increases were due to higher gross research and development expenses, offset in part by increased reimbursed research and development expenses and amounts included in cost of revenue. These expenses increased as a percentage of revenue due to the reduced acceptances in the current quarter as compared with 2013.

Sales and Marketing and General and Administrative Expenses

Our sales and marketing and general and administrative expenses for the three months ended March 31, 2014 and 2013, respectively, were (in thousands, except for percentages):

	Three Months Ended March 31,
	2014			2013
Sales and marketing	$	11,776		$	11,143
Percentage of total revenue	21		%	14		%
General and administrative	$	5,413		$	5,485
Percentage of total revenue	10		%	7		%

Sales and Marketing. Sales and marketing expense for the three months ended March 31, 2014 increased $0.6 million from the same period in 2013, primarily due to an increase in salaries and employee-related expenses in connection with the expansion of our sales force. These expenses increased as a percentage of revenue due to the reduced acceptances in the current quarter as compared with 2013.

General and Administrative. General and administrative expense for the three months ended March 31, 2014 were in line with the prior year comparative period as increased compensation expense was offset by lower expense from outside services.

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These expenses increased as a percentage of revenue due to the reduced acceptances in the current quarter as compared with 2013.

Other Expense, net

For the three months ended March 31, 2014, we recognized net other expense of $0.6 million compared to net other expense of $0.3 million for the same period in 2013. Net other expense for the three months ended March 31, 2014 and 2013 was principally the result of foreign currency transaction gains and losses.

Interest Income, net

Our interest income and interest expense for the three months ended March 31, 2014 and 2013, respectively, were (in thousands):

	Three Months Ended March 31,
	2014			2013
Interest income	$	71		$	385
Interest expense	(10		)	(9		)
Interest income, net	$	61		$	376

Interest income, net for the three months ended March 31, 2014 decreased as compared to the same periods in 2013 due to lower average invested balances.

Taxes

Our effective tax rates were approximately 42% and 40% for the three months ended March 31, 2014 and 2013, respectively. Our effective tax rates for the three months ended March 31, 2014 and 2013 were higher than the U.S. federal statutory rate primarily as a result of state taxes.

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. The material changes in certain of our balance sheet accounts were due to the timing of product deliveries, customer acceptances, contractually determined billings and cash collections. Working capital requirements, including inventory purchases and normal capital expenditures, are generally funded with cash from operations.

Cash and cash equivalents decreased by $4.9 million from December 31, 2013 to March 31, 2014. The decrease was in part attributable to an increase in restricted cash of $19.4 million, investments of $43.7 million, inventory of $23.1 million, and payment of the 2013 accrued incentive compensation expense, which resulted in a decrease in accrued payroll and related expenses of $12.1 million. This was offset by a decrease in accounts and other receivables from $182.5 million at December 31, 2013 to $58.8 million at March 31, 2014.

As of March 31, 2014, we had working capital of $314.9 million compared to $334.9 million as of December 31, 2013. During the three months ended March 31, 2014, we invested $52.7 million in debt securities and had a total of $57.7 million in debt security investments as of March 31, 2014.

Cash flow information included the following (in thousands):

	Three Months Ended March 31,
	2014			2013
Cash provided by (used in):
Operating Activities	$	61,011		$	(71,728	)
Investing Activities	$	(66,665	)	$	(16,806	)
Financing Activities	$	702		$	1,143

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2014 was $61.0 million compared to $71.7 million net cash used in operating activities for the same period in 2013. Cash provided by operating

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activities in the first three months of 2014 was primarily driven by a decrease in accounts receivable of $123.8 million, offset by an increase in inventory of $23.1 million, an increase in prepaid expenses and other current assets of $10.7 million and payment of the 2013 accrued incentive compensation expense, which resulted in a decrease in accrued payroll and related expenses of $12.1 million. For the three months ended March 31, 2013, cash used in operating activities was principally the result of fewer collections from customers as the majority of the payments associated with product acceptances in the fourth quarter of 2012 were collected in that period and the payment of the 2012 accrued incentive compensation expense.

Investing Activities. Net cash used in investing activities was $66.7 million for the three months ended March 31, 2014, compared to $16.8 million net cash used in investing activities for the same 2013 period. Net cash used in investing activities for the three months ended March 31, 2014 was due principally to purchases of debt securities of $52.7 million and an increase in restricted cash of $19.4 million, partially offset by sales and maturities of debt securities of $9.0 million. For the three months ended March 31, 2013, net cash used in investing activities was due principally to purchases of debt securities of $14.9 million.

Financing Activities. Net cash provided by financing activities for the three months ended March 31, 2014 and 2013 was $0.7 million and $1.1 million, respectively. Net cash provided by financing activities for both periods resulted primarily from 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, offset by statutory tax withholding amounts made in exchange for the forfeiture of common stock by holders of vesting restricted stock awards.

In addition, we lease certain equipment and facilities used in our operations under operating leases in the normal course of business and have contractual commitments under certain development arrangements. The following table summarizes our contractual obligations as of March 31, 2014 (in thousands):

	Amounts Committed by Year
Contractual Obligations	Total		2014 (Less  than 1 Year)		2015-2016		2017-2018		Thereafter
Development agreements	$	4,240	$	3,998	$	242	$	—	$	—
Operating leases	18,670		3,546		8,184		4,797		2,143
Total contractual cash obligations	$	22,910	$	7,544	$	8,426	$	4,797	$	2,143

As of March 31, 2014, we had a $10.0 million unsecured line of credit with Wells Fargo Bank, National Association. This facility has a maturity date of October 15, 2014. As of March 31, 2014, we also had a $10.0 million letter of credit facility with Silicon Valley Bank. The Silicon Valley Bank facility is unsecured and may be used only to support the issuance of letters of credit. This facility has a maturity date of October 17, 2014. We have made no draws and had no outstanding borrowings on any credit facilities as of March 31, 2014.

As of March 31, 2014, we had $33.2 million in restricted cash associated with certain letters of credit outstanding to secure customer prepayments.

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 three months ended March 31, 2014, we incurred $3.5 million for such arrangements.

At any particular time, our cash position is affected by the timing of cash receipts for product sales, maintenance contracts, government co-funding for research and development activities and our payments for inventory, resulting in significant fluctuations in our cash balance from quarter-to-quarter and within a quarter. Our principal sources of liquidity are our cash and cash equivalents, short-term investments and cash from operations. We expect our cash resources to be adequate for at least the next twelve months.

Critical Accounting Policies and Estimates

This discussion, as well as disclosures included elsewhere in this quarterly report on Form 10-Q, are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these 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. Our significant accounting policies are set forth in Note 2 to the Consolidated Financial Statements included in our 2013 Annual Report on Form 10-K and

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should be reviewed in conjunction with the accompanying Condensed Consolidated Financial Statements and notes thereto as of March 31, 2014 in this quarterly report on Form 10-Q, as they are integral to understanding our results of operations and financial condition in this interim period. 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 fair value and selling price determination used in revenue recognition, percentage of completion accounting, estimates of proportional performance on co- funded engineering contracts and prepaid engineering services, assessments of substantive nature of milestone payments, realization of accounts receivable, determination of inventory at the lower of cost or market, useful lives for depreciation and amortization, determination of future cash flows associated with impairment testing of long-lived assets, determination of the fair value of stock options and other assessments of fair value, realization of deferred income tax assets, including our ability to utilize such assets, potential income tax assessments 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 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, risk of loss has transferred to the customer, and, where applicable, a customer acceptance has been obtained, where applicable. 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 Condensed 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. Product 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 in situations 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 contain a

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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 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

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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 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 have additional expense 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 may 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.

As of March 31, 2014, we had approximately $114.5 million of net deferred tax assets, against which we provided a $76.3 million valuation allowance. We continue to provide a partial valuation allowance against our U.S. deferred tax assets and a full valuation allowance against our deferred tax assets in a limited number of foreign jurisdictions as the realization of such assets is not considered to be more likely than not. Our conclusion about the realizability of our deferred tax assets, and therefore the appropriateness of a valuation allowance, is reviewed quarterly. If our conclusion about the realizability of our deferred tax assets changes in a future period, we could record a substantial tax provision or benefit in our Condensed Consolidated Statements of Operations when that occurs.

Estimated interest and penalties are recorded as components of interest expense and other expenses, respectively.

Research and Development Expenses

Research and development expenses include costs incurred in the development and production of our hardware and software, costs incurred to enhance and support existing product features, costs incurred to support and improve our development processes, and costs related to future product development. Research and development costs are expensed as incurred, and may be offset by co-funding from third parties. We may also enter into arrangements whereby we make advance, non-refundable payments to a vendor to perform certain research and development services. These payments are deferred and recognized over the vendor’s estimated performance period.

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

We do not record a receivable from the U.S. government prior to completing the requirements necessary to bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget restrictions and milestones may be subject to completion risk, and as a result, there may be periods in which research and development costs are expensed as incurred for which no reimbursement is recorded, as milestones have not been completed or the U.S. government has not funded an agreement. Accordingly, there can be substantial variability in the amount of net research and development expenses from quarter to quarter and year to year.

We classify amounts to be received from funded research and development projects as either revenue or a reduction to research and development expense based on the specific facts and circumstances of the contractual arrangement, considering total costs expected to be incurred compared to total expected funding and the nature of the research and development

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contractual arrangement. In the event that a particular arrangement is determined to represent revenue, the corresponding research and development costs are classified as cost of revenue.

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 shares to executives as one of the ways to align compensation with shareholder interests. Vesting of these awards is contingent upon achievement of certain performance conditions. Compensation expense for these awards is only recorded when vesting is deemed to be probable.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates and foreign currency fluctuations.

Interest Rate Risk: We invest our available cash principally in highly liquid investment-grade debt instruments of corporate issuers and in debt instruments of the U.S. government and its agencies. We do not have any derivative instruments in our investment portfolio. We protect and preserve invested funds by limiting default, liquidity, market and reinvestment risk.

Foreign Currency Risk: We sell our products primarily in North America, Asia and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Our products are generally priced in U.S. dollars, and a strengthening of the dollar could make our products less competitive in foreign markets. While we commonly sell products with payments in U.S. dollars, our product sales contracts may call for payment in foreign currencies and to the extent we do so, or engage with our foreign subsidiaries in transactions deemed to be short-term in nature, we are subject to foreign currency exchange risks. As of March 31, 2014, we were a party to forward exchange contracts that hedged approximately $127.8 million of anticipated cash receipts on specific foreign currency denominated sales contracts. These forward contracts hedge the risk of foreign exchange rate changes between the time that the related contract was signed and when the cash receipts are expected to be received. Our foreign maintenance contracts are typically paid in local currencies and provide a 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. As of March 31, 2014, a 10% change in foreign exchange rates could impact our annual earnings and cash flows by approximately $2.1 million.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this quarterly report. Based on this evaluation, our chief executive officer and chief financial officer concluded as of March 31, 2014 that our disclosure controls and procedures were effective such that the information required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Limitations on effectiveness of control. Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A

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control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

Part II. OTHER INFORMATION

Item 1A. Risk Factors

You should carefully consider the risks described below together with all of the other information in this quarterly report on Form 10-Q and in our 2013 annual report on Form 10-K. If any of these risks actually occur, our business, financial condition or operating results could be materially adversely affected and the trading price of our common stock could decline.

Our operating results fluctuate significantly and we may not achieve profitability in any given period. Our operating results are subject to significant fluctuations which make predicting revenue and operating results for any specific period very difficult, particularly because a material portion of product revenue recognized in any given quarter or year typically depends on a very limited number of system sales expected for that quarter or year and the product revenue generally depends on the timing of product acceptances by customers and contractual provisions affecting revenue recognition. Delays in achieving customer acceptances of installed systems and recognizing revenue from a product transaction or transactions due to development or product delivery delays, not receiving needed components timely or with anticipated quality and performance, inability of a system to meet performance requirements or targets, contractual provisions or for other reasons, could have a material adverse effect on our operating results in any specific quarter or year, and could shift associated revenue, gross profit and cash receipts from one quarter to another, or even from one year to another in the case of revenue expected to be realized in the fourth quarter of any year. In addition, because our revenue can be concentrated in particular quarters, often the fourth quarter, rather than evenly spread throughout a year, we generally do not expect to sustain profitability over successive quarters even if we are profitable for the year.

Although we have recorded positive annual net income since 2010, we experienced net losses in earlier periods and, prior to 2010, had last recorded positive annual net income in 2003. Net income may fluctuate significantly as a result of many factors, including as a result of significant investments we may make to grow our business even though the benefits of those investments may not be realized when expected or at all.

Whether we will be able to increase our revenue and achieve and sustain profitability on a quarterly and annual basis depends on a number of factors, including:

• our ability to secure sufficient orders for our Cray XC30 and CS300 systems as well as upgrades and successor systems;

• successfully delivering and obtaining customer acceptances of our Cray XC30 and CS300 systems;

• our ability to successfully generate revenue and profitability from opportunities developed from our YarcData and storage and data management businesses;

• our ability to scale our internal processes effectively to enable growth;

• 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 acceptances by customers and contractual provisions affecting the timing and amount of revenue recognition;

• revenue delays or losses due to customers postponing purchases to wait for future upgraded or new systems, delays in delivery of upgraded or new systems, longer than expected customer acceptance cycles or penalties resulting from system acceptance issues;

• our expense levels, including research and development expense net of government funding;

• our ability to successfully and timely design, integrate and secure competitive processors for our Cray XC30 and CS300 systems and upgrades and successors systems;

• the level of product gross profit contribution in any given period due to volume or product mix, particularly with the introduction of flexible commodity-based supercomputers, competitive factors, strategic transactions, product life cycle, currency fluctuations, acceptance penalties and component costs;

• the competitiveness of our products and prices;

• our ability to secure additional government funding for future development projects;

• maintaining our product development projects on schedule and within budgetary limitations;

• the level and timing of maintenance contract renewals with existing customers; and

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• the terms and conditions of sale or lease for our products and services.

The receipt of orders and the timing of shipments and acceptances impact our quarterly and annual results, including cash flows, and are affected by events outside our control, such as:

• the timely availability of acceptable or customer committed components, including, but not limited to, processors, in sufficient quantities to meet customer delivery schedules at a competitive cost;

• the timing and level of government funding and resources available for product acquisitions and research and development contracts, which has been, and may continue to be, adversely affected by the current economic and fiscal uncertainties, increased governmental budgetary limitations and disruptions in the operations of the U.S. government;

• the introduction or announcement of competitive or key industry supplier products;

• competitor pricing strategies;

• price fluctuations in the processors and other commodity electronics and memory markets;

• general economic trends, including changes in levels of customer capital spending;

• the availability of adequate customer facilities to install and operate new Cray systems; and

• currency fluctuations, international conflicts or economic crises, including the ongoing economic challenges in the United States, Japan and Europe.

Because of the numerous factors affecting our revenue and results of operations, we may not achieve profitability on a quarterly or annual basis in the future. We anticipate that our quarterly results will fluctuate significantly, and include losses, even in years where we expect or achieve positive annual net income. Delays in third-party component availability, product development, receipt of orders, or product acceptances, the level and timing of approved government fiscal budgets, issues with third-party component performance, reductions in outside funding for our research and development efforts and achieving contractual development milestones have had a substantial adverse effect on our past results and could continue to have such an effect on our results in 2014 and in future years.

If we are unable to successfully develop, sell and deliver our Cray XC30 systems and successor systems, and recognize revenue for these systems, our operating results will be adversely affected. We expect that a substantial portion of our revenue in the foreseeable future will come from acceptances of delivered Cray XC30 systems and successor systems, including systems integrating future processors and accelerators. The development effort related to these systems are lengthy and technically challenging processes, and require a significant investment of capital, engineering and other resources often years ahead of the time when we can be assured that they will result in competitive products. We may invest significant resources in alternatives that prove ultimately unfruitful. Unanticipated performance and/or development issues may require more engineers, time or testing resources than are currently available. Given the breadth of our engineering challenges, changes in the market and technology and our limited engineering and technical personnel resources, we periodically review the anticipated contributions and expense of our product programs to determine their long-term viability, and we may substantially modify or terminate one or more development programs. We may not be successful in meeting our development schedules for technical reasons and/or because of insufficient engineering resources, which could result in an uncompetitive product or cause a lack of confidence in our capabilities among our key customers. To the extent that we incur delays in completing the design, development and production of hardware components, delays in development of requisite system software, cancellation of programs due to technical or economic infeasibility or investment in unproductive development efforts, our revenue, results of operations and cash flows, and the reputation of such systems in the market, could be adversely affected.

In addition, many factors affect our ability to successfully sell and recognize revenue for these systems, including the following:

• the level of product differentiation in our Cray XC30 systems and successor systems. We need to compete successfully against HPC systems from both, large established companies and smaller companies and demonstrate the value of our balanced high bandwidth systems;

• 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 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 completing development of new products when we must estimate future system performance, such as has been required with our Cray XC30, Cray XE6 and Cray XK7 systems and will be required for subsequent systems;

• our ability to source competitive, key components in appropriate quantities, in a timely fashion and on acceptable terms and conditions and that meet the performance criteria required. If we underestimated our needs, we could

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limit the number of possible sales of these products and reduce potential revenue, or if we overestimated, we could incur inventory obsolescence charges and reduce our gross profit, as has happened in the past; and

• whether potential customers delay purchases of our products because they decide to wait for successor systems or upgrades that we have announced or they believe will be available in the future.

Failure to successfully develop and sell our Cray XC30 systems and successor systems into the supercomputing market and recognize revenue for such systems will adversely affect our operating results.

If our current and future growth initiatives targeting markets outside of our traditional markets, primarily our big data analytics and storage and data management opportunities, are not successful, our ability to grow our revenues and achieve and sustain profitability will be adversely affected. Our ability to materially grow our revenues and achieve and sustain profitability will be adversely affected if we are unable to generate sufficient revenue from growth initiatives targeting markets outside of our traditional market, particularly if those market segments do not grow significantly. We are currently focusing on big data analytics and storage and data management opportunities. To grow our revenue from new opportunities outside our primary market, we must compete successfully with many established companies and new entrants in these markets, continue to win awards for new contracts, timely perform on existing contracts, develop our capability for broader market sales and business development and successfully develop and introduce new solution-oriented offerings, notwithstanding that these are relatively new businesses for us and we do not have significant experience targeting these markets. These big data analytics and storage and data management opportunities require significant monetary investments ahead of revenue, including product development efforts, adding experienced personnel and initiating new marketing and sales efforts and therefore may reduce net income in the short term even if successful.

If our Cray Cluster Solutions business is not successful, our operating results will be adversely affected. Our Cray Cluster Solutions business is the result of our acquisition of Appro International, Inc., or Appro, in the fourth quarter of 2012. We have had limited experience selling a cluster-based solution into the same markets we sell our core supercomputers, and for this business to be successful we must successfully do so without impairing our ability to sell tightly-integrated solutions, such as our Cray XC products.

We completed the acquisition of Appro in the fourth quarter of 2012, and may make acquisitions in the future, which could require significant management attention, disrupt our business, result in dilution to our stockholders, deplete our cash reserves and adversely affect our financial results. Acquisitions involve numerous risks, including the following:

• difficulties in successfully integrating the operations, systems, technologies, products, offerings and personnel of the acquired company or companies;

• insufficient revenue to offset increased expenses associated with acquisitions;

• 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;

• potential difficulties in completing projects associated with in-process research and development intangibles;

• difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

• initial dependence on unfamiliar supply chains or relatively small supply partners; and

• the potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans.

Acquisitions may also cause us to:

• use a substantial portion of our cash reserves or incur debt;

• issue equity securities or grant equity incentives to acquired employees that would dilute our current shareholders’ percentage ownership;

• assume liabilities, including potentially unknown liabilities;

• record goodwill and nonamortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges;

• incur amortization expenses related to certain intangible assets;

• incur large and immediate write-offs and restructuring and other related expenses; or

• become subject to intellectual property or other litigation.

Acquisitions of high-technology companies and assets are inherently risky and subject to many factors outside of our control, and no assurance can be given that our recently completed or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.

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If the U.S. government and other governments purchase, or fund the purchase of, fewer supercomputers or delay such purchases, our revenue would be reduced and our operating results would be adversely affected. Historically, sales to the U.S. government and customers primarily serving the U.S. government have represented the largest single market segment for supercomputer sales worldwide, including our products and services. In 2011, 2012, 2013 and the first three months of 2014, approximately 54%, 68%, 51% and 40%, respectively, of our revenue was derived from such sales. Our plans for the foreseeable future contemplate significant sales to U.S. government agencies and customers primarily serving the U.S. government. Sales to government agencies and customers primarily serving the U.S. government, including further sales pursuant to existing contracts, have been, and may continue to be, adversely affected by factors outside our control, such as by:

• Congressional failures or successes in addressing budget concerns, current economic uncertainty;

• disruptions in the operations of the U.S. government;

• "sequestration;”

• the downgrading of U.S. government debt or the possibility of such action;

• the political climate in the U.S. focusing on cutting or limiting budgets and their effect on government budgets;

• the limits on federal borrowing capacity;

• changes in procurement policies;

• budgetary considerations including Congressional delays in completing appropriation bills as occurred in 2011, 2012, and 2013;

• domestic crises;

• political efforts to limit the activities of the National Security Agency, or NSA; including proposed state legislation that would limit or even criminalize doing business with the NSA for certain companies doing business with state governments; and

• international political developments, such as the downgrading of European debt.

If agencies and departments of the United States or other governments were to stop, reduce or delay their use and purchases of supercomputers, our revenue and operating results would be adversely affected.

Our reliance on third-party suppliers poses significant risks to our operating results, business and prospects. We rely upon third-party vendors to supply processors for most of the products we sell and use service providers to co-develop key technologies. We subcontract the manufacture of a majority of the hardware components for our high-end products, including integrated circuits, printed circuit boards, memory parts, connectors, cables and power supplies, on a sole or limited source basis to third-party suppliers. We use contract manufacturers to assemble certain important components for all of our systems. We also rely on third parties to supply key software and hardware capabilities, such as file systems, solution-specific servers and storage subsystems, and in the case of our Sonexion products, we rely on third-party original equipment manufacturers to supply complete storage systems. Because specific components must be designed into our systems well in advance of initial deliveries of those systems, we are particularly reliant on our processor vendors to deliver on the capabilities and pricing expected at the time we design key elements of the system. We are subject to substantial risks because of our reliance on these and other limited or sole source suppliers, including the following risks:

• if a supplier does not provide components or systems that meet our specifications in sufficient quantities and with acceptable 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 penalties even once delivered and accepted, which has happened during 2011, 2012, 2013 and 2014 and has at times significantly lowered our revenue for a particular quarter or year;

• 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, 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 of a component is subject to a claim that the component infringes a third-party’s intellectual property rights, as has happened with one of our suppliers, our ability to obtain necessary components could be adversely affected or our cost to obtain such components could increase significantly;

• 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;

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• if a supplier provides us with hardware or software that contains bugs or other errors or is different from what we expected, as is occurring with a key component, 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

• if a key supplier is acquired or has a significant business change, such as may occur with the proposed acquisition of the third-party original equipment manufacturers that supplies complete storage systems for our Sonexion product, 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.

Certain delays in the availability of acceptable components, including processors and memory parts, and increases in order lead times for certain components, adversely affected our revenue and operating results in prior periods, in some cases significantly and including in 2011, 2012 and 2013, and could adversely affect future results.

If we are unable to compete successfully in the highly competitive HPC market, our business will not be successful. The market for HPC systems is very competitive. An increase in competitive pressures in our market or our failure to compete effectively may result in pricing reductions, reduced gross margins and loss of market share and revenue. Many of our competitors are established companies well known in the HPC market, including IBM, NEC, Hewlett-Packard, Fujitsu, Hitachi, Silicon Graphics International, and Bull S.A. Most of these competitors have substantially greater research, engineering, manufacturing, marketing and financial resources than we do.

We also compete with systems builders and resellers of systems that are constructed from commodity components using processors manufactured by Intel, AMD, ARM and others. These competitors include the companies named above and Dell, with IBM using both third-party processors and its own proprietary processors, as well as smaller companies that benefit from the low research and development costs needed to assemble systems from commercially available commodity products. Such companies, because they can offer high peak performance per dollar, can put pricing pressure on us in certain competitive procurements. In addition, to the extent that Intel, IBM and other processor suppliers develop processors with greater capabilities or at a lower cost than the processors we currently use, our Cray XC systems may be at a competitive disadvantage to systems utilizing such other processors until we can design in, integrate and secure competitive processors, if at all.

Our growth initiatives in the big data analytics and storage and data management markets must also compete successfully with many established companies and new entrants, many of whom have significantly greater resources and brand recognition in these markets than we do.

Periodic announcements by our competitors of new HPC, storage or data analytics systems or plans for future systems and price adjustments may reduce customer demand for our products. Many of our potential customers already own or lease high performance computer, storage or data analytics systems. Some of our competitors may offer substantial discounts to potential customers. We have in the past and may again be required to provide substantial discounts to make strategic sales, which may reduce or eliminate any gross profit on such transactions, or to provide lease financing for our products, which could result in a deferral of our receipt of cash and revenue for these systems. These developments limit our revenue and financial resources and reduce our ability to be profitable and grow.

If we cannot retain, attract and motivate key personnel, we may be unable to effectively implement our business plan. Our success depends in large part upon our ability to retain, attract and motivate highly skilled management, development, marketing, sales and service personnel. The loss of and failure to replace key engineering management and personnel could adversely affect multiple development efforts. Recruitment and retention of senior management and skilled technical, sales and other personnel is very competitive, and we may not be successful in either attracting or retaining such personnel. From time to time, including recently, we have lost key personnel to other high technology companies, and many larger companies with significantly greater resources than we do have aggressively recruited, and continue to aggressively recruit, key personnel. As part of our strategy to attract and retain key personnel, we may offer equity compensation through stock options and restricted stock grants. Potential employees, however, may not perceive our equity incentives as attractive enough. In addition, due to the intense competition for qualified employees, we may be required to and have had to increase the level of compensation paid to existing and new employees, which could materially increase our operating expenses, particularly in the case of personnel associated with our big data efforts.

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The continuing commoditization of HPC hardware and software has resulted in pricing pressure and may adversely affect our operating results. The continuing commoditization of HPC hardware, such as processors, interconnects, storage and other infrastructure, and the growing commoditization of software, including plentiful building blocks and more capable open source software, as well as the potential for integration of differentiated technology into already-commoditized components, has resulted in, and may result in pricing pressure that may cause us to reduce our pricing in order to remain competitive, which can negatively impact our gross margins and adversely affect our operating results.

We may not realize the anticipated benefits, or minimize the possible risks, of the sale of certain interconnect hardware assets to Intel Corporation, which could alter the revenue, costs and nature of our business. In connection with our sale of certain interconnect hardware assets to Intel, we conducted business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the intended advantages of the transaction. Additionally, the transfer of certain of our employees and technologies to Intel may result in unforeseen operating difficulties and expenditures and could involve a number of potential adverse risks to our business, including the following:

• harm to our ability to compete in relevant markets or in customer perception of our products;

• unanticipated costs or adverse tax consequences;

• exposure to potential liabilities to third parties or Intel, or claims for indemnification by Intel, including with respect to third-party litigation matters;

• failure to successfully further develop our current products or disruption to our current or future product roadmaps and ongoing business;

• delays and difficulties in receiving key components for our products from suppliers, including Intel;

• loss of customers, vendors or alliances; and

• failure to create shareholder value with the additional cash resources.

If we fail to realize the expected benefits from the transaction, or to minimize the expected risks of the transaction, whether as a result of unidentified risks or other unforeseen events, our business, results of operations and financial condition could be adversely affected.

Customers and other third parties may make statements speculating about or announcing an intention to complete purchases or acceptances of our products before such purchases or acceptances are substantially certain, and these proposed purchases or acceptances may not be completed when or as expected, if at all. From time to time, customers and other third parties may make statements speculating about or announcing a potential purchase of our products before we have obtained an order for such purchases or completed negotiations and signed a contract for the purchase of such products. In some instances, government and government-funded customers may announce possible purchases even before they have obtained the necessary budget to procure the products. As a result, these statements or announcements do not mean that we will ultimately be able to secure the sale when or as expected or at all as it is not certain that the contract or order negotiations will be completed successfully or as expected or that the customer will be able to obtain the budget they hope for or expect. In addition, from time to time, customers and other third parties may make statements speculating about or announcing the completion of an acceptance process of a delivery system before such acceptance is completed or certain. As a result, these statements or announcements do not mean that we will ultimately be able to obtain the acceptance when or as expected or recognize revenue.

We are subject to increasing government regulations and other requirements due to the nature of our business, which may adversely affect our business operations. In 2011, 2012, 2013 and the first three months of 2014, approximately 54%, 68%, 51%, and 40% respectively, of our revenue was derived from the U.S. government or customers primarily serving the U.S. government. In addition to normal business risks, our contracts with the U.S. government are subject to unique risks, some of which are beyond our control. Our contracts with the U.S. government are subject to particular risks, including:

The funding of U.S. government programs is subject to congressional appropriations. Many of the U.S. government programs in which we participate may extend for several years; however, these programs are normally funded annually. Changes in U.S. strategy and priorities may affect our future procurement opportunities and existing programs. Long-term government contracts and related orders are subject to cancellation, or delay, if appropriations for subsequent performance periods are not made. The termination of funding for existing or new U.S. government programs could result in a material adverse effect on our results of operations and financial condition.

The U.S. government may modify, curtail or terminate its contracts with us. The U.S. government may modify, curtail or terminate its contracts and subcontracts with us, without prior notice at its convenience upon payment for work done and commitments made at the time of termination. Modification, curtailment or termination of our major programs or contracts could have a material adverse effect on our results of operations and financial condition.

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Our U.S. government contract costs are subject to audits by U.S. government agencies. U.S. government representatives may audit the costs we incur on our U.S. government contracts, including allocated indirect costs. Such audits could result in adjustments to our contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed must be refunded. If any audit uncovers improper or illegal activities or non-compliance with the terms of a specific contract, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government.

Our business is subject to potential U.S. government inquiries and investigations. We may be subject to U.S. government inquiries and investigations of our business practices due to our participation in government contracts. Any such inquiry or investigation could potentially result in a material adverse effect on our results of operations and financial condition.

Our U.S. government business is also subject to specific procurement regulations and other requirements. These requirements, although customary in U.S. government contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from U.S. government contracting or subcontracting for a period of time and could have a negative effect on our reputation and ability to secure future U.S. government contracts.

U.S. export controls could hinder our ability to make sales to foreign customers and our future prospects. The U.S. government regulates the export of HPC systems such as our products. Occasionally we have experienced delays for up to several months in receiving appropriate approvals necessary for certain sales, which have delayed the shipment of our products. Delay or denial in the granting of any required licenses could make it more difficult to make sales to certain foreign customers, eliminating an important source of potential revenue. Our ability to have certain components manufactured in certain foreign countries for a lower cost has also been adversely affected by export restrictions covering information necessary to allow such foreign manufacturers to manufacture components for us.

Our stock price is volatile. The trading price of our common stock is subject to significant fluctuations in response to many factors, including stock market trends and shareholder profile, our quarterly operating results, changes in analysts’ estimates or our outlook, our capital raising activities, announcements of technological innovations and customer contracts by us or our competitors, a significant aggressive seller or buyer, general economic conditions and conditions in our industry.

We may infringe or be subject to claims that we infringe the intellectual property rights of others. Third parties in the past have asserted, and may in the future assert intellectual property infringement claims against us. As a result of such intellectual property infringement claims, we could be required or otherwise decide that it is appropriate to:

• pay third-party infringement claims;

• discontinue manufacturing, using, or selling particular products subject to infringement claims;

• discontinue using the technology or processes subject to infringement claims;

• develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible; or

• license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms.

Regardless of the merits, any intellectual property infringement claim would require management attention and could be expensive to defend.

We incorporate software licensed from third parties into the operating systems for our products as well as in our tools to design products and any significant interruption in the availability of these third party software products or defects in these products could reduce the demand for our products or cause delay in development. The operating system as well as other software we develop for our supercomputers contains components that are licensed to us under open source software licenses. Our business could be disrupted if this software, or functional equivalents of this software, were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case we would be required to redesign our operating system software to function with alternative third-party software, or develop these components ourselves, which would result in increased costs and could result in delays in product shipments. Our supercomputer systems utilize software system variants that incorporate Linux technology. The open source licenses under which we have obtained certain components of our operating system software may not be enforceable. Any ruling by a court that these licenses are not enforceable, or that Linux-based operating systems, or significant portions of them, may not be copied, modified or distributed as provided in those licenses, would adversely affect our ability to sell our systems. In addition, as a result of concerns about the risks of litigation and open source software generally, we may be forced to protect our customers from potential claims of infringement. In any such event, our financial condition and results of operations may be adversely affected.

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We also incorporate proprietary incidental software from third parties, such as for file systems, job scheduling and storage subsystems. We have experienced some functional issues in the past with implementing such software with our supercomputer systems. In addition, we may not be able to secure needed software systems on acceptable terms, which may make our systems less attractive to potential customers. These issues may result in lost revenue, additional expense by us and/or loss of customer confidence.

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 at the end of each fiscal year, and any adverse results from such future evaluations could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management and a report by our independent registered public accounting firm on our internal control over financial reporting in our annual reports on Form 10-K as to whether we have any material weaknesses in our internal controls over financial reporting. Depending on their nature and severity, any future material weaknesses could result in our having to restate financial statements, could make it difficult or impossible for us to obtain an audit of our annual financial statements or could result in a qualification of any such audit. In such events, we could experience a number of adverse consequences, including our inability to comply with applicable reporting and listing requirements, a loss of market confidence in our publicly available information, delisting from the NASDAQ Global Market, an inability to complete a financing, loss of other financing sources such as our line of credit, and litigation based on the events themselves or their consequences.

We may not be able to protect our proprietary information and rights adequately. We rely on a combination of patent, copyright and trade secret protection, nondisclosure agreements and licensing arrangements to establish, protect and enforce our proprietary information and rights. We have a number of patents and have additional applications pending. There can be no assurance, however, that patents will be issued from the pending applications or that any issued patents will adequately protect those aspects of our technology to which such patents will relate. Despite our efforts to safeguard and maintain our proprietary rights, we cannot be certain that we will succeed in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technologies. The laws of some countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the United States. Additionally, under certain conditions, the U.S. government might obtain non-exclusive rights to certain of our intellectual property. Although we continue to implement protective measures and intend to defend our proprietary rights vigorously, these efforts may not be successful.

We maintain confidential and proprietary information on our computer networks and employ security measures designed to protect this information from unauthorized access. If our security measures are breached, we could lose proprietary data and may suffer economic losses. We maintain confidential information on our computer networks, including information and data that are proprietary to our customers and third parties, as well as to us. Although we have designed and employed and continue to enhance a multitude of security measures to protect this information from unauthorized access, security breaches may occur as a result of third-party action, including computer hackers, employee error, malfeasance or otherwise, that could result in someone obtaining unauthorized access to our customers’ data or our data, including our intellectual property and other confidential business information. Because the techniques employed by hackers to obtain unauthorized access or to sabotage systems change frequently, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in disclosure of our trade secrets or disclosure of confidential customer, supplier or employee data. If this should happen, we could be exposed to potentially significant legal liability, remediation expense, harm to our reputation and other harm to our business.

Provisions of our Restated Articles of Incorporation and Amended and Restated Bylaws could make a proposed acquisition of our business that is not approved by our Board of Directors more difficult. Provisions of our Restated Articles of Incorporation and Amended and Restated Bylaws could make it more difficult for a third party to acquire us. These provisions could limit the price that investors might be willing to pay in the future for our common stock. For example, our Restated Articles of Incorporation and Amended and Restated Bylaws provide for:

• removal of a director only in limited circumstances and only upon the affirmative vote of not less than two-thirds of the shares entitled to vote to elect directors;

• the ability of our Board of Directors to issue up to 5,000,000 shares of preferred stock, without shareholder approval, with rights senior to those of the common stock;

• no cumulative voting of shares;

• the right of shareholders to call a special meeting of the shareholders only upon demand by the holders of not less than 30% of the shares entitled to vote at such a meeting;

• the affirmative vote of not less than two-thirds of the outstanding shares entitled to vote on an amendment, unless the amendment was approved by a majority of our continuing directors, who are defined as directors who have either served as a director since August 31, 1995, or were nominated to be a director by the continuing directors;

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• special voting requirements for mergers and other business combinations, unless the proposed transaction was approved by a majority of continuing directors;

• special procedures to bring matters before our shareholders at our annual shareholders’ meeting; and

• special procedures to nominate members for election to our Board of Directors.

These provisions could delay, defer or prevent a merger, consolidation, takeover or other business transaction between us and a third party that is not approved by our Board of Directors.

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Item 6. Exhibits

Exhibit	Exhibit Description	Incorporated by Reference
		Form	File No.	Filing Date	Exhibit/Annex	Filed Herewith
10.1	2014 Executive Bonus Plan					X
10.2	Offer Letter between the Company and Michael C. Piraino, dated August 31, 2009					X
10.3	Amended and Restated Non-Employee Director Compensation Policy					X
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X

101.INS XBRL Instance Document*

101.SCH XBRL Taxonomy Extension Schema Document*

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB XBRL Taxonomy Extension Label Linkbase Document*

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CRAY INC.
Date:	April 29, 2014	/S/ PETER J. UNGARO
		Peter J. Ungaro
		President and Chief Executive Officer
Date:	April 29, 2014	/S/ BRIAN C. HENRY
		Brian C. Henry
		Executive Vice President and Chief Financial Officer
Date:	April 29, 2014	/S/ CHARLES D. FAIRCHILD
		Charles D. Fairchild
		Vice President, Corporate Controller and Chief Accounting Officer

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EX-10.1

Exhibit 10.1

2014 Executive Bonus Plan

I.Purpose

The purpose of this Plan is to promote the success of the Company by providing to participating executives cash incentives based on achievement of critical strategic, tactical and financial goals.

II.Definitions

Award Setting Deadline - The deadline by which to document Performance Measures for a Participant for a given Performance Period. This deadline shall be the earlier of either: 1) ninety (90) days after commencement of the Performance Period, or 2) the expiration of twenty-five percent (25%) of the Performance Period. Documentation of Performance Measures for Participants hired after January 1, 2014 shall be completed the earlier of either: 1) ninety (90) days after date of hire; or 2) September 30, 2014.

Base Salary - The aggregate gross base annualized salary of a Participant as of September 30th in the year of the Performance Period, but prior to reductions for salary deferred pursuant to any deferred compensation plan or for contributions to a plan qualifying under Code Section 401(k), ESPP contributions, deductions for parking benefits, health insurance or non-cash benefits or perquisites. Notwithstanding the foregoing, Base Salary does not include any actual or imputed income from Company-provided benefits or perquisites.

Bonus Award - The cash payment made pursuant to this Plan for a particular Performance Period. Notwithstanding the Bonus Formula, a Bonus Award may not exceed two-hundred percent (200%) of the Bonus Target.

Bonus Formula - The formula established to determine the Bonus Award, if any, paid to Participant based upon the level of achievement of targeted goals for selected Performance Measures. The formula may differ from Participant to Participant. If targeted goals identify achievement at staged levels, the Bonus Formula may include interpolation between levels above the identified "threshold" level at the discretion of the Committee.

Bonus Target - The Bonus Award that may be paid if one-hundred percent (100%) of Performance Measures are achieved at target during the Performance Period. The Bonus Target shall be equal to a fixed percentage of Participant's Base Salary for such Performance Period, and may not exceed one hundred fifty percent (150%) of a participant's Base Salary.

Code - U.S. Internal Revenue Code of 1986, as amended from time to time.

Company - Cray Inc. and subsidiaries.

Committee - The Compensation Committee of the Company's Board of Directors.

GAAP - U.S. General Accepted Accounting Principles.

Participant - Any Company employee selected by the Committee to participate in the Plan for a given Performance Period. Typically, Participants in this Plan are comprised of the CEO and his/her direct reports.

Performance Measure(s) - Any one or a combination of pre-determined business criteria measured either on an either objective or subjective basis, in each case as specified by the Committee.

Performance Period - Any specific fiscal year or other such period as determined by the Committee.

Performance Target(s) - Specific, objective or subjective goal(s) established by the Committee for each Participant for the Performance Period in respect of any one or more of the Performance Measures.

Ill.Eligibility

The Committee, in its sole discretion, shall select Participants for any Performance Period. Participation in the Plan is at the sole discretion of the Committee, and on a Performance Period by Performance Period basis. A Participant for a given Performance Period is not guaranteed to be selected for participation in any subsequent Performance Period. Any change of in reporting responsibilities to a level below that at the time selected for participation in the Plan or move to part time subsequent to being designated a Participant shall disqualify such Participant from participation in the Plan except to the extent set forth below or as determined otherwise by the Committee in its sole discretion.

IV.    Administration

1. Administrator - This Plan shall be administered by the Committee in accordance with Plan provisions.

2. Authority - The Committee shall have all powers and discretion necessary or appropriate to interpret and administer the Plan and to control its operation. Such authority includes selecting Participants in the Plan, determining Bonus Targets for each Participant, determining Performance Measures and Bonus Formulas to score performance, determining which Participants shall be granted Bonus Awards, and determining the form and manner in which Bonus Awards will be made (which may include elective or mandatory deferral alternatives).

3. Decisions Binding - All determinations and decisions made by the Committee pursuant to the provisions of the Plan shall be final, conclusive and binding on all persons, and shall be given the maximum deference permitted by law.

4. Delegation by Committee - The Committee, in its sole discretion and on such terms and conditions as it may provide, may delegate all or part of its authority and powers under the Plan to one or more directors and/or officers of the Company; provided, however, that the Committee shall review and approve all recommendations for any payments pursuant to the Plan prior to such payments being made.

5. Term of Plan - Once approved by the Committee, this Plan shall be effective at the start of the Performance Period. Once approved, this Plan shall continue until the earlier of: 1) the end of the Performance Period; 2) termination of the Plan as described in the "Amendment and Termination Provisions" section below; or 3) termination of Participant from the Company's employ, with respect to that Participant.

V.    Bonus Provisions

Prior to the Award Setting Deadline for a Performance Period or as soon as practicable thereafter, the Committee shall designate or approve the following:

1. Performance Period

2. Executives who will be Participants for the Performance Period

3. Bonus Target for each Participant

4. Performance Targets for each Participant

5. Bonus Formulas for each Participant

VI.    Bonus Award Determination

After the end of each Performance Period, the Committee shall approve the extent to which the Performance Targets applicable to each Participant for the Performance Period were achieved. The Bonus Award for each Participant shall be determined by applying the Bonus Formula to the level of actual performance. The Committee, at its sole discretion, may eliminate, reduce or increase the Bonus Award payable to any Participant below orabove that which otherwise would be payable under the Bonus Formula; provided, however that no Bonus Award may exceed 150% of a Participant's Bonus Target.

The Committee may appropriately adjust any evaluation of performance under a Performance Measure to exclude any of the following events that may occur during a Performance Period:

1. The effects of currency fluctuation

2. Any or all items excluded, or that could be excluded, from the calculation of non-GAAP earnings as reflected in any Company press release or 8-K filing relating to an earnings announcement

3. Asset write-downs

4. Litigation or claim judgments or settlements

5. The effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results

6. Accruals for reorganization and restructuring programs

7. Any other extraordinary or non-operational items

8. Acquisition or disposition costs

9. The gain or losses as a result of a Board approved acquisition or disposition, including current year impact on bonus year targets planned without consideration of the transaction.

VII.    Right to Receive Payment

1. Plan Unfunded and Unsecured - Each Bonus Award under this Plan shall be paid solely from the general assets of the Company. This Plan is unfunded and unsecured; nothing in this Plan shall be construed to create a trust or to establish or evidence any Participant's claim of any right to, or form of, payment of a Bonus other than as an unsecured general creditor with respect to any payment to which he/she may be entitled.

2. Termination of Employment - Except as may otherwise be provided for in the "Bonus Award Payments" section below, in the event a Participant terminates employment with the Company prior to the end of a Performance Period, he/she shall not be entitled to payment of a Bonus Award for the applicable Performance Period pursuant to this Plan; provided that this provision shall not affect any amounts that may be due Participant under the Company's Executive Severance Policy or other applicable policy or agreement.

VIII.    Bonus Award Payments

1. Timing -The Company shall distribute Bonus Awards to Participants as soon as is administratively practicable following the determination and written certification of the Committee for a Performance Period, but in no event later than March 15 of the year following the end of the fiscal year for which the Committee determines the Bonus Award.

2. Active Employment - Payment of a Bonus Award requires that Participant be an active employee on the Company's payroll no later than September 30, 2014 and remain active until the last day of the Performance Period, subject to subsection 4 below. The Committee may make exceptions to the active employment requirement in the case of retirement, death or disability, or in the case of a corporate change in control, in each case determined on its own merits by the Committee.

3. Manner of Payment - Bonus Awards will be payable in cash as a single lump sum, subject to all applicable taxes and contributions required by law to be withheld in accordance with procedures established by the Company. Bonus Awards for Participants who become eligible after the first day of the Performance Period will be prorated accordingly.

4. Change in Status - A Participant whose change in status or move to part time results in he/she being ineligible to participate in this Plan in a Performance Period may receive a prorated Bonus Award, at the sole discretion of the Committee. A Participant whose change in reporting responsibilities results in he/she being ineligible to participate in this Plan in a Performance Period may receive a modified Bonus Award, at the sole discretion of the Committee. No Participant shall have any right to a prorated or modified Bonus Award, and the method in which a Bonus Award may be prorated or modified shall be determined by the Committee in its sole discretion.

5. Recoupment of Bonus Award - If the Company's reported financial or operating results become subject to a material restatement, the Committee may require Participant to pay to the Company an amount corresponding to the Bonus Award that Participant received under this Plan, or a portion of such award, that the Committee determines would not have been paid if Company results as originally published had been equal to Company results as subsequently restated. Any requirement or claim to recoup a Bonus Award must be made, if at all, within five (5) years after the date the amount claimed was originally paid by the Company.

6. Code Section 409A - It is intended that this Plan comply with the requirements of Code Section 409A so that none of the Bonus Award payments to be provided under this Plan will be subject to the additional tax imposed under Code Section 409A. Any ambiguities will be interpreted to so comply.

IX.    Amendment and Termination Provisions

1. Amendment, Modification, Suspension, Termination, or Reinstatement of Plan - The Board of Directors or the Committee may amend, modify, suspend, terminate or reinstate this Plan, in whole or in part, at any time, including adopting amendments deemed necessary or desirable to correct any defect or to supply omitted data, to reconcile any inconsistency in this Plan or in any Bonus Award granted hereunder or to adapt thePlan, including, but not limited to, Performance Measures under this Plan, to material changed circumstances (as determined by the Committee in its sole discretion).

2. Plan Variations for non-U.S. Participants - For Participants employed outside the United States, the Company may vary the provisions of this Plan as deemed appropriate to conform with, as required by or made desirable by, local laws, practices and procedures.

X.    General Provisions

1. Non-transferability of Awards - No Bonus Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in the prior subsection. All rights with respect to a Bonus Award granted to a Participant shall be available during his or her lifetime only to the Participant.

2. No Additional Participant Rights - Employees selected to participate in this Plan shall not have any right to be retained in the Company's employ, and the right of the Company to dismiss such Participant or to terminate any arrangement pursuant to which any such Participant provides services to the Company, with or without cause, is specifically reserved. No person shall have claim to a Bonus Award under this Plan, except as otherwise provided for herein, or to continued participation under this Plan. There is no obligation for uniformity of treatment of Participants under this Plan. The benefits provided for Participants under this Plan shall be in addition to and shall in no way preclude other forms of compensation to or in respect of such Participants.

3. Successors -All obligations of the Company under this Plan with respect to Bonus Awards shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company.

4. Indemnification - Each member of the Company's Board of Directors and each Committee member shall be indemnified and held harmless by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him/her in connection with or resulting from any claim, action, suit, or proceeding to which he/she may be a

party or in which he/she may be involved by reason of any action taken or failure to act under the Plan or any award, and (ii) from any and all amounts paid by him/her in settlement thereof, with the Company's approval, or paid by him/her in satisfaction of any judgment in any such claim, action, suit or proceeding against him/her, provided he/she shall give the Company an opportunity, at its own expense, to handle and defend the same before he/she undertakes to handle and defend it on his/her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.

5. Severability - The provisions of this Plan are severable. If a court of competent jurisdiction rules that any provision of this Agreement is invalid or unenforceable, the court's ruling will not affect the validity and enforceability of the other provisions of this Plan.

6. Requirements of Law -Bonus awards granted under this Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

7. Governing Law -Thevalidity, interpretation, construction and performance of the Plan and awards under it shall be governed and interpreted in accordance with the laws of the State of Washington.

XI.Certification

The undersigned Corporate Secretary of the Company certifies that the foregoing constitutes a complete and correct copy of the Plan as approved by the Compensation Committee of the Board of Directors and its delegate, the Chief Executive Officer.

/s/ Michael C. PirainoMarch 03, 2014

Michael C. Piraino                            Date

Vice President Administration,

General Counsel & Corporate Secretary

EX-10.2

Exhibit 10.2

August 31, 2009

Dear Mike,

I am pleased to offer you employment with Cray as Vice President and General Counsel. In this position you will report to Peter Ungaro, President and CEO.

Your bi-weekly base salary will be $8,846.15 ($230,000 annualized). In addition, you will participate in the annual executive bonus plan as approved from time to time by the Board of Directors. Your target bonus will be 50% of your base salary ($230,000 annualized) to commence in 2009 and will be based on performance. Annual payout of this bonus will range from 0 to 150% of the target bonus, although for 2009, your bonus potential will be prorated and based on Cray’s Adjusted Operating Income (we will use the same AOI target for you as is carried by Peter Ungaro). For 2009 only, we will set your minimum bonus at 100% of your target level, therefore your 2009 bonus range will be 100-150% of your target bonus.

When you become an employee you will receive an option to purchase 100,000 shares pursuant to Cray’s Stock Option Plan. The options vest over four years, with 25% vesting after one year and the remaining options vesting monthly over the following 36 months.

Obviously, we all hope that the Company prospers, that the Company’s stock reflects that success, and that the stock becomes a valuable investment for you.

You will be considered a Vice President for purposes of the Cray Executive Severance Policy.

Cray provides a variety of benefits including:

• health and dental care

• life insurance

• Section 125 Flexible Spending Plan

• 401 (k) Plan

• stock purchase plan.

Your salary and benefits are subject to periodic modification.

As a condition of employment, all new employees are required to present documentation that confirms their identity and eligibility for employment in the United States. On your first day of employment with Cray, you will be asked to execute an “Employment Eligibility Certification” attesting to such. Your employment is further conditioned on executing our standard Confidentiality Agreement.

Copies of the relevant plans and documents will be sent to you separately once you have accepted our offer of employment.

This employment opportunity, which Cray offers, is of indefinite duration and will continue as long as both you and Cray consider it of mutual benefit. Either you or Cray are free to terminate the employment relationship at will (without cause) and at any time.

We consider the terms of this offer to be confidential, except as disclosure may be required by the federal securities laws. Your employment would commence on a date that is agreed upon between you and Peter Ungaro but is currently expected to be in the early October timeframe.

I’m sure that you know how excited we are about the chance to work closely with you. While there clearly is a lot of work ahead, there should also be a lot of success and fun. To indicate your acceptance of this offer, please sign and return one copy of this letter to my confidential fax number.

Sincerely,

/s/ Linda Howitson

Linda Howitson

Vice President, Human Resources

Cray Inc.

Accepted by:/s/ Michael C. Piraino, this 2^nd day of September 2009

EX-10.3

Exhibit 10.3

CRAY INC.

AMENDED AND RESTATED NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

Equity Compensation

Continuing Directors. At the conclusion of each annual meeting of the Company’s shareholders (“Annual Meeting”), each continuing non-employee director (“NE Director”) elected by the shareholders at such Annual Meeting will automatically be granted, without any further action by the Board of Directors, a number of restricted shares of the Company’s common stock (the “Refresher Awards”) determined by dividing the dollar amount of such director’s fees earned during the previous fiscal year, including the annual retainer, fees for chairing the Board and Board committees and for Board and committee attendance, by the closing sales price for the common stock on the trading day immediately prior to the date of the Annual Meeting, as reported by NASDAQ.

The Refresher Awards shall vest in full on the earlier of (i) 12 months from the date of grant and (ii) the date that is immediately prior to the date of the next Annual Meeting. Until the shares are vested, as set forth pursuant to the above schedule, the shares will be restricted against sale or transfer.

The NE Directors may vote and receive dividends on the restricted shares while the restrictions remain in place.

If an NE Director resigns from the Board without the prior approval of the Corporate Governance Committee prior to the full vesting of the Restricted Award, the NE Director will forfeit the unvested shares that remain restricted.

New Directors. Each NE Director, upon his or her first election to the Board, shall be granted stock options for 20,000 shares of the Company’s common stock, which options shall be immediately vested as of the date of grant and have an exercise price equal to the fair market value of the common stock on the date of grant.

Cash Compensation

NE Directors receive cash compensation for serving in such positions as follows:

Board and Committee Annual Retainer: The following changes to the cash compensation of the Board became effective January 1, 2013: $40,000 annual retainer for serving on the Board (with the retainer including one Board meeting per quarter), plus $5,000 annual retainer for each Committee served (except Audit), paid quarterly; plus $10,000 annual retainer for serving on the Audit Committee, paid quarterly.

Board and Committee Chairman Fees:

• Board: $25,000 annual fee, paid quarterly

• Audit Committee: $15,000 annual fee, paid quarterly

• Compensation Committee: $10,000 annual fee, paid quarterly

• Corporate Governance Committee: $5,000 annual fee, paid quarterly

• Strategic Technology Committee: $5,000 annual fee, paid quarterly

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Peter J. Ungaro, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cray Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	April 29, 2014	/s/ PETER J. UNGARO
		Peter J. Ungaro
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Brian C. Henry, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cray Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	April 29, 2014	/s/ BRIAN C. HENRY
		Brian C. Henry
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Cray Inc. (the “Company”) hereby certify, to such officers’ knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2014 (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	April 29, 2014	/s/ PETER J. UNGARO
		Peter J. Ungaro
		President and Chief Executive Officer
		(Principal Executive Officer)
Date:	April 29, 2014	/s/ BRIAN C. HENRY
		Brian C. Henry
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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Deferred Revenue (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Deferred revenue
Total deferred revenue	$ 143,720	$ 141,965
Less long-term deferred revenue	(54,167)	(50,477)
Deferred revenue in current liabilities	89,553	91,488
Deferred product revenue
Deferred revenue
Total deferred revenue	59,174	54,065
Deferred service revenue
Deferred revenue
Total deferred revenue	$ 84,546	$ 87,900

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Segment Information Revenue (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenue by geographic location
Product revenue	$ 30,015	$ 59,868
Service	25,095	19,679
Revenue:	55,110	79,547
United States
Revenue by geographic location
Product revenue	10,463	31,144
Service	17,744	13,472
Revenue:	28,207	44,616
Other Countries
Revenue by geographic location
Product revenue	19,552	28,724
Service	7,351	6,207
Revenue:	$ 26,903	$ 34,931

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Taxes (Details)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Income Tax Disclosure [Abstract]
Effective Tax Rates	42.00%	40.00%

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Earnings (Loss) Per Share ("EPS") (Details) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Earnings Per Share [Abstract]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	3.2	4.2

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Share-Based Compensation (Tables)

3 Months Ended

Mar. 31, 2014

Share-based Compensation [Abstract]

Key weighted average assumptions used in determining the fair value

The following key weighted average assumptions were employed in the calculation for the three months ended March 31, 2014:

	Three Months Ended March 31, 2014
Risk-free interest rate	1.24%
Expected dividend yield	—%
Volatility	50.40%
Expected life	4.0 years
Weighted average Black-Scholes value of options granted	$11.01

Gross share-based compensation cost recorded in the condensed consolidated statements of operations

The following table sets forth the gross share-based compensation cost resulting from stock options and unvested restricted stock grants that were recorded in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014		2013
Cost of product revenue	$	52	$	27
Cost of service revenue	69		62
Research and development, net	761		386
Sales and marketing	751		516
General and administrative	889		735
Total	$	2,522	$	1,726

Stock option activity

A summary of the Company’s year-to-date stock option activity and related information follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2013	2,078,069		$	9.29
Grants	44,800		$	27.46
Exercises	(143,258	)	$	6.95
Cancellations	(5,497	)	$	24.54
Outstanding at March 31, 2014	1,974,114		$	9.83	6.9
Exercisable at March 31, 2014	1,201,668		$	6.34	5.9
Available for grant at March 31, 2014	2,985,282

Unvested restricted stock grants and restricted stock units changes

A summary of the Company’s unvested restricted stock grants and changes during the three months ended March 31, 2014 is as follows:

	Standard Restricted Shares				Performance Vesting Restricted Shares				Total Restricted Shares
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2013	1,127,700		$	12.05	1,094,000		$	15.94	2,221,700		$	13.97
Granted	100,800		$	34.73	—		$	—	100,800		$	34.73
Forfeited	(5,000	)	$	26.01	(10,000	)	$	12.90	(15,000	)	$	17.27
Vested	(36,250	)	$	8.09	—		$	—	(36,250	)	$	8.09
Outstanding at March 31, 2014	1,187,250		$	14.04	1,084,000		$	15.97	2,271,250		$	14.96

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Share-Based Compensation Compensation Costs (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Gross share-based compensation cost recorded in the condensed consolidated statements of operations
Gross share-based compensation cost, total	$ 2,522	$ 1,726
Cost of product revenue
Gross share-based compensation cost recorded in the condensed consolidated statements of operations
Gross share-based compensation cost, total	52	27
Cost of service revenue
Gross share-based compensation cost recorded in the condensed consolidated statements of operations
Gross share-based compensation cost, total	69	62
Research and development, net
Gross share-based compensation cost recorded in the condensed consolidated statements of operations
Gross share-based compensation cost, total	761	386
Sales and marketing
Gross share-based compensation cost recorded in the condensed consolidated statements of operations
Gross share-based compensation cost, total	751	516
General and administrative
Gross share-based compensation cost recorded in the condensed consolidated statements of operations
Gross share-based compensation cost, total	$ 889	$ 735

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Inventory (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Inventory Disclosure [Abstract]
Components and subassemblies	$ 39,376	$ 46,339
Work in process	15,880	23,618
Finished goods	62,938	25,172
Total	$ 118,194	$ 95,129

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Information of Operating Segments
Revenue:	$ 55,110	$ 79,547
Gross Profit:	17,937	24,150
Supercomputing
Information of Operating Segments
Revenue:	43,626	61,755
Gross Profit:	13,223	16,257
Storage and Data Management
Information of Operating Segments
Revenue:	8,065	16,282
Gross Profit:	2,907	7,157
Maintenance and Support
Information of Operating Segments
Revenue:	21,965	18,213
Gross Profit:	10,214	9,160
Engineering Services and Other
Information of Operating Segments
Revenue:	3,419	1,510
Gross Profit:	1,807	736
Elimination of inter-segment revenue
Information of Operating Segments
Revenue:	(21,965)	(18,213)
Gross Profit:	$ (10,214)	$ (9,160)

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Accumulated Other Comprehensive Income Accumulated Other Comprehensive Income

3 Months Ended

Mar. 31, 2014

Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]

Accumulated Other Comprehensive Income

Note 3— Accumulated Other Comprehensive Income

The following table shows the gross and net of tax reclassification adjustments from accumulated other comprehensive income resulting from hedged foreign currency transactions recorded by the Company for the three months ended March 31, 2014 and 2013 (in thousands). The gross reclassification adjustments decreased product revenue for the three months ended March 31, 2014. The gross reclassification adjustments increased product revenue for the three months ended March 31, 2013.

	Three Months Ended March 31,
	2014			2013
Gross of Tax Reclassifications	$	(33	)	$	33
Net of Tax Reclassifications	$	(20	)	$	20

The following tables show the changes in Accumulated Other Comprehensive Income by component for the three months ended March 31, 2014 and 2013 (in thousands):

Three Months Ended March 31, 2014
	Unrealized Gain on Investments		Foreign Currency Translation Adjustments			Unrealized Loss on Cash Flow Hedges			Accumulated Other Comprehensive Income
Beginning balance	$	—	$	3,257		$	(2,404	)	$	853
Current-period change, net of tax	4		23			(308		)	(281		)
Ending balance	$	4	$	3,280		$	(2,712	)	$	572
Income tax expense (benefit) associated with current-period change	$	2	$	(167	)	$	(205	)	$	(370	)

Three Months Ended March 31, 2013
	Unrealized Gain/(Loss) on Investments			Foreign Currency Translation Adjustments		Unrealized Gain on Cash Flow Hedges		Accumulated Other Comprehensive Income
Beginning balance	$	(46	)	$	4,301	$	926	$	5,181
Current-period change, net of tax	49			165		2,000		2,214
Ending balance	$	3		$	4,466	$	2,926	$	7,395
Income tax expense associated with current-period change	$	33		$	110	$	1,333	1,476

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Share-Based Compensation Option Activity (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Stock option activity
Options, Outstanding beginning balance (In Shares)	2,078,069
Weighted Average Exercise Price, Outstanding beginning balance (Per Share)	$ 9.29
Options, Grants (In Shares)	44,800
Weighted Average Exercise Price, Grants (Per Share)	$ 27.46
Options, Exercises (Per Share)	(143,258)	(202,321)
Weighted Average Exercise Price, Exercises (Per Share)	$ 6.95
Options, Cancellations (In Shares)	(5,497)
Weighted Average Exercise Price, Cancellations (Per Share)	$ 24.54
Options, Outstanding ending balance (In Shares)	1,974,114
Weighted Average Exercise Price, Outstanding ending balance (Per Share)	$ 9.83
Weighted Average Remaining Contractual Term, Outstanding ending balance	6 years 11 months 0 days
Options, Exercisable ending balance (in Shares)	1,201,668
Weighted Average Exercise Price, Exercisable ending balance (Per Share)	$ 6.34
Weighted Average Remaining Contractual Term, Exercisable ending balance	5 years 10 months 24 days
Options, Available for grant ending balance (In Shares)	2,985,282

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Fair Value Measurement (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014		Dec. 31, 2013
Assets:
Cash and cash equivalents and restricted cash	$ 220,891
Available-for-sale investments	57,733	[1]	14,048
Foreign exchange forward contracts	1,160	[2]
Assets measured at fair value at March 31, 2014	279,784
Liabilities:
Foreign exchange forward contracts	(6,734)	[3]
Liabilities measured at fair value at March 31, 2014	(6,734)
Quoted Prices in Active Markets (Level 1)
Assets:
Cash and cash equivalents and restricted cash	220,891
Available-for-sale investments	57,733	[1]
Foreign exchange forward contracts	0	[2]
Assets measured at fair value at March 31, 2014	278,624
Liabilities:
Foreign exchange forward contracts	0	[3]
Liabilities measured at fair value at March 31, 2014	0
Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents and restricted cash	0
Available-for-sale investments	0	[1]
Foreign exchange forward contracts	1,160	[2]
Assets measured at fair value at March 31, 2014	1,160
Liabilities:
Foreign exchange forward contracts	(6,734)	[3]
Liabilities measured at fair value at March 31, 2014	$ (6,734)

[1] Included in "Short-term investments" and "Long-term investments" on the Company’s Condensed Consolidated Balance Sheets.

[2] Included in “Prepaid expenses and other 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.

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Basis of Presentation (Details)	3 Months Ended
	Mar. 31, 2014
Basis of Presentation (Textual) [Abstract]
Product delivery period	5 years
Maintenance services period	1 year

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Share-Based Compensation Restricted Stock (Details) (USD $)	3 Months Ended
	Mar. 31, 2014
Standard Restricted Shares
Unvested restricted stock grants and restricted stock units changes
Shares, Outstanding beginning balance (In Shares)	1,127,700
Weighted Average Grant Date Fair Value, Outstanding beginning balance (Per Share)	$ 12.05
Shares, Granted (In Shares)	100,800
Weighted Average Grant Date Fair Value, Granted (Per Share)	$ 34.73
Shares, Forfeited (In Shares)	(5,000)
Weighted Average Grant Date Fair Value, Forfeited (Per Share)	$ 26.01
Shares, Vested (In Shares)	(36,250)
Weighted Average Grant Date Fair Value, Vested (Per Share)	$ 8.09
Shares, Outstanding ending balance (In Shares)	1,187,250
Weighted Average Grant Date Fair Value, Outstanding ending balance (Per Share)	$ 14.04
Performance Vesting Restricted Shares
Unvested restricted stock grants and restricted stock units changes
Shares, Outstanding beginning balance (In Shares)	1,094,000
Weighted Average Grant Date Fair Value, Outstanding beginning balance (Per Share)	$ 15.94
Shares, Granted (In Shares)	0
Weighted Average Grant Date Fair Value, Granted (Per Share)	$ 0.00
Shares, Forfeited (In Shares)	(10,000)
Weighted Average Grant Date Fair Value, Forfeited (Per Share)	$ 12.90
Shares, Vested (In Shares)	0
Weighted Average Grant Date Fair Value, Vested (Per Share)	$ 0.00
Shares, Outstanding ending balance (In Shares)	1,084,000
Weighted Average Grant Date Fair Value, Outstanding ending balance (Per Share)	$ 15.97
Total Restricted Shares
Unvested restricted stock grants and restricted stock units changes
Shares, Outstanding beginning balance (In Shares)	2,221,700
Weighted Average Grant Date Fair Value, Outstanding beginning balance (Per Share)	$ 13.97
Shares, Granted (In Shares)	100,800
Weighted Average Grant Date Fair Value, Granted (Per Share)	$ 34.73
Shares, Forfeited (In Shares)	(15,000)
Weighted Average Grant Date Fair Value, Forfeited (Per Share)	$ 17.27
Shares, Vested (In Shares)	(36,250)
Weighted Average Grant Date Fair Value, Vested (Per Share)	$ 8.09
Shares, Outstanding ending balance (In Shares)	2,271,250
Weighted Average Grant Date Fair Value, Outstanding ending balance (Per Share)	$ 14.96

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Fair Value Measurement Derivaitves (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014		Dec. 31, 2013
Derivatives, Fair Value [Line Items]
Foreign exchange forward contracts	$ 1,160	[1]
Total derivatives classified as hedging instruments	(5,574)		(5,507)
Foreign currency contracts | Prepaid expenses and other current assets
Derivatives, Fair Value [Line Items]
Foreign exchange forward contracts	1,160		1,654
Foreign currency contracts | Other non-current assets
Derivatives, Fair Value [Line Items]
Foreign exchange forward contracts	0		76
Foreign currency contracts | Other accrued liabilities
Derivatives, Fair Value [Line Items]
Total derivatives classified as hedging instruments	(2,669)		(2,942)
Foreign currency contracts | Other non-current liabilities
Derivatives, Fair Value [Line Items]
Total derivatives classified as hedging instruments	$ (4,065)		$ (4,295)

[1] Included in “Prepaid expenses and other current assets” on the Company’s Condensed Consolidated Balance Sheets.

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Fair Value Measurement Narrative (Details) In Millions, unless otherwise specified	Mar. 31, 2014 USD ($)	Mar. 31, 2014 CAD	Mar. 31, 2014 EUR (€)	Mar. 31, 2014 GBP (£)	Mar. 31, 2014 JPY (¥)	Mar. 31, 2014 SGD	Dec. 31, 2013 USD ($)	Dec. 31, 2013 CAD	Dec. 31, 2013 CHF	Dec. 31, 2013 EUR (€)	Dec. 31, 2013 GBP (£)	Dec. 31, 2013 JPY (¥)	Dec. 31, 2013 SGD
Fair Value Disclosures [Abstract]
Outstanding notional amounts, forward contracts		3.9	€ 33.3	£ 36.4	¥ 2,300.0	1.4		3.9	5.6	€ 53.0	£ 36.4	¥ 1,200.0	3.2
Hedged foreign currency exposure	$ 127.8						$ 151.4

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Fair Value Measurement

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurement

Note 2— Fair Value Measurement

Based on the observability of the inputs used in the valuation techniques used to determine the fair value of certain financial assets and liabilities, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2014, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

Description	Fair Value as of March 31, 2014			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents and restricted cash	$	220,891		$	220,891	$	—
Available-for-sale investments (1)	57,733			57,733		—
Foreign exchange forward contracts (2)	1,160			—		1,160
Assets measured at fair value at March 31, 2014	$	279,784		$	278,624	$	1,160
Liabilities:
Foreign exchange forward contracts (3)	$	(6,734	)	$	—	$	(6,734	)
Liabilities measured at fair value at March 31, 2014	$	(6,734	)	$	—	$	(6,734	)

 ____________________

(1) Included in "Short-term investments" and "Long-term investments" on the Company’s Condensed Consolidated Balance Sheets.

(2) Included in “Prepaid expenses and other 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.

Foreign Currency Derivatives

The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales transactions that are payable in foreign currencies.

As of March 31, 2014, the Company had outstanding forward contracts which were designated as cash flow hedges of anticipated future cash receipts on sales contracts payable in foreign currencies. The outstanding notional amounts were approximately 36.4 millionBritish Pounds, 33.3 millionEuro, 2.3 billionJapanese Yen, $3.9 millionCanadian Dollars and $1.4 millionSingapore Dollars, resulting in hedged foreign currency exposure of approximately $127.8 million. Cash receipts associated with the hedged contracts are expected to be received from 2014 through 2018, during which time the revenue on the associated sales contracts is expected to be recognized.

As of December 31, 2013, the outstanding notional amounts were approximately 36.4 millionBritish Pounds, 53.0 millionEuro, 1.2 billionJapanese Yen, 5.6 millionSwiss Francs, $3.9 millionCanadian Dollars and $3.2 millionSingapore Dollars, resulting in hedged foreign currency exposure of approximately $151.4 million.

Fair Values of Derivative Instruments (in thousands):

Hedge Classification	Balance Sheet Location	Fair Value as of March 31, 2014			Fair Value as of December 31, 2013
Foreign currency contracts	Prepaid expenses and other current assets	$	1,160		$	1,654
Foreign currency contracts	Other non-current assets	—			76
Foreign currency contracts	Other accrued liabilities	(2,669		)	(2,942		)
Foreign currency contracts	Other non-current liabilities	(4,065		)	(4,295		)
Total fair value of derivatives classified as hedging instruments		$	(5,574	)	$	(5,507	)

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Accumulated Other Comprehensive Income (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]
Gross of Tax Reclassifications	$ (33)	$ 33
Net of Tax Reclassifications	(20)	20
Unrealized Gain (Loss) on Investments, Beginning Balance	0	(46)
Unrealized Gain on Investments, Current-period change, net of tax	4	49
Unrealized Gain on Investments, Ending Balance	4	3
Unrealized Gain on Investments, Income tax expense associated with current-period change	2	33
Foreign Currency Translation Adjustments Beginning Balance	3,257	4,301
Foreign Currency Translation Adjustments, Current-period change, net of tax	23	165
Foreign Currency Translation Adjustments Ending Balance	3,280	4,466
Foreign Currency Translation Adjustments, Income tax expense (benefit) associated with current-period change	(167)	110
Unrealized Gain (Loss) on Cash Flow Hedges Beginning Balance	(2,404)	926
Unrealized Gain (Loss) on Cash Flow Hedges, Current-period change, net of tax	(308)	2,000
Unrealized Gain (Loss) on Cash Flow Hedges Ending Balance	(2,712)	2,926
Unrealized Gain (Loss) on Cash Flow Hedges, Income tax expense (benefit) associated with current-period change	(205)	1,333
Accumulated Other Comprehensive Income Beginning Balance	853	5,181
Accumulated Other Comprehensive Income, Current-period change, net of tax	(281)	2,214
Accumulated Other Comprehensive Income Ending Balance	572	7,395
Accumulated Other Comprehensive Income, Income tax expense (benefit) associated with current-period change	$ (370)	$ 1,476

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Deferred Revenue Narrative (Details) (Deferred Revenue)	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Deferred Revenue Arrangement [Line Items]
Number of customer accounted for total deferred revenue	2	3
Customer Concentration Risk
Deferred Revenue Arrangement [Line Items]
Percentage of total deferred revenue	37.00%	47.00%

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Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 187,691	$ 192,633
Restricted cash	18,100	0
Short-term investments	49,916	14,048
Accounts and other receivables, net	58,765	182,527
Inventory	118,194	95,129
Prepaid expenses and other current assets	31,722	20,999
Total current assets	464,388	505,336
Long-term restricted cash	15,100	13,768
Long-term investments	7,817	0
Property and equipment, net	30,624	30,278
Service inventory, net	1,709	1,828
Goodwill	14,182	14,182
Intangible assets other than goodwill, net	5,764	6,362
Deferred tax assets	24,592	19,206
Other non-current assets	11,700	12,406
TOTAL ASSETS	575,876	603,366
Current liabilities:
Accounts payable	35,833	34,225
Accrued payroll and related expenses	10,348	22,470
Other accrued liabilities	13,709	22,225
Deferred revenue	89,553	91,488
Total current liabilities	149,443	170,408
Long-term deferred revenue	54,167	50,477
Other non-current liabilities	6,675	6,894
TOTAL LIABILITIES	210,285	227,779
Shareholders’ equity:
Preferred stock — Authorized and undesignated, 5,000,000 shares; no shares issued or outstanding	0	0
Common stock and additional paid-in capital, par value $.01 per share — Authorized, 75,000,000 shares; issued and outstanding 40,689,605 and 40,469,854 shares, respectively	589,721	586,243
Accumulated other comprehensive income	572	853
Accumulated deficit	(224,702)	(211,509)
TOTAL SHAREHOLDERS’ EQUITY	365,591	375,587
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$ 575,876	$ 603,366

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Share-Based Compensation Narrative (Details) (USD $) In Millions, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Share-based Compensation [Abstract]
Estimated forfeiture rate	10.00%
Vesting period of stock option	4 years
Aggregate intrinsic value of outstanding stock option (In USD)	$ 54.3
Aggregate intrinsic value of exercisable stock option (In USD)	37.2
Stock option (In shares)	143,258	202,321
Total intrinsic value of shares exercised (In USD)	4.3	2.6
Aggregate fair value of restricted stock vested (In USD)	1.1	0.7
Unrecognized compensation cost (In USD)	31.2
Unrecognized compensation cost, performance vesting restricted stock which are not considered probable to vest	17.0
Unrecognized compensation cost for performance vesting restricted stock subject to performance measures which are considered probable to vest	$ 0.3
Unrecognized compensation cost, weighted average period	1 year 8 months 12 days

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Operating activities:
Net loss	$ (12,938)	$ (7,609)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	3,910	3,429
Accretion and amortization on available for sale investments	53	0
Loss on disposal of fixed assets	204	1
Share-based compensation expense	2,522	1,726
Inventory write-down	382	0
Deferred income taxes	(9,797)	(3,866)
Cash provided (used) due to changes in operating assets and liabilities:
Accounts and other receivables	124,120	(45,221)
Inventory	(24,127)	9,617
Prepaid expenses and other assets	(5,588)	(1,200)
Accounts payable	1,612	(2,103)
Accrued payroll and related expenses and other accrued liabilities	(20,884)	(15,498)
Other non-current liabilities	(218)	(365)
Deferred revenue	1,760	(10,639)
Net cash provided by (used in) operating activities	61,011	(71,728)
Investing activities:
Sales/maturities of available-for-sale investments	9,000	0
Purchases of available-for-sale investments	(52,732)	(14,938)
Increase in restricted cash	(19,432)	0
Purchases of property and equipment	(3,501)	(1,868)
Net cash used in investing activities	(66,665)	(16,806)
Financing activities:
Proceeds from issuance of common stock through employee stock purchase plan	169	110
Purchase of employee restricted shares to fund related statutory tax withholding	(453)	(340)
Proceeds from exercises of stock options	986	1,373
Net cash provided by financing activities	702	1,143
Effect of foreign exchange rate changes on cash and cash equivalents	10	(219)
Net decrease in cash and cash equivalents	(4,942)	(87,610)
Cash and cash equivalents:
Beginning of period	192,633	253,065
End of period	187,691	165,455
Supplemental disclosure of cash flow information:
Cash paid for interest	5	0
Cash paid for income taxes	1,232	1,682
Non-cash investing and financing activities:
Inventory transfers to fixed assets and service inventory	$ 680	$ 1,598

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Accounts and Other Receivables, Net (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	$ 58,871	$ 182,684
Net accounts and other receivables
Allowance for doubtful accounts	(106)	(157)
Accounts and other receivables, net	58,765	182,527
Trade accounts receivable
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	44,947	169,417
Advance billings
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	1,165	2,141
Other receivables
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	1,430	2,051
Unbilled receivables
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	$ 11,329	$ 9,075

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Accounts and Other Receivables, Net (Tables)

3 Months Ended

Mar. 31, 2014

Receivables [Abstract]

Accounts and Other Receivables, Net

Net accounts and other receivables consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Trade accounts receivable	$	44,947		$	169,417
Unbilled receivables	11,329			9,075
Advance billings	1,165			2,141
Other receivables	1,430			2,051
	58,871			182,684
Allowance for doubtful accounts	(106		)	(157		)
Accounts and other receivables, net	$	58,765		$	182,527

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Accounts and Other Receivables, Net Narrative (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	$ 58,871	$ 182,684
US. government agencies and customers
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	12,000	111,900
Accounts Receivable | Non US government customers
Accounts and Other Receivables, Net (Textual) [Abstract]
Concentration Risk, Number of Customers	3	0
Non-U.S. government customers accounted, percentage	37.00%	10.00%
Unbilled receivables
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	11,329	9,075
Unbilled receivables | US. government agencies and customers
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts receivable	$ 300	$ 300

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Deferred Revenue (Tables)

3 Months Ended

Mar. 31, 2014

Deferred Revenue Disclosure [Abstract]

Deferred revenue

Deferred revenue consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Deferred product revenue	$	59,174		$	54,065
Deferred service revenue	84,546			87,900
Total deferred revenue	143,720			141,965
Less long-term deferred revenue	(54,167		)	(50,477		)
Deferred revenue in current liabilities	$	89,553		$	91,488

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Basis of Presentation

3 Months Ended

Mar. 31, 2014

Basis of Presentation [Abstract]

Basis of Presentation

Note 1— Basis of Presentation

In these notes, Cray Inc. and its wholly-owned subsidiaries are collectively referred to as the “Company.” In the opinion of management, the accompanying Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Loss, and Statements of Cash Flows have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Management believes that all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The Company’s revenue, results of operations and cash balances are likely to fluctuate significantly from quarter to quarter. These fluctuations are due to such factors as the high average sales prices and limited number of sales of the Company’s products, the timing of purchase orders and product deliveries, the revenue recognition accounting policy of generally not recognizing product revenue until customer acceptance and other contractual provisions have been fulfilled and the timing of payments for product sales, maintenance services, government research and development funding and purchases of inventory. Given the nature of the Company’s business, its revenue, receivables and other related accounts are likely to be concentrated among a relatively small number of customers.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Cray Inc. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until the products have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where applicable, a customer acceptance has been obtained. The sales price is not considered to be fixed or determinable until all material contingencies related to the sales have been resolved. The Company records revenue in the Condensed Consolidated Statements of Operations net of any sales, use, value added or certain excise taxes imposed by governmental authorities on specific sales transactions. In addition to the aforementioned general policy, the following are the Company's statements of policy with regard to multiple-element arrangements and specific revenue recognition policies for each major category of revenue.

Multiple-Element Arrangements. The Company commonly enters into revenue arrangements that include multiple deliverables of its product and service offerings due to the needs of its customers. Products may be delivered in phases over time periods which can be as long as five years. Maintenance services generally begin upon acceptance of the first equipment delivery and future deliveries of equipment generally have an associated maintenance period. The Company considers the maintenance period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which may include a warranty period and accordingly allocates a portion of the arrangement consideration as a separate deliverable which is recognized as service revenue over the entire service period. Other services such as training and engineering services can be delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement is separated into more than one unit of accounting if the following criteria are met:

• The delivered item(s) has value to the customer on a standalone basis; and

• If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.

If these criteria are met for each element, the arrangement consideration is allocated to the separate units of accounting based on each unit's relative selling price. If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered.

The Company follows a selling price hierarchy in determining the best estimate of the selling price of each deliverable. Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to determine vendor specific objective evidence, or VSOE. The Company determines VSOE based on normal pricing and discounting practices for the product or service when sold separately.

When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company attempts to establish the selling price of each remaining element based on third-party evidence, or TPE. The Company's inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract terms which can be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. TPE is determined based on the Company's prices or competitor prices for similar deliverables when sold separately. However, the Company is often unable to determine TPE, as the Company's offerings contain a significant level of customization and differentiation from those of competitors and the Company is often unable to reliably determine what similar competitor products' selling prices are on a standalone basis.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price, or ESP, in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. In determining ESP, the Company uses the cost to provide the product or service plus a margin, or considers other factors. When using cost plus a margin, the Company considers the total cost of the product or service, including customer-specific and geographic factors. The Company also considers the historical margins of the product or service on previous contracts and several factors including any changes to pricing methodologies, competitiveness of products and services and cost drivers that would cause future margins to differ from historical margins.

Products. The Company most often recognizes revenue from sales of products upon customer acceptance of the system. Where formal acceptance is not required, the Company recognizes revenue upon delivery or installation. When the product is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to product revenue based on estimates of selling price.

Services. Maintenance services are provided under separate maintenance contracts with customers. These contracts generally provide for maintenance services for one year, although some are for multi-year periods, often with prepayments for the term of the contract. The Company considers the maintenance period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which may include a warranty period. When service is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance contracts that are billed in advance of revenue recognition are recorded as deferred revenue. Maintenance revenue is recognized ratably over the term of the maintenance contract.

Revenue from engineering services is recognized as services are performed.

Project Revenue. Revenue from design and build contracts is recognized under the percentage-of-completion (or POC method). Under the POC method, revenue is recognized based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in income in the period in which the circumstances that gave rise to the revision become known by management. The Company performs ongoing profitability analyses of its contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.

The Company records revenue from certain research and development contracts which include milestones using the milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive if management believes there is substantive uncertainty that it will be achieved and the milestone consideration meets all of the following criteria:

• It is commensurate with either of the following:

• The Company's performance to achieve the milestone; or

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

• It relates solely to past performance.

• It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

The individual milestones are determined to be substantive or non-substantive in their entirety and milestone consideration is not bifurcated.

Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work performed.

Nonmonetary Transactions. The Company values and records nonmonetary transactions at the fair value of the asset surrendered unless the fair value of the asset received is more clearly evident, in which case the fair value of the asset received is used.

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Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Preferred stock, shares Authorized	5,000,000	5,000,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock and additional paid-in capital, par value	$ 0.01	$ 0.01
Common stock and additional paid-in capital, shares authorized	75,000,000	75,000,000
Common stock and additional paid-in capital, shares issued	40,689,605	40,469,854
Common stock and additional paid-in capital, shares outstanding	40,689,605	40,469,854

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Segment Information

3 Months Ended

Mar. 31, 2014

Segment Reporting [Abstract]

Segment Information

Note 11— Segment Information

The Company has the following reportable segments: Supercomputing (formerly HPC Systems), Storage and Data Management, and Maintenance and Support. The Company's segment presentation has changed to be consistent with information now provided to its Chief Operating Decision Maker. This information has been modified to include inter-segment revenue and gross profit from Maintenance and Support services in Supercomputing and Storage and Data Management resulting from the sales of products in these segments. The prior period financial information has been reclassified to conform to the current period’s presentation.

The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, who is the Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance. The segments are determined based on several factors, including the Company’s internal operating structure, the manner in which the Company’s operations are managed, client base, similar economic characteristics and the availability of separate financial information.

Supercomputing

Supercomputing includes a suite of highly advanced systems, including the Cray XC30, Cray XE6, Cray XE6m, Cray XK7, Cray XK6m, and the Cray CS300, which are used by single users all the way up through large research and engineering centers in universities, government laboratories, and commercial institutions. Supercomputing also includes the ongoing maintenance of these systems as well as system analysts.

Storage and Data Management

Storage and Data Management offers the Cray Sonexion 1600 and Tiered Adaptive Storage solution as well as other third-party storage products and their ongoing maintenance as well as system analysts.

Maintenance and Support

Maintenance and Support provides ongoing maintenance of Cray supercomputers, big data storage and analytic systems, as well as system analysts.

Engineering Services and Other

Included within Engineering Services and Other is the Company’s YarcData business unit and Custom Engineering.

The following table presents revenues and gross margin for the Company’s operating segments for the three months ended March 31 (in thousands):

	Three Months Ended March 31,
	2014			2013
Revenue:
Supercomputing	$	43,626		$	61,755
Storage and Data Management	8,065			16,282
Maintenance and Support	21,965			18,213
Engineering Services and Other	3,419			1,510
Elimination of inter-segment revenue	(21,965		)	(18,213		)
Total revenue	$	55,110		$	79,547
Gross Profit:
Supercomputing	$	13,223		$	16,257
Storage and Data Management	2,907			7,157
Maintenance and Support	10,214			9,160
Engineering Services and Other	1,807			736
Elimination of inter-segment gross profit	(10,214		)	(9,160		)
Total gross profit	$	17,937		$	24,150

Revenue and cost of revenue is the only discrete financial information the Company prepares for its segments. Other financial results or assets are not separated by segment.

The Company’s geographic operations outside the United States include sales and service offices in Canada, Brazil, Europe, Japan, Australia, India, South Korea, China, Singapore and Taiwan. The following data represents the Company’s revenue for the United States and all other countries, which is determined based upon a customer’s geographic location (in thousands):

	United States				Other Countries				Total
	2014		2013		2014		2013		2014		2013
Three months ended March 31,
Product revenue	$	10,463	$	31,144	$	19,552	$	28,724	$	30,015	$	59,868
Service revenue	17,744		13,472		7,351		6,207		25,095		19,679
Total revenue	$	28,207	$	44,616	$	26,903	$	34,931	$	55,110	$	79,547

Product and service revenue from U.S. government agencies and customers primarily serving the U.S. government totaled approximately $22.0 million for the three months ended March 31, 2014, compared to approximately $38.6 million for the three months ended March 31, 2013. For the three months ended March 31, 2014, revenue in Japan accounted for 25% of total revenue. For the three months ended March 31, 2013, combined revenue in Switzerland and Japan accounted for 32% of total revenue.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014	Apr. 22, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	CRAY INC
Entity Central Index Key	0000949158
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		40,691,023

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Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2014

Basis of Presentation [Abstract]

Principles of Consolidation

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Cray Inc. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Revenue Recognition

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until the products have been shipped or services provided to the customer, risk of loss has transferred to the customer, and, where applicable, a customer acceptance has been obtained. The sales price is not considered to be fixed or determinable until all material contingencies related to the sales have been resolved. The Company records revenue in the Condensed Consolidated Statements of Operations net of any sales, use, value added or certain excise taxes imposed by governmental authorities on specific sales transactions. In addition to the aforementioned general policy, the following are the Company's statements of policy with regard to multiple-element arrangements and specific revenue recognition policies for each major category of revenue.

Multiple-Element Arrangements. The Company commonly enters into revenue arrangements that include multiple deliverables of its product and service offerings due to the needs of its customers. Products may be delivered in phases over time periods which can be as long as five years. Maintenance services generally begin upon acceptance of the first equipment delivery and future deliveries of equipment generally have an associated maintenance period. The Company considers the maintenance period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which may include a warranty period and accordingly allocates a portion of the arrangement consideration as a separate deliverable which is recognized as service revenue over the entire service period. Other services such as training and engineering services can be delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement is separated into more than one unit of accounting if the following criteria are met:

• The delivered item(s) has value to the customer on a standalone basis; and

• If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.

If these criteria are met for each element, the arrangement consideration is allocated to the separate units of accounting based on each unit's relative selling price. If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered.

The Company follows a selling price hierarchy in determining the best estimate of the selling price of each deliverable. Certain products and services are sold separately in standalone arrangements for which the Company is sometimes able to determine vendor specific objective evidence, or VSOE. The Company determines VSOE based on normal pricing and discounting practices for the product or service when sold separately.

When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company attempts to establish the selling price of each remaining element based on third-party evidence, or TPE. The Company's inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system size and contract terms which can be due to infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. TPE is determined based on the Company's prices or competitor prices for similar deliverables when sold separately. However, the Company is often unable to determine TPE, as the Company's offerings contain a significant level of customization and differentiation from those of competitors and the Company is often unable to reliably determine what similar competitor products' selling prices are on a standalone basis.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated selling price, or ESP, in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. In determining ESP, the Company uses the cost to provide the product or service plus a margin, or considers other factors. When using cost plus a margin, the Company considers the total cost of the product or service, including customer-specific and geographic factors. The Company also considers the historical margins of the product or service on previous contracts and several factors including any changes to pricing methodologies, competitiveness of products and services and cost drivers that would cause future margins to differ from historical margins.

Products. The Company most often recognizes revenue from sales of products upon customer acceptance of the system. Where formal acceptance is not required, the Company recognizes revenue upon delivery or installation. When the product is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to product revenue based on estimates of selling price.

Services. Maintenance services are provided under separate maintenance contracts with customers. These contracts generally provide for maintenance services for one year, although some are for multi-year periods, often with prepayments for the term of the contract. The Company considers the maintenance period to commence upon acceptance of the product or installation in situations where a formal acceptance is not required, which may include a warranty period. When service is part of a multiple element arrangement, the Company allocates a portion of the arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance contracts that are billed in advance of revenue recognition are recorded as deferred revenue. Maintenance revenue is recognized ratably over the term of the maintenance contract.

Revenue from engineering services is recognized as services are performed.

Project Revenue. Revenue from design and build contracts is recognized under the percentage-of-completion (or POC method). Under the POC method, revenue is recognized based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in income in the period in which the circumstances that gave rise to the revision become known by management. The Company performs ongoing profitability analyses of its contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.

The Company records revenue from certain research and development contracts which include milestones using the milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive if management believes there is substantive uncertainty that it will be achieved and the milestone consideration meets all of the following criteria:

• It is commensurate with either of the following:

• The Company's performance to achieve the milestone; or

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

• It relates solely to past performance.

• It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

The individual milestones are determined to be substantive or non-substantive in their entirety and milestone consideration is not bifurcated.

Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work performed.

Nonmonetary Transactions. The Company values and records nonmonetary transactions at the fair value of the asset surrendered unless the fair value of the asset received is more clearly evident, in which case the fair value of the asset received is used.

Investment, Policy

The Company’s investments in debt securities with maturities at purchase greater than three months are classified as "available-for-sale."  Changes in fair value are reflected in other comprehensive income (loss).

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Condensed Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenue:
Product	$ 30,015	$ 59,868
Service	25,095	19,679
Total revenue	55,110	79,547
Cost of revenue:
Cost of product revenue	23,972	45,570
Cost of service revenue	13,201	9,827
Total cost of revenue	37,173	55,397
Gross profit	17,937	24,150
Operating expenses:
Research and development, net	22,621	20,226
Sales and marketing	11,776	11,143
General and administrative	5,413	5,485
Total operating expenses	39,810	36,854
Loss from operations	(21,873)	(12,704)
Other expense, net	(646)	(335)
Interest income, net	61	376
Loss before income taxes	(22,458)	(12,663)
Income tax benefit	9,520	5,054
Net loss	$ (12,938)	$ (7,609)
Basic net loss per common share (EPS)	$ (0.34)	$ (0.20)
Diluted net loss per common share (EPS)	$ (0.34)	$ (0.20)
Basic weighted average shares outstanding (Shares Outstanding)	38,317	37,335
Diluted weighted average shares outstanding (Shares Outstanding)	38,317	37,335

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Accounts and Other Receivables, Net

3 Months Ended

Mar. 31, 2014

Receivables [Abstract]

Accounts and Other Receivables, Net

Note 6— Accounts and Other Receivables, Net

Net accounts and other receivables consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Trade accounts receivable	$	44,947		$	169,417
Unbilled receivables	11,329			9,075
Advance billings	1,165			2,141
Other receivables	1,430			2,051
	58,871			182,684
Allowance for doubtful accounts	(106		)	(157		)
Accounts and other receivables, net	$	58,765		$	182,527

Unbilled receivables represent amounts where the Company has recognized revenue in advance of the contractual billing terms. Advance billings represent billings made based on contractual terms for which revenue has not been recognized.

As of March 31, 2014 and December 31, 2013, accounts receivable included $12.0 million and $111.9 million, respectively, due from U.S. government agencies and customers primarily serving the U.S. government. Of these amounts, $0.3 million and $0.3 million were unbilled as of March 31, 2014 and December 31, 2013, respectively, based upon contractual billing arrangements with these customers. As of March 31, 2014, three non-U.S. government customers accounted for 37% of total accounts and other receivables. As of December 31, 2013, no non-U.S. government customer accounted for more than 10% of total accounts and other receivables.

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Investments

3 Months Ended

Mar. 31, 2014

Investments, Debt and Equity Securities [Abstract]

Investments

Note 5— Investments

The Company’s investments in debt securities with maturities at purchase greater than three months are classified as "available-for-sale."  Changes in fair value are reflected in other comprehensive income (loss).

The carrying amount of the Company’s investments in available-for-sale securities as of March 31, 2014 is shown in the table below (in thousands):

			Unrealized
	Cost		Gains (Losses)			Fair Value
Short-term available-for-sale securities	$	49,889	$	27		$	49,916
Long-term available-for-sale securities	7,838		(21		)	7,817
Total	$	57,727	$	6		$	57,733

The carrying amount of the Company’s investments in available-for-sale securities as of December 31, 2013 is shown in the table below (in thousands):

			Unrealized
	Cost		Gains (Losses)		Fair Value
Short-term available-for-sale securities	$	14,048	$	—	$	14,048
Long-term available-for-sale securities	—		—		—
Total	$	14,048	$	—	$	14,048

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Inventory (Tables)

3 Months Ended

Mar. 31, 2014

Inventory Disclosure [Abstract]

Inventory

Inventory consisted of the following (in thousands):

	March 31, 2014		December 31, 2013
Components and subassemblies	$	39,376	$	46,339
Work in process	15,880		23,618
Finished goods	62,938		25,172
Total	$	118,194	$	95,129

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Fair Value Measurement (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Company's financial assets and liabilities measured at fair value and the hierarchy of the valuation inputs

The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2014, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

Description	Fair Value as of March 31, 2014			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents and restricted cash	$	220,891		$	220,891	$	—
Available-for-sale investments (1)	57,733			57,733		—
Foreign exchange forward contracts (2)	1,160			—		1,160
Assets measured at fair value at March 31, 2014	$	279,784		$	278,624	$	1,160
Liabilities:
Foreign exchange forward contracts (3)	$	(6,734	)	$	—	$	(6,734	)
Liabilities measured at fair value at March 31, 2014	$	(6,734	)	$	—	$	(6,734	)

 ____________________

(1) Included in "Short-term investments" and "Long-term investments" on the Company’s Condensed Consolidated Balance Sheets.

(2) Included in “Prepaid expenses and other 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.

Fair Values of Derivative Instruments

Fair Values of Derivative Instruments (in thousands):

Hedge Classification	Balance Sheet Location	Fair Value as of March 31, 2014			Fair Value as of December 31, 2013
Foreign currency contracts	Prepaid expenses and other current assets	$	1,160		$	1,654
Foreign currency contracts	Other non-current assets	—			76
Foreign currency contracts	Other accrued liabilities	(2,669		)	(2,942		)
Foreign currency contracts	Other non-current liabilities	(4,065		)	(4,295		)
Total fair value of derivatives classified as hedging instruments		$	(5,574	)	$	(5,507	)

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Share-Based Compensation

3 Months Ended

Mar. 31, 2014

Share-based Compensation [Abstract]

Share-Based Compensation

Note 9— Share-Based Compensation

The Company accounts for its share-based compensation based on an estimate of fair value of the grant on the date of grant.

The fair value of unvested restricted stock is based on the market price of a share of the Company’s common stock on the date of grant and is amortized over the vesting period.

In determining fair value of stock options, the Company uses the Black-Scholes option pricing model. As no options were granted during the three months ended March 31, 2013, no calculation was performed for that period. The following key weighted average assumptions were employed in the calculation for the three months ended March 31, 2014:

	Three Months Ended March 31, 2014
Risk-free interest rate	1.24%
Expected dividend yield	—%
Volatility	50.40%
Expected life	4.0 years
Weighted average Black-Scholes value of options granted	$11.01

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is based on the assumption that options will be exercised, on average, about two years after vesting occurs. The Company recognizes compensation expense for only the portion of options or stock units that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates. The estimated forfeiture rate applied during the three months ended March 31, 2014 was 10.0%. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. The Company’s stock price volatility, option lives and expected forfeiture rates involve management’s best estimates at the time of such determination, which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting period or requisite service period of the option. The Company typically issues stock options with a four year vesting period (the requisite service period) and amortizes the fair value of stock options (stock compensation cost) ratably over the requisite service period. The fair value of unvested restricted stock is based on the market price of a share of the Company’s common stock on the date of grant and is amortized over the vesting period.

The Company also has an employee stock purchase plan (“ESPP”) which allows employees to purchase shares of the Company’s common stock at 95% of fair market value on the fourth business day after the end of each offering period. The ESPP is deemed non-compensatory and therefore is not subject to the fair value provisions.

The following table sets forth the gross share-based compensation cost resulting from stock options and unvested restricted stock grants that were recorded in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (in thousands):

	Three Months Ended March 31,
	2014		2013
Cost of product revenue	$	52	$	27
Cost of service revenue	69		62
Research and development, net	761		386
Sales and marketing	751		516
General and administrative	889		735
Total	$	2,522	$	1,726

A summary of the Company’s year-to-date stock option activity and related information follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Outstanding at December 31, 2013	2,078,069		$	9.29
Grants	44,800		$	27.46
Exercises	(143,258	)	$	6.95
Cancellations	(5,497	)	$	24.54
Outstanding at March 31, 2014	1,974,114		$	9.83	6.9
Exercisable at March 31, 2014	1,201,668		$	6.34	5.9
Available for grant at March 31, 2014	2,985,282

As of March 31, 2014, there was $54.3 million of aggregate intrinsic value of outstanding stock options, including $37.2 million of aggregate intrinsic value of exercisable stock options. Intrinsic value represents the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of its first quarter of 2014 and the exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received by the option holders had all option holders exercised their options on March 31, 2014. During the three months ended March 31, 2014, stock options covering 143,258 shares of common stock with a total intrinsic value of $4.3 million were exercised. During the three months ended March 31, 2013, stock options covering 202,321 shares of common stock with a total intrinsic value of $2.6 million were exercised.

A summary of the Company’s unvested restricted stock grants and changes during the three months ended March 31, 2014 is as follows:

	Standard Restricted Shares				Performance Vesting Restricted Shares				Total Restricted Shares
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2013	1,127,700		$	12.05	1,094,000		$	15.94	2,221,700		$	13.97
Granted	100,800		$	34.73	—		$	—	100,800		$	34.73
Forfeited	(5,000	)	$	26.01	(10,000	)	$	12.90	(15,000	)	$	17.27
Vested	(36,250	)	$	8.09	—		$	—	(36,250	)	$	8.09
Outstanding at March 31, 2014	1,187,250		$	14.04	1,084,000		$	15.97	2,271,250		$	14.96

The aggregate fair value of restricted stock vested during the three months ended March 31, 2014 and 2013 was $1.1 million and $0.7 million, respectively.

As of March 31, 2014, the Company had $31.2 million of total unrecognized compensation cost related to unvested stock options and unvested restricted stock. This includes $17.0 million for performance vesting restricted stock subject to performance measures which are currently not considered probable to vest and $0.3 million for performance vesting restricted stock subject to performance measures which currently are considered probable to vest. No compensation expense is recorded for performance vesting restricted stock subject to performance measures that are not yet considered probable of attainment.

Unrecognized compensation cost related to unvested stock options and unvested restricted stock grants considered probable to vest is expected to be recognized over a weighted average period of 1.7 years.

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Inventory

3 Months Ended

Mar. 31, 2014

Inventory Disclosure [Abstract]

Inventory

Note 7— Inventory

Inventory consisted of the following (in thousands):

	March 31, 2014		December 31, 2013
Components and subassemblies	$	39,376	$	46,339
Work in process	15,880		23,618
Finished goods	62,938		25,172
Total	$	118,194	$	95,129

Finished goods inventory of $61.9 million and $24.8 million was located at customer sites pending acceptance as of March 31, 2014 and December 31, 2013, respectively. At March 31, 2014, two customers accounted for $50.7 million, and at December 31, 2013, one customer accounted for $18.0 million of finished goods inventory.

During the three months ended March 31, 2014 the Company wrote off $0.4 million of inventory, primarily related to our CS300 product line. There were no write offs during the three months ended March 31, 2013.

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Deferred Revenue

3 Months Ended

Mar. 31, 2014

Deferred Revenue Disclosure [Abstract]

Deferred Revenue

Note 8— Deferred Revenue

Deferred revenue consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Deferred product revenue	$	59,174		$	54,065
Deferred service revenue	84,546			87,900
Total deferred revenue	143,720			141,965
Less long-term deferred revenue	(54,167		)	(50,477		)
Deferred revenue in current liabilities	$	89,553		$	91,488

As of March 31, 2014, two customers accounted for 37% of total deferred revenue. At December 31, 2013, three customers accounted for 47% of total deferred revenue.

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Taxes

3 Months Ended

Mar. 31, 2014

Income Tax Disclosure [Abstract]

Taxes

Note 10— Taxes

The Company’s effective tax rates for the three months ended March 31, 2014 and 2013 were as follows:

	Three Months Ended March 31,
	2014	2013
Effective Tax Rates	42%	40%

The effective tax rates for the three months ended March 31, 2014 and 2013 were higher than the U.S. federal statutory rate primarily as a result of state taxes.

The Company continues to provide a partial valuation allowance against its U.S. deferred tax assets and a full valuation allowance against its deferred tax assets in a limited number of foreign jurisdictions as the realization of such assets is not considered to be more likely than not. The Company’s conclusion about the realizability of its deferred tax assets, and therefore the appropriateness of a valuation allowance, is reviewed quarterly. If the Company’s conclusion about the realizability of its deferred tax assets changes in a future period, the Company could record a substantial tax provision or benefit in its Condensed Consolidated Statements of Operations when that occurs.

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Investments (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014		Dec. 31, 2013
Schedule of Held-to-maturity Securities [Line Items]
Available-for-sale Securities, Amortized Cost	$ 57,727		$ 14,048
Available-for-sale Securities, Gross Unrealized Gain (Losses)	6		0
Available-for-sale investments	57,733	[1]	14,048
Short-term available-for-sale securities
Schedule of Held-to-maturity Securities [Line Items]
Available-for-sale Securities, Amortized Cost	49,889		14,048
Available-for-sale Securities, Gross Unrealized Gain (Losses)	27		0
Available-for-sale investments	49,916		14,048
Long-term available-for-sale securities
Schedule of Held-to-maturity Securities [Line Items]
Available-for-sale Securities, Amortized Cost	7,838		0
Available-for-sale Securities, Gross Unrealized Gain (Losses)	(21)		0
Available-for-sale investments	$ 7,817		$ 0

[1] Included in "Short-term investments" and "Long-term investments" on the Company’s Condensed Consolidated Balance Sheets.

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Investments (Tables)

3 Months Ended

Mar. 31, 2014

Investments, Debt and Equity Securities [Abstract]

Invesrments

The carrying amount of the Company’s investments in available-for-sale securities as of March 31, 2014 is shown in the table below (in thousands):

			Unrealized
	Cost		Gains (Losses)			Fair Value
Short-term available-for-sale securities	$	49,889	$	27		$	49,916
Long-term available-for-sale securities	7,838		(21		)	7,817
Total	$	57,727	$	6		$	57,733

The carrying amount of the Company’s investments in available-for-sale securities as of December 31, 2013 is shown in the table below (in thousands):

			Unrealized
	Cost		Gains (Losses)		Fair Value
Short-term available-for-sale securities	$	14,048	$	—	$	14,048
Long-term available-for-sale securities	—		—		—
Total	$	14,048	$	—	$	14,048

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Taxes (Tables)

3 Months Ended

Mar. 31, 2014

Income Tax Disclosure [Abstract]

Schedule of Effective Income Tax Rate Reconciliation

The Company’s effective tax rates for the three months ended March 31, 2014 and 2013 were as follows:

	Three Months Ended March 31,
	2014	2013
Effective Tax Rates	42%	40%

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Segment Information Narrative (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenue, Major Customer [Line Items]
Product and service revenue	$ 55,110	$ 79,547
US. government agencies and customers
Revenue, Major Customer [Line Items]
Product and service revenue	$ 22,000	$ 38,600
Japan
Revenue, Major Customer [Line Items]
Percentage of total revenue	25.00%
Japan and Switzerland
Revenue, Major Customer [Line Items]
Percentage of total revenue		32.00%

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Share-Based Compensation Assumptions (Details) (USD $)	3 Months Ended
	Mar. 31, 2014
Key weighted average assumptions used in determining the fair value
Risk-free interest rate	1.24%
Expected dividend yield	0.00%
Volatility	50.40%
Expected life	4 years
Weighted average Black-Scholes value of options granted	$ 11.01

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Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Net loss	$ (12,938)	$ (7,609)
Other comprehensive income (loss), net of tax:
Unrealized gain on available-for-sale investments	4	49
Foreign currency translation adjustments	23	165
Unrealized gain (loss) on cash flow hedges	(328)	2,020
Reclassification adjustments on cash flow hedges included in net loss	20	(20)
Other comprehensive income (loss)	(281)	2,214
Comprehensive loss	$ (13,219)	$ (5,395)

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Earnings (Loss) Per Share ("EPS")

3 Months Ended

Mar. 31, 2014

Earnings Per Share [Abstract]

Earnings (Loss) Per Share ("EPS")

Note 4— Earnings (Loss) Per Share ("EPS")

Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares, excluding unvested restricted stock, outstanding during the period. Diluted EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common and potential common shares outstanding during the period, which includes the additional dilution related to conversion of stock options, unvested restricted stock and restricted stock units as computed under the treasury stock method.

For the three months ended March 31, 2014 and 2013, outstanding stock options, unvested restricted stock grants and restricted stock units were antidilutive because of the net losses and, as such, their effect has not been included in the calculation of basic or diluted net loss per share. For the three months ended March 31, 2014 and 2013, potential gross common shares of 3.2 million and 4.2 million, respectively, were antidilutive and not included in computing diluted EPS.

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Segment Information (Tables)

3 Months Ended

Mar. 31, 2014

Segment Reporting [Abstract]

Information of operating segments

The following table presents revenues and gross margin for the Company’s operating segments for the three months ended March 31 (in thousands):

	Three Months Ended March 31,
	2014			2013
Revenue:
Supercomputing	$	43,626		$	61,755
Storage and Data Management	8,065			16,282
Maintenance and Support	21,965			18,213
Engineering Services and Other	3,419			1,510
Elimination of inter-segment revenue	(21,965		)	(18,213		)
Total revenue	$	55,110		$	79,547
Gross Profit:
Supercomputing	$	13,223		$	16,257
Storage and Data Management	2,907			7,157
Maintenance and Support	10,214			9,160
Engineering Services and Other	1,807			736
Elimination of inter-segment gross profit	(10,214		)	(9,160		)
Total gross profit	$	17,937		$	24,150

Revenue by geographic location

The following data represents the Company’s revenue for the United States and all other countries, which is determined based upon a customer’s geographic location (in thousands):

	United States				Other Countries				Total
	2014		2013		2014		2013		2014		2013
Three months ended March 31,
Product revenue	$	10,463	$	31,144	$	19,552	$	28,724	$	30,015	$	59,868
Service revenue	17,744		13,472		7,351		6,207		25,095		19,679
Total revenue	$	28,207	$	44,616	$	26,903	$	34,931	$	55,110	$	79,547

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Narrative (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Inventory [Line Items]
Finished goods inventory	$ 61,900,000		$ 24,800,000
Customers accounted of finished goods	50,700,000		18,000,000
Inventory , written off	$ 382,000	$ 0
Finished Goods Inventory
Inventory [Line Items]
Number of customer accounted for finished goods inventory	2		1

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Accumulated Other Comprehensive Income (Tables)

3 Months Ended

Mar. 31, 2014

Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]

Reclassification from Accumulated Other Comprehensive Income

The gross reclassification adjustments increased product revenue for the three months ended March 31, 2013.

	Three Months Ended March 31,
	2014			2013
Gross of Tax Reclassifications	$	(33	)	$	33
Net of Tax Reclassifications	$	(20	)	$	20

Schedule of Accumulated Other Comprehensive Income (Loss)

The following tables show the changes in Accumulated Other Comprehensive Income by component for the three months ended March 31, 2014 and 2013 (in thousands):

Three Months Ended March 31, 2014
	Unrealized Gain on Investments		Foreign Currency Translation Adjustments			Unrealized Loss on Cash Flow Hedges			Accumulated Other Comprehensive Income
Beginning balance	$	—	$	3,257		$	(2,404	)	$	853
Current-period change, net of tax	4		23			(308		)	(281		)
Ending balance	$	4	$	3,280		$	(2,712	)	$	572
Income tax expense (benefit) associated with current-period change	$	2	$	(167	)	$	(205	)	$	(370	)

Three Months Ended March 31, 2013
	Unrealized Gain/(Loss) on Investments			Foreign Currency Translation Adjustments		Unrealized Gain on Cash Flow Hedges		Accumulated Other Comprehensive Income
Beginning balance	$	(46	)	$	4,301	$	926	$	5,181
Current-period change, net of tax	49			165		2,000		2,214
Ending balance	$	3		$	4,466	$	2,926	$	7,395
Income tax expense associated with current-period change	$	33		$	110	$	1,333	1,476