##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2009
 Or
 o
    
    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
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    93-0962605
(I.R.S. Employer Identification No.)
 901 Fifth Avenue, Suite 1000
Seattle, Washington
(Address of Principal Executive Office)
    
    98164
(Zip Code)
 Registrants Telephone Number, Including Area Code:
(206) 701-2000
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



CRAY INC.
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Unaudited Condensed Consolidated Financial Statements:
    
    
    3Balance Sheets as of March 31, 2009 and December 31, 2008
    
    
    3Statements of Operations for the Three Months Ended March 31, 2009 and 2008
    
    
    4Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Item 4T. Controls and Procedures
    
    
    26PART II. OTHER INFORMATION
    
    
    26Item1A. Risk Factors
    
    
    26Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34EX-31.1EX-31.2EX-32.1
  Available Information
  h ®
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
 
  
 December 31,March 31,
    
    
    20082009
    
    

    (As Adjusted)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    123,428
    
    
    $
    72,373Restricted cash
    
    
    2,691
    
    
    
    2,691Short-term investments, available-for-sale
    
    
    5,641
    
    
    
    5,350Accounts receivable, net
    
    
    23,756
    
    
    
    95,667Inventory
    
    
    53,726
    
    
    
    80,437Prepaid expenses and other current assets
    
    
    23,630
    
    
    
    29,993Total current assets
    
    
    232,872
    
    
    
    286,511Property and equipment, net
    
    
    18,246
    
    
    
    18,396Service inventory, net
    
    
    1,734
    
    
    
    1,917Deferred tax asset
    
    
    1,716
    
    
    
    1,200Other non-current assets
    
    
    6,533
    
    
    
    5,837TOTAL ASSETS
    
    $
    261,101
    
    
    $
    313,861LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    20,012
    
    
    $
    16,730Accrued payroll and related expenses
    
    
    10,267
    
    
    
    23,672Advance research and development payments
    
    
    1,432
    
    
    
    13,887Convertible notes, net of discount
    
    
    26,218
    
    
    
    25,681Other accrued liabilities
    
    
    6,173
    
    
    
    24,670Deferred revenue
    
    
    56,847
    
    
    
    67,692Total current liabilities
    
    
    120,949
    
    
    
    172,332Long-term deferred revenue
    
    
    17,782
    
    
    
    18,154Other non-current liabilities
    
    
    3,070
    
    
    
    3,170TOTAL LIABILITIES
    
    
    141,801
    
    
    
    193,656Commitments and contingenciesShareholders 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 34,106,275 and 33,506,573 shares, respectively
    
    
    546,431
    
    
    
    543,442Accumulated other comprehensive income
    
    
    10,358
    
    
    
    9,364Accumulated deficit
    
    
    (437,489
    )
    
    
    (432,601
    )TOTAL SHAREHOLDERS EQUITY
    
    
    119,300
    
    
    
    120,205TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    261,101
    
    
    $
    313,861
 See accompanying notes
 3




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##### Table of Contents



Three Months EndedMarch 31,20082009
    

    
    (As Adjusted)Revenue:Product
    
    $
    59,462
    
    
    $
    10,690Service
    
    
    15,019
    
    
    
    15,438Total revenue
    
    
    74,481
    
    
    
    26,128Cost of revenue:Cost of product revenue
    
    
    46,334
    
    
    
    6,412Cost of service revenue
    
    
    10,276
    
    
    
    8,359Total cost of revenue
    
    
    56,610
    
    
    
    14,771Gross profit
    
    
    17,871
    
    
    
    11,357Operating expenses:Research and development, net
    
    
    11,215
    
    
    
    13,719Sales and marketing
    
    
    6,063
    
    
    
    5,382General and administrative
    
    
    4,146
    
    
    
    3,696Total operating expenses
    
    
    21,424
    
    
    
    22,797Loss from operations
    
    
    (3,553
    )
    
    
    (11,440
    )Other income (expense), net
    
    
    (754
    )
    
    
    253Interest expense, net
    
    
    (533
    )
    
    
    (496
    )Loss before income taxes
    
    
    (4,840
    )
    
    
    (11,683
    )Income tax expense
    
    
    (48
    )
    
    
    (282
    )Net loss
    
    $
    (4,888
    )
    
    $
    (11,965
    )Basic and diluted net loss per common share
    
    $
    (0.15
    )
    
    $
    (0.37
    )Basic and diluted weighted average shares outstanding
    
    
    33,197
    
    
    
    32,371
 See accompanying notes
 4




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##### Table of Contents



Three Months EndedMarch 31,20082009
    
    
    (As Adjusted)Operating activities:Net loss
    
    $
    (4,888
    )
    
    $
    (11,965
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    2,192
    
    
    
    2,857Share-based compensation expense
    
    
    2,370
    
    
    
    573Inventory write-down
    
    
    156
    
    
    
    85Amortization of debt issuance costs
    
    
    52
    
    
    
    125Amortization of convertible notes debt discount
    
    
    537
    
    
    
    1,381Deferred income taxes
    
    
    (549
    )
    
    
    (37
    )Cash provided by (used in) due to changes in operating assets and liabilities:Accounts receivable
    
    
    72,367
    
    
    
    (17,826
    )Inventory
    
    
    26,087
    
    
    
    (3,010
    )Prepaid expenses and other assets
    
    
    6,181
    
    
    
    (1,156
    )Accounts payable
    
    
    3,303
    
    
    
    (1,479
    )Accrued payroll and related expenses, other accrued liabilities and advance research and
development payments
    
    
    (43,017
    )
    
    
    (8,456
    )Other non-current liabilities
    
    
    (99
    )
    
    
    185Deferred revenue
    
    
    (11,146
    )
    
    
    7,161Net cash provided by (used in) operating activities
    
    
    53,546
    
    
    
    (31,562
    )Investing activities:Sales/maturities of short-term investments
    
    
    2,200
    
    
    
    25,851Purchases of short-term investments
    
    
    (2,493
    )
    
    
    (1,673
    )Purchases of property and equipment
    
    
    (1,365
    )
    
    
    (494
    )Net cash provided by (used in) investing activities
    
    
    (1,658
    )
    
    
    23,684Financing activities:Proceeds from issuance of common stock through employee stock purchase plan
    
    
    144
    
    
    
    2009 stock option repurchase tender offer, purchase of options
    
    
    (669
    )
    
    
    Net cash used in financing activities
    
    
    (525
    )
    
    
    Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (308
    )
    
    
    61Net (decrease) increase in cash and cash equivalents
    
    
    51,055
    
    
    
    (7,817
    )Cash and cash equivalents:Beginning of period
    
    
    72,373
    
    
    
    120,539End of period
    
    $
    123,428
    
    
    $
    112,722Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    2Non-cash investing and financing activities:Inventory transfers to fixed assets and service inventory
    
    $
    468
    
    
    $
    249Shares issued for 401(k) match
    
    $
    1,062
    
    
    $
    1,013
 See
accompanying notes
 5




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##### Table of Contents



Note 1  Basis of Presentation
    Principles of Consolidation
  Adjustments and Reclassifications
 Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)
 Note 12  Convertible Notes
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Use of Estimates
  Note 2  New Accounting Pronouncements
 Disclosures about Derivative Instruments and Hedging Activities Accounting for Derivative Instruments and Hedging
Activities Note 3  Fair Value Measurement
 Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active Fair Value Measurements
 Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments,
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly
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##### Table of Contents



Note 3  Fair Value Measurement
 Effective Date of FASB
Statement No. 157
  Quoted
    
    
    SignificantPrices in
    
    
    OtherFair Value
    
    
    Active
    
    
    Observableat March 31,
    
    
    Markets
    
    
    InputsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)Assets:Cash, cash equivalents and restricted cash
    
    $
    126,119
    
    
    $
    126,119
    
    
    $
    Short-term investments, available-for-sale
    
    
    5,641
    
    
    
    5,641
    
    
    
    Foreign exchange forward contracts (1)
    
    
    90
    
    
    
    
    
    
    
    90Assets measured at fair value at March 31, 2009
    
    $
    131,850
    
    
    $
    131,760
    
    
    $
    90
 
 (1)
    
    Included in Prepaid expenses and other current assets on the Companys Condensed Consolidated Balance Sheets.  Short-term Investments
  Amortized
    
    
    Gross
    
    
    GrossCost
    
    
    Unrealized
    
    
    UnrealizedBasis
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2009Corporate notes and bonds
    
    $
    3,150
    
    
    $
    6
    
    
    $
    (11
    )
    
    $
    3,145Commercial paper
    
    
    2,496
    
    
    
    
    
    
    
    
    
    
    
    2,496Total short-term investments
    
    $
    5,646
    
    
    $
    6
    
    
    $
    (11
    )
    
    $
    5,641December 31, 2008Corporate notes and bonds
    
    $
    5,351
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    5,350Total short-term investments
    
    $
    5,351
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    5,350
  8




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##### Table of Contents



Foreign Currency Derivatives
     Fair Value
    
    Fair Valueas of
    
    as ofMarch 31,
    
    December 31,Hedge Classification
    
    Balance Sheet Location
    
    2009
    
    2008Cash flow hedges
    
    Prepaid expenses and other current assets
    
    $
    90
    
    
    $
    5,478Total
derivatives
classified as
hedging
instruments
    
    
    
    $
    90
    
    
    $
    5,478
  Note 4  Earnings (Loss) Per Share (EPS)
   9




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Note 5  Comprehensive Loss
  Three Months EndedMarch 31,2009
    
    
    2008 (1)Net loss
    
    $
    (4,888
    )
    
    $
    (11,965
    )Unrealized gain (loss) on available-for-sale investments
    
    
    (4
    )
    
    
    76Cash flow hedges:Gain on cash flow hedges
    
    
    536
    
    
    
    197Reclassification adjustment to revenue
    
    
    24
    
    
    
    560
    
    
    
    197Foreign currency translation adjustment
    
    
    438
    
    
    
    (3,325
    )Comprehensive loss
    
    $
    (3,894
    )
    
    $
    (15,017
    )
 
 (1)
    
    Net loss adjusted for retrospective application of FSP APB 14-1 (see Note 12 
Convertible Notes) Note 6  Accounts Receivable
  March 31,
    
    
    December 31,2009
    
    
    2008Trade accounts receivable
    
    $
    19,856
    
    
    $
    75,624Unbilled receivables
    
    
    1,029
    
    
    
    6,703Advance billings
    
    
    3,102
    
    
    
    13,43923,987
    
    
    
    95,766Allowance for doubtful accounts
    
    
    (231
    )
    
    
    (99
    )Accounts receivable, net
    
    $
    23,756
    
    
    $
    95,667
   Note 7  Inventory
  March 31,
    
    
    December 31,2009
    
    
    2008Components and subassemblies
    
    $
    21,414
    
    
    $
    16,805Work in process
    
    
    13,174
    
    
    
    6,284Finished goods
    
    
    19,138
    
    
    
    57,348Total
    
    $
    53,726
    
    
    $
    80,437
  h
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Note 8  Deferred Revenue
  March 31,
    
    
    December 31,2009
    
    
    2008Deferred product revenue
    
    $
    35,477
    
    
    $
    43,295Deferred service revenue
    
    
    39,152
    
    
    
    42,551Total deferred revenue
    
    
    74,629
    
    
    
    85,846Less long-term deferred revenue
    
    
    (17,782
    )
    
    
    (18,154
    )Deferred revenue in current liabilities
    
    $
    56,847
    
    
    $
    67,692
  Note 9  Share-Based Compensation
 Share-Based Payment
   Three Months EndedMarch 31,2009
    
    2008Risk-free interest rate
    
    
    1.4
    %
    
    
    2.4
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    78
    %
    
    
    69
    %Expected life
    
    4.0 years
    
    4.0 yearsWeighted average Black-Scholes value of options granted
    
    $
    1.14
    
    
    $
    2.88
   11




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##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008Cost of product revenue
    
    $
    91
    
    
    $
    14Cost of service revenue
    
    
    217
    
    
    
    26Research and development, net
    
    
    892
    
    
    
    221Sales and marketing
    
    
    364
    
    
    
    81General and administrative
    
    
    806
    
    
    
    231Total
    
    $
    2,370
    
    
    $
    573
  WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractualOptions
    
    
    Price
    
    
    TermOutstanding at December 31, 2008
    
    
    3,755,894
    
    
    $
    12.30Grants
    
    
    10,000
    
    
    $
    1.97Exercises
    
    
    
    
    
    
    Cancellations
    
    
    (1,879,317
    )
    
    $
    16.40Outstanding at March 31, 2009
    
    
    1,886,577
    
    
    $
    8.16
    
    
    6.9 yearsExercisable at March 31, 2009
    
    
    1,182,544
    
    
    $
    9.79
    
    
    5.3 yearsAvailable for grant at March 31, 2009
    
    
    3,336,815
   WeightedAverageGrant dateShares
    
    
    Fair ValueOutstanding at December 31, 2008
    
    
    623,874
    
    
    $
    7.36Granted
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Outstanding at March 31, 2009
    
    
    623,874
    
    
    $
    7.36
   12




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##### Table of Contents



Note 10  Taxes
    Note 11  Geographic Segment Information
 Disclosure about Segments of an Enterprise and Related Information
  United States
    
    
    Other Countries
    
    
    Total2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Three months ended March 31,Product revenue
    
    $
    50,709
    
    
    $
    9,783
    
    
    $
    8,753
    
    
    $
    907
    
    
    $
    59,462
    
    
    $
    10,690Service revenue
    
    
    9,627
    
    
    
    9,529
    
    
    
    5,392
    
    
    
    5,909
    
    
    
    15,019
    
    
    
    15,438Total revenue
    
    $
    60,336
    
    
    $
    19,312
    
    
    $
    14,145
    
    
    $
    6,816
    
    
    $
    74,481
    
    
    $
    26,128
   Note 12  Convertible Notes
   13




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As Originally
    
    
    
    
    
    
    Effect ofReported
    
    
    As Adjusted
    
    
    ChangeIncome Statement for the three-month period ended March 31, 2008:Interest income (expense), net
    
    $
    837
    
    
    $
    (496
    )
    
    $
    (1,333
    )Loss before income taxes
    
    $
    (10,350
    )
    
    $
    (11,683
    )
    
    $
    (1,333
    )Net loss
    
    $
    (10,632
    )
    
    $
    (11,965
    )
    
    $
    (1,333
    )Basic and diluted net loss per common share
    
    $
    (0.33
    )
    
    $
    (0.37
    )
    
    $
    (0.04
    )Cash Flow Statement for the three-month period ended March 31, 2008:Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Net loss
    
    $
    (10,632
    )
    
    $
    (11,965
    )
    
    $
    (1,333
    )Amortization of debt issuance costs
    
    $
    173
    
    
    $
    125
    
    
    $
    (48
    )Amortization of convertible notes debt discount
    
    $
    
    
    
    $
    1,381
    
    
    $
    1,381Balance Sheet as of December 31, 2008:Prepaid expenses and other current assets
    
    $
    30,023
    
    
    $
    29,993
    
    
    $
    (30
    )Total Assets
    
    $
    313,891
    
    
    $
    313,861
    
    
    $
    (30
    )Convertible notes, net of discount
    
    $
    27,727
    
    
    $
    25,681
    
    
    $
    (2,046
    )Total Liabilities
    
    $
    195,702
    
    
    $
    193,656
    
    
    $
    (2,046
    )Common stock and additional paid-in capital
    
    $
    518,727
    
    
    $
    543,442
    
    
    $
    24,715Accumulated deficit
    
    $
    (409,902
    )
    
    $
    (432,601
    )
    
    $
    (22,699
    )Total Shareholders Equity
    
    $
    118,189
    
    
    $
    120,205
    
    
    $
    2,016Total Liabilities and Shareholders Equity
    
    $
    313,891
    
    
    $
    313,861
    
    
    $
    (30
    )
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Preliminary Note Regarding Forward-Looking Statements
  14




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##### Table of Contents



Overview and Executive Summary
   Summary of First Three Months of 2009 Results
    Market Overview and Challenges
  
    
    The commoditization of HPC hardware, particularly processors and also interconnect
systems,
    
    The growing commoditization of software, including plentiful building blocks and more
capable open source software,
    
    Supercomputing with commodity processors increasing scalability requirements,
    
    Electrical power requirements becoming a design constraint and driver in total cost of
ownership determinations,
    
    Increased micro-architectural diversity, including many-core processors with vector
extensions and growing experimentation with accelerators, as the rate of per-core
performance has decreased, and
    
    Data needs growing faster than computational needs.
   15




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Our Goals and Strategy
  Gain Share in Our Core Supercomputing Market.
 Extend Technology Leadership.
 Expand Our Total Addressable Market.
 Maintain Our Focus on Execution and Profitability.
  Key Performance Indicators
  Revenue.
 16




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##### Table of Contents



Gross profit.
 Operating expenses.
 Liquidity and cash flows.
 Critical Accounting Policies and Estimates
    17




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##### Table of Contents



Revenue Recognition
  Multiple-Element Arrangements. Revenue Arrangements with
Multiple Deliverables
 
    
    The element could be sold separately;
    
    The fair value of the undelivered element is established; and
    
    In cases with any general right of return, our performance with respect to any
undelivered element is within our control and probable.
  Products.
 Project Revenue. Accounting for Performance of Construction-Type
and Certain Production-Type Contracts.
 Services.
 Inventory Valuation
  18




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##### Table of Contents



Accounting for Income Taxes
 Accounting for Income Taxes
  Research and Development Expenses
     19




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Share-based Compensation
  New Accounting Pronouncements
 Disclosures about Derivative Instruments and Hedging
Activities Accounting for Derivative Instruments and Hedging Activities Note 3  Fair Value Measurement
 Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
 Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments,
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly Fair Value Measurements
 Results of Operations
 Revenue
and Gross Profit Margins
  20




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##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008Product revenue
    
    $
    59,462
    
    
    $
    10,690Less: Cost of product revenue
    
    
    46,334
    
    
    
    6,412Product gross profit
    
    $
    13,128
    
    
    $
    4,278Product gross profit margin
    
    
    22
    %
    
    
    40
    %Service revenue
    
    $
    15,019
    
    
    $
    15,438Less: Cost of service revenue
    
    
    10,276
    
    
    
    8,359Service gross profit
    
    $
    4,743
    
    
    $
    7,079Service gross profit margin
    
    
    32
    %
    
    
    46
    %Total revenue
    
    $
    74,481
    
    
    $
    26,128Less: Total cost of revenue
    
    
    56,610
    
    
    
    14,771Gross profit
    
    $
    17,871
    
    
    $
    11,357Gross profit margin
    
    
    24
    %
    
    
    43
    %
 Product Revenue
 h
 h
 Service Revenue
   Cost of Product Revenue and Product Gross Profit
   Cost of Service Revenue and Service Gross Profit
  21




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##### Table of Contents



Research and Development Expenses
  Three Months EndedMarch 31,2009
    
    
    2008Gross research and development expenses
    
    $
    26,018
    
    
    $
    22,092Less: Amounts included in cost of revenue
    
    
    (582
    )
    
    
    Less: Reimbursed research and development
(excludes amounts in cost of revenue)
    
    
    (14,221
    )
    
    
    (8,373
    )Net research and development expenses
    
    $
    11,215
    
    
    $
    13,719Percentage of total revenue
    
    
    15
    %
    
    
    53
    %
     Sales and Marketing and General and Administrative Expenses
  Three Months EndedMarch 31,2009
    
    2008Sales and marketing
    
    $
    6,063
    
    
    $
    5,382Percentage of total revenue
    
    
    8
    %
    
    
    21
    %General and administrative
    
    $
    4,146
    
    
    $
    3,696Percentage of total revenue
    
    
    6
    %
    
    
    14
    %
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##### Table of Contents



Sales and Marketing .
 General and Administrative
 Other Income (Expense), net
  Interest Income (Expense)
  Three Months EndedMarch 31,2009
    
    
    2008(As Adjusted)Interest income
    
    $
    270
    
    
    $
    1,635Interest expense
    
    
    (803
    )
    
    
    (2,131
    )Net interest income (expense)
    
    $
    (533
    )
    
    $
    (496
    )
   Taxes
  Liquidity and Capital Resources
   23




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##### Table of Contents



Amounts Committed by Year2009(Less thanContractual Obligations
    
    Total
    
    
    1 Year)
    
    
    2010-2011
    
    
    2012-2013
    
    
    ThereafterDevelopment agreements
    
    $
    51,683
    
    
    $
    13,969
    
    
    $
    22,714
    
    
    $
    15,000
    
    
    $
    Operating leases
    
    
    18,445
    
    
    
    2,325
    
    
    
    4,569
    
    
    
    4,206
    
    
    
    7,345Unrecognized income tax benefits
    
    
    646
    
    
    
    
    
    
    
    646
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    70,774
    
    
    $
    16,294
    
    
    $
    27,929
    
    
    $
    19,206
    
    
    $
    7,345
     24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  WeightedAveragedInterestFair Value
    
    
    Maturities
    
    
    RateCorporate notes and bonds
    
    $
    3,145
    
    
    
    2009
    
    
    
    4.7
    %Commercial paper
    
    $
    2,496
    
    
    
    2009
    
    
    
    0.6
    %Total short-term investments
    
    $
    5,641
 Foreign Currency Risk
 
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
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##### Table of Contents



Item 4T. Controls and Procedures
  
 Part II. OTHER INFORMATION
 
 Item 1A. Risk Factors
  Our operating results may fluctuate significantly and we may not achieve profitability in any
given period.
   
    
    successful development and selling of our Cray XT5 and Cray XT5m systems, including
upgrades and successor systems;
    
    the level of revenue recognized in any given period, which is affected by the very high
average sales prices and limited number of system sales in any quarter, the timing of
product acceptances by customers and contractual provisions affecting the timing and amount
of revenue recognition;
    
    the successful expansion of our Custom Engineering program, including winning new
contracts in time for performance in 2009 and subsequent years;
    
    our expense levels, including research and development net of government funding, which
are affected by the level and timing of such funding and the meeting of contractual
development milestones;
    
    maintaining our product development projects on schedule and within budgetary
limitations;
    
    the level of product gross profit contribution in any given period due to product mix,
strategic transactions, product life cycle and component costs;
    
    the competitiveness of our products, which may be affected by the competitiveness of key
components from suppliers;
    
    the level and timing of maintenance contract renewals with existing customers;
    
    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 and longer than
expected customer acceptance cycles;
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##### Table of Contents




    
    the terms and conditions of sale or lease for our products; and
    
    the building of a reseller network for our Cray CX1 system and achieving significant
sales of Cray CX1 systems.
  
    
    the timely availability of acceptable components in sufficient quantities to meet
customer delivery schedules;
    
    the timing and level of government funding for product acquisitions and research and
development contracts, which may be adversely affected by the current economic and fiscal
situation;
    
    price fluctuations in the commodity electronics and memory markets;
    
    the availability of adequate customer facilities to install and operate new Cray systems;
    
    general economic trends, including changes in levels of customer capital spending;
    
    the introduction or announcement of competitive products;
    
    currency fluctuations, international conflicts or economic crises; and
    
    the receipt and timing of necessary export licenses.
  Our reliance on third-party suppliers poses significant risks to our operating results,
business and prospects.
 
    
    if a supplier does not provide components that meet our specifications in sufficient
quantities on time, then production and sales of our systems could be delayed, which would
result in decreased revenue and gross profit and adversely affect cash flow  these risks
are accentuated during steep production ramp periods as we introduce new or successor
products;
    
    if an interruption of supply of our components occurs because a supplier changes its
technology roadmap, decides to no longer provide those components, increases the price of
those components significantly or imposes 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. In some cases,
such as with key integrated circuits and memory parts, we may not be able to redesign such
components or find alternate sources that we could use in any realistic time frame.
Defective components may need to be replaced, which may result in increased costs and
obsolete inventory;
    
    if a supplier cannot provide a competitive key component, such as processors, our systems
may be less competitive than systems using components with greater capabilities;
    
    if a supplier provides us with hardware, software or other intellectual property that
contains bugs or other errors or is different from what we expected, our development
projects and production systems may be adversely affected through additional design testing
and verification efforts, respins of integrated circuits and/or development of replacement
components, the production and
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##### Table of Contents



sales of our systems could be delayed and systems installed
at customer sites could require significant field component replacements, resulting in
decreased revenue and gross profit and adversely affecting cash flow;
 
    
    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 not possible to
complete;
    
    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; and
    
    if a key supplier is acquired or has a significant business change, production and sales
of our systems may be delayed or our development programs may be delayed or may not be
possible to complete.
 tm
 The achievement of our business plan in 2009 and future periods is highly dependent on
increased product revenue and gross profit from our Cray XT5 and successor systems.
  
    
    the level of product differentiation in our Cray XT5 and successor systems. We need to
compete successfully against HPC systems from large established companies and lower
bandwidth cluster systems. Our long-term success may be adversely affected if we are not
successful in demonstrating the value of our balanced high bandwidth systems with the
capability of solving challenging problems quickly to a market beyond our current core of
customers, largely certain agencies of the U.S. and other governments, that require systems
with the performance and features we offer;
    
    we sometimes do not meet all of the contract requirements for customer acceptance and
ongoing reliability of our systems, which has resulted in contract penalties. Most often
these penalties adversely affect the gross profit through the provision of additional
equipment and services and/or service credits to satisfy delivery delays and performance
shortfalls. Such penalties adversely impacted gross profits in 2007 and 2008, and we will
incur additional penalties in 2009. The risk of contract penalties is increased when we bid
for new business prior to completing development of new products and must estimate future
system performance;
    
    in March 2008, we placed a last-time buy for a key component for our Cray XT4, Cray XT5
and Cray XMT systems, which had to be placed before we could know all the possible sales
prospects for these products. If we estimated our needs too low, we could limit the number
of possible sales of these products and reduce potential revenue, or if we estimated too
high, we could incur inventory obsolescence charges and reduce our gross profit. Either way,
our operating results could be adversely affected; and
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##### Table of Contents




    
    in the past, product gross profit has been adversely impacted by lower volumes than
planned and higher than anticipated manufacturing variances, including scrap, rework and
excess and obsolete inventory.
  If DARPA terminated our DARPA HPCS program, our desired strategy would be adversely affected,
our net research and development expenditures and capital requirements would increase significantly
and our ability to conduct research and development would decrease.
 If we do not meet our revenue goals for our new strategic initiatives, our revenue and
operating results will be adversely affected.
 Failure to overcome the technical challenges of completing the development of our
supercomputer systems on our product roadmap would adversely affect our revenue and operating
results in subsequent years.
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##### Table of Contents



If the U.S. government purchases fewer supercomputers, our revenue would be reduced and our
operating results would be adversely affected.
 If we are unable to compete successfully in the HPC market, our revenue will decline.
   If we cannot retain, attract and motivate key personnel, we may be unable to effectively
implement our business plan.
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##### Table of Contents



Our stock price is volatile.
 We will require a significant amount of cash to purchase the Notes and to fund planned capital
expenditures, research and development efforts and other corporate expenses and we may have to seek
additional financing.
 U.S. export controls could hinder our ability to make sales to foreign customers and our
future prospects.
 We may infringe or be subject to claims that we infringe the intellectual property rights of
others.
 We incorporate software licensed from third parties into the operating systems for our
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.
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##### Table of Contents



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.
 We may not be able to protect our proprietary information and rights adequately.
 A substantial number of our shares are eligible for future sale and may depress the market
price of our common stock and may hinder our ability to obtain additional financing.
 
    
    34,106,275 shares of common stock;
    
    1,284,852 shares of common stock issuable upon exercise of warrants;
    
    1,886,577 shares of common stock issuable upon exercise of options, of which options to
purchase 1,182,544 shares of common stock were then exercisable; and
    
    Notes convertible into an aggregate of 1,436,260 shares of common stock at a current
conversion price of approximately $19.31 per share, subject to adjustment, or, under certain
circumstances specified in the indenture governing the Notes, a maximum of 1,974,857 shares
of common stock.
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##### Table of Contents



Provisions of our Restated Articles of Incorporation and Bylaws could make a proposed
acquisition that is not approved by our Board of Directors more difficult.
 
    
    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;
    
    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.
  
 Item 6. Exhibits
 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 200231.2
    
    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 200232.1
    
    Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted. 33




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SIGNATURES
  CRAY INC.Date: May 8, 2009
    /s/ PETER J. UNGAROPeter J. UngaroChief Executive Officer and President/s/ BRIAN C. HENRYBrian C. HenryChief Financial Officer/s/ KENNETH D. ROSELLIKenneth D. RoselliChief Accounting Officer 34