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CRAY INC.

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CRAY INC : Other Events (form 8-K)

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08/13/2019 | 09:11am EST
Item 8.01 Other Events
Cray Inc. ("Cray", "we" or "us") announced today that we entered into two
agreements covering awards for Lawrence Livermore National Laboratory ("LLNL")
under the Department of Energy's ("DOE") "CORAL-2" program. The CORAL-2 program
(which is a collaboration of Oak Ridge National Laboratory ("ORNL"), Argonne
National Laboratory and Lawrence Livermore National Laboratory) relates to the
joint effort to procure next-generation, exascale-class supercomputers for the
referenced national laboratories under the DOE. The CORAL-2 program specifically
seeks to fund non-recurring engineering (NRE) and centers of excellence (COE)
related to, and fund the purchase of, exascale-class high-performance computer
systems. Previously we announced we had entered into a fixed price Lease
Agreement with UT-Battelle, LLC under which we will provide items including an
exascale-class high performance computer system and services including system
maintenance and analyst services as a subcontractor to UT-Battelle, LLC (the
"ORNL Build Contract"). We will be delivering another system for this program
for LLNL that is also based on Cray's recently announced next-generation,
exascale-class Cray Shasta platform and the Cray Slingshot interconnect fabric.
Non-Recurring Engineering and Center of Excellence
On April 8, 2019, we entered into a fixed price subcontract between Lawrence
Livermore National Security, LLC (LLNS) and Cray to provide NRE and COE services
to LLNL for the CORAL-2 program. Previously we announced we had entered into a
fixed price subcontract between UT-Battelle, LLC and Cray to provide NRE and COE
services to ORNL for the CORAL-2 program and related to the ORNL Build Contract.
Together these NRE and COE contracts are referred to as the "NRE Contracts" and
LLNL and ORNL together are referred to as the "Laboratories."
For purposes of this project, NRE refers to work performed by Cray including
design, development and testing of new products or product enhancements relating
to the procurement of exascale-class systems for the Laboratories (often
referred to as a development contract). The majority of the NRE is work that
will benefit the exascale-class supercomputers at both of the Laboratories, and
now that both Laboratories have awarded contracts to Cray they plan to share NRE
costs between the two Laboratories (which means that, among other things,
certain work that is covered by our NRE contract with ORNL will now benefit both
Laboratories and vice versa). COE work consists of multiple milestones to
support porting key applications to the Laboratories' systems and improving the
performance of customer applications on those systems. The total payments to
Cray provided for under the NRE Contracts are approximately $130 million, which
is subject to and conditioned upon incremental funding and any changes agreed to
by the Laboratories and Cray as a result of changes to system configuration.
This means that only an initial portion (approximately $30 million) of the
planned work under the NRE Contracts is currently funded by the U.S. government,
and the Laboratories must periodically seek to increase the funded amount and
authorize additional work. Such additional funding may be dependent on
successful completion of already-funded work. About $40 million of the NRE
Contracts payments are currently expected to be used to fund development work at
our technology partners. Payments for work under the NRE Contracts will be due
following submission of an invoice for specific milestones and/or deliverables
that have been completed. Work under the NRE Contracts is currently expected to
be completed between 2019 and 2026 with much of such work completed between 2019
and 2021.
The NRE Contracts contains a class advance waiver on intellectual property for
work performed by Cray. In general, the waiver allows Cray and any first-tier
subcontractor of Cray to assert copyright to its works of authorship and to
elect title to its subject inventions developed under the program. The patent
waiver allows Cray to commercialize the outcome of the work performed under the
NRE Contracts and pursue further sales of products developed or enhanced by Cray
through such work. In order to maintain the patent waiver Cray is responsible
for sharing 40% of the costs of project performance, which means for example
that for work performed by Cray under the NRE Contracts that is expected to cost
$1,000,000, Cray would receive $600,000 in payments. The work planned to be
completed under the NRE Contracts is focused on development of and improvements
to Cray's next-generation Shasta system platform. As this program is subject to
federal funding, Cray and the Laboratories have agreed to provisions allowing
termination of the NRE Contracts for the convenience of the Laboratories. In the
event of termination for convenience, Cray will be paid for certain work Cray
performed and/or costs incurred prior to termination.
LLNL System Delivery
On July 3, 2019, we entered into a fixed price Subcontract with Lawrence
Livermore National Security, LLC under which we will provide items including an
exascale-class high performance computer system and services including system
maintenance and analyst services (the "LLNL Build Contract"). The LLNL Build
Contract consists of several system deliveries, culminating in a final system
known as "El Capitan." The total estimated price to Cray for performance of the
LLNL Build Contract is approximately $523 million, inclusive of both products
and services and which is subject to and conditioned upon incremental funding
and adjustments as described below. This means that the entire contract value is
not currently funded but is expected to be incrementally funded as performance
progresses and LLNL receives ongoing funding from the U.S. government, with
approximately $5 million of the contracted amount funded by the U.S government
as of the


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signing of the LLNL Build Contract. The LLNL Build Contract also contains
various options for LLNL to purchase additional products and services.
The systems to be delivered by us under the LLNL Build Contract includes Early
Access Systems (EAS) and associated services, an Early Delivery System (EDS) and
associated services, a Capacity Tier System (CTS) and associated services, an
Intermediate Delivery System (IDS) and associated services and a final system
and associated services. The EAS, valued at approximately $5 million with
associated services, are planned for delivery by mid 2020 and will provide LLNL
an opportunity for early evaluation of system architecture at a prototype level.
Following completion of aspects of the NRE and COE activities and a prototype
checkpoint, the LLNL Build Contract provides for a "Go/No-Go" decision point to
determine whether or not LLNL wishes to proceed with the purchase of the EDS,
CTS, IDS, and final system, with such "Go/No-Go" planned to occur in 2021,
subject to change depending on factors such as program milestone progress and
configuration changes. In the event a "No-Go" decision is made then LLNL
reserves the option to wind down the program with no further deliveries by Cray,
and this "unwind" option may be exercised by the parties within 15 days of a
"No-Go." If either of the parties exercises the "unwind" option, this would
represent a cancellation of the program. In the event a "Go" decision is made,
it is expected the parties will negotiate an updated system configuration and
performance targets taking into account the outcome of the NRE efforts and
projected state of technology at time of system delivery. Because of the
"Go/No-Go" decision point, the value of the "El Capitan" system would not be
included in Cray's backlog until after a "Go" decision.
As the "Go/No-Go" decision and system deliveries will occur in the future we
have negotiated a mechanism designed to minimize the financial risk of cost
fluctuations in key system commodity components that currently include: Memory
DIMMS (DDR5), High-Bandwidth Memory (HBM2e), solid state drives (SSD) and hard
disk drives (HDD). The final price of the system and/or or the final
configuration will be adjusted based on the ultimate prices of these components.
Should the price of the risk-sharing components be less than the price assumed
in the contract, the total price of the system will be less than the estimated
system price above or the customer could decide to increase the size of the
configuration. If the total price of the risk-shared components were to exceed
the costs assumed in the contract, then the customer could decide to reduce the
size of the system from the original configuration or increase the funds to be
spent, or a combination of both, to accommodate the cost increase. Any changes
to the final price of the system as a result of the risk-sharing provisions will
be made dollar-for-dollar based on changes to the covered commodity component
costs. The potential total impact of the risk-sharing adjustment could exceed
$100 million.
The final system is planned for acceptance in March 2023. Although LLNL
currently prefers to acquire the systems with direct funding the LLNL Build
Contract contains an option for LLNL to utilize third party leasing services.
Additionally, given the size of the final system, the subcontract is structured
such that Cray will receive milestone payments based on completing discrete
elements of each system delivery (such as, for example, completion of the EDS)
and/or purchase of certain components during the build process. As a result,
over $400 million may be subject to early payment in the roughly six months
prior to final system acceptance to provide earlier cash flow for Cray. Each
system is subject to acceptance tests as agreed to by Cray and LLNL. Cash
payments may be due following completing discrete elements and "acceptance" of
each system delivery even if revenue for such discrete element is not recognized
by Cray at that time.
As the LLNL Build Contract is subject to federal funding, Cray has agreed with
LLNL to certain termination rights for the convenience of LLNL. In the event of
termination for convenience by LLNL, Cray will be paid a percentage of the price
reflecting the percentage of the work performed prior to the notice of
termination, plus any reasonable charges resulting from the termination which we
are able to substantiate to the satisfaction of LLNL, such amounts not to exceed
the total value of the subcontract. As the subcontract deals with delivery of
cutting-edge technology LLNL has agreed, prior to pursuing any termination
remedies, to engage in a review of the subcontract and system requirements and
attempt renegotiation of the requirements and schedule.
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Forward-Looking Statements This current report on Form 8-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or 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," "estimate," and "targeted," and similar expressions intended to identify forward-looking statements, 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, without limitation, any statements of the plans, expectations, strategies and objectives for performance of the NRE Contracts and LLNL or ORNL Build Contract; any statements related to the timing of delivery or acceptance of products or systems covered under the LLNL or ORNL Build Contract, any statements related to Cray's ability to deliver products, systems or services that meet LLNL's or ORNL's requirements; any statements concerning proposed or prototype

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products, technologies, systems or services; any statements regarding expected payments under the NRE Contracts or LLNL or ORNL Build Contract; any statements relating to the anticipated timing for achievement and payment of milestones under the NRE Contracts and LLNL or ORNL Build Contract; and any statements of belief and any statement 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, among others, the following: the risk that the products or systems ordered by LLNL or ORNL are not delivered when expected, do not perform as expected once delivered, or have technical issues that must be corrected before acceptance; the risk that the acceptance process for products or systems delivered to LLNL or ORNL are not completed, or acceptances from LLNL or ORNL are not received, when expected or at all; the risk that Cray is not able to successfully complete its planned product development efforts or to ship Shasta systems within the planned timeframe or at all; the risk that Shasta systems will not have the features, performance or components currently planned; the risk that processors planned for Cray Shasta systems, including those to be delivered to LLNL or ORNL, are not available when expected or with the performance or pricing expected; the risk that there are unforeseen delays in the completion of or payments for identified milestones under the NRE Contracts or the LLNL or ORNL Build Contract; the risk that work under these contracts is not funded by the U.S. government at the levels expected or when expected; the risk that LLNL or ORNL will decide on a "No-Go" for the LLNL or ORNL Build Contract and "unwind" the contract prior to completion; the risk that the value of the LLNL or ORNL contracts or economics to Cray under these contracts decrease as a result of changes agreed upon as part of a "Go" decision or as otherwise required by LLNL or ORNL; the risk that the commodity component "risk sharing" provisions result in a decrease in the contract value or economics to Cray due to changes in commodity component prices; and the other risks described in the "Risk Factors" section of our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q and other sections of such reports and our other filings with the Securities and Exchange Commission. 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.

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© Edgar Online, source Glimpses

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