UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 25, 2016

Or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                 to

Commission File Number 000-51333

SILICON GRAPHICS INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

Delaware	32-0047154
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

900 North McCarthy Blvd.

Milpitas, California 95035

(Address of principal executive offices, including zip code)

(669) 900-8000

(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  x    No   o

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 x  No  o

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filerx	Non-accelerated filero	Smaller reporting company o
		(Do not check if a 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  o    No   x

As of April 26, 2016, there were 36,277,436 shares of the registrant's common stock outstanding.

SILICON GRAPHICS INTERNATIONAL CORP.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 25, 2016 and March 27, 2015	2
	Condensed Consolidated Statement of Comprehensive Income (Loss) for the Three and Nine Months Ended March 25, 2016 and March 27, 2015	3
	Condensed Consolidated Balance Sheets as of March 25, 2016 and June 26, 2015	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 25, 2016 and March 27, 2015	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42
PART II	OTHER INFORMATION	43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
Revenue
Product	$	96,432		$	82,398		$	305,518		$	257,688
Service	35,651			36,106			104,698			110,667
Total revenue	132,083			118,504			410,216			368,355
Cost of revenue
Product	74,295			63,794			243,567			201,428
Service	20,020			21,051			59,592			64,087
Total cost of revenue	94,315			84,845			303,159			265,515
Gross profit	37,768			33,659			107,057			102,840
Operating expenses:
Research and development	12,744			13,016			38,911			40,995
Sales and marketing	12,308			14,248			38,702			46,889
General and administrative	12,226			12,840			36,737			41,399
Gain from sale of assets	(4,425		)	—			(4,425		)	—
Restructuring	—			—			—			116
Total operating expenses	32,853			40,104			109,925			129,399
Income (loss) from operations	4,915			(6,445		)	(2,868		)	(26,559		)
Total other expense, net:
Interest expense, net	(1,988		)	(1,614		)	(6,044		)	(1,714		)
Other expense, net	(1,812		)	(575		)	(1,375		)	(679		)
Total other expense, net	(3,800		)	(2,189		)	(7,419		)	(2,393		)
Income (loss) before income taxes	1,115			(8,634		)	(10,287		)	(28,952		)
Income tax provision	376			128			1,025			581
Net income (loss)	$	739		$	(8,762	)	$	(11,312	)	$	(29,533	)
Basic net income (loss) per share	$	0.02		$	(0.25	)	$	(0.32	)	$	(0.86	)
Diluted net income (loss) per share	$	0.02		$	(0.25	)	$	(0.32	)	$	(0.86	)
Weighted average shares used in computing basic net income (loss) per share	35,954			34,586			35,553			34,462
Weighted average shares used in computing diluted net income (loss) per share	37,028			34,586			35,553			34,462

See accompanying notes.

2

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
Net income (loss)	$	739		$	(8,762	)	$	(11,312	)	$	(29,533	)
Other comprehensive income (loss):
Unrecognized gain on defined benefit plans, net of zero tax	2			60			6			194
Unrealized (loss) gain on derivative instruments, net of zero tax	(1,112		)	968			(958		)	1,713
Unrealized (gain) loss on derivative instruments reclassified into income, net of zero tax	(168		)	(361		)	85			(838		)
Foreign currency translation adjustment, net of zero tax	843			(9		)	1,221			(2,006		)
Other comprehensive (loss) income	(435		)	658			354			(937		)
Total comprehensive income (loss)	$	304		$	(8,104	)	$	(10,958	)	$	(30,470	)

See accompanying notes.

3

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	March 25, 2016			June 26, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	98,959		$	67,191
Current portion of restricted cash	2,109			2,109
Accounts receivable, net of allowance for doubtful accounts of $603 and $190 as of March 25, 2016 and June 26, 2015, respectively	80,723			118,219
Inventories	51,791			82,832
Current portion of deferred cost of revenue	14,130			12,108
Prepaid expenses and other current assets	12,734			17,547
Total current assets	260,446			300,006
Non-current portion of restricted cash	2,153			2,251
Property and equipment, net	40,769			38,480
Goodwill and intangible assets, net	10,801			11,303
Non-current portion of deferred cost of revenue	11,183			9,648
Other non-current assets	27,292			25,896
Total assets	$	352,644		$	387,584
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	46,471		$	48,677
Accrued compensation	15,724			17,797
Short-term debt, net of unamortized debt issuance costs of $1,104 and $1,074 as of March 25, 2016 and June 26, 2015, respectively	3,980			3,096
Current portion of deferred revenue	71,946			96,473
Other current liabilities	27,108			33,180
Total current liabilities	165,229			199,223
Long-term debt, net of unamortized debt issuance costs of $1,512 and $2,232 as of March 25, 2016 and June 26, 2015, respectively	64,366			65,581
Non-current portion of deferred revenue	42,997			43,781
Long-term income taxes payable	8,188			8,420
Retirement benefit obligations	9,310			9,330
Other non-current liabilities	7,923			7,871
Total liabilities	298,013			334,206
Commitments and contingencies (Note 25)
Stockholders' equity:
Preferred stock, par value $0.001 per share; 12,000 shares authorized; none outstanding	—			—
Common stock, par value $0.001 per share; 120,000 shares authorized; 38,578 shares and 37,225 shares issued at March 25, 2016 and June 26, 2015, respectively	39			37
Additional paid-in capital	555,707			543,498
Treasury stock, at cost (2,315 shares at March 25, 2016 and at June 26, 2015)	(22,899		)	(22,899		)
Accumulated other comprehensive loss	(4,915		)	(5,269		)
Accumulated deficit	(473,301		)	(461,989		)
Total stockholders' equity	54,631			53,378
Total liabilities and stockholders' equity	$	352,644		$	387,584

See accompanying notes.

4

SILICON GRAPHICS INTERNATIONAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	March 25, 2016			March 27, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,312	)	$	(29,533	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	8,279			8,290
Share-based compensation	10,022			11,566
Gain on sale of Mineset, Inc.	(4,425		)	—
Asset impairment charges	—			1,100
Other	551			844
Changes in operating assets and liabilities:
Accounts receivable	39,681			(14,673		)
Inventories	25,152			(58,815		)
Deferred cost of revenue	(2,648		)	562
Prepaid expenses and other assets	3,859			7,648
Accounts payable	(1,793		)	(7,167		)
Deferred revenue	(27,300		)	7,132
Other liabilities	(8,754		)	(14,181		)
Net cash provided by (used in) operating activities	31,312			(87,227		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(5,343		)	(4,495		)
Proceeds from sale of Mineset, Inc.	4,400			—
Payments related to sale of Mineset, Inc.	(247		)	—
Other	98			(804		)
Net cash used in investing activities	(1,092		)	(5,299		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Term loan	—			70,000
Payments of Term Loan	(5,713		)	—
Proceeds from draw-down of prior credit facility	—			15,000
Payments of credit facility	—			(15,000		)
Payments for loan origination costs	—			(3,637		)
Funding of restricted stock units withheld for taxes	(1,406		)	(1,987		)
Purchase of treasury stock	—			(4,222		)
Proceeds from issuance of common stock upon exercise of stock options	143			445
Proceeds from issuance of common stock under employee stock purchase plan	3,451			3,462
Proceeds from Japan loans	6,504			2,508
Payments of Japan loans	(2,182		)	—
Net cash provided by financing activities	797			66,569
Effect of exchange rate changes on cash	751			(3,418		)
Net increase (decrease) in cash	31,768			(29,375		)
Cash-beginning of period	67,191			109,297
Cash-end of period	$	98,959		$	79,922
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION:
Income taxes (paid) refunded	$	(615	)	$	293
Cash paid for interest	$	5,422		$	153
NON CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchases in accounts payable	$	1,267		$	1,262
Inventory transfers to property and equipment	$	4,922		$	4,417

See accompanying notes.

5

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. DESCRIPTION OF BUSINESS

Silicon Graphics International Corp. ("SGI" or the "Company", "we", "us" or "our") is a global leader in high performance solutions for compute, data analytics and data management. We are focused on helping customers solve their most demanding business and technology challenges by delivering high performance computing, data management and data analytics solutions that accelerate time to discovery, innovation and profitability.

The Company develops, markets and sells a broad line of low cost, mid-range and high-end scale-out and scale-up servers, differentiating software and designed-to-order solutions for large-scale deployments, coupled with global support and highly experienced professional services. SGI solutions are designed to deliver high impact results with lower total cost of ownership and to achieve industry-leading speed, scale and efficiency.

The Company's solutions are utilized by scientific, business and government communities to fulfill highly compute intensive application needs in petascale and exascale environments. Delivering industry-leading computing power and fast and efficient data movement, both within the computing system and to and from large-scale data storage and data management installations, SGI systems enable customers to access, analyze, transform, manage and visualize information in real and near real-time. The vertical markets the Company serves include the federal government, defense and strategic systems, weather and climate, physical and life sciences, energy (including oil and gas), aerospace, automotive manufacturing, internet, financial services, education and research institutions and media and entertainment. The Company's headquarters is located in Milpitas, California and its sole manufacturing facility is located in Chippewa Falls, Wisconsin.

2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. The results for the interim periods are not necessarily indicative of results for the entire year or any future periods. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended June 26, 2015, which are included in the Company's Annual Report on Form 10-K filed with the SEC on September 9, 2015.

The preparation of unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as presented in the accompanying unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Fiscal Year. The Company has a 52 or 53-week fiscal year ending on the last Friday in June. The current fiscal year 2016 will be comprised of 52 weeks and will end on June 24, 2016. Fiscal year 2015 was comprised of 52 weeks and ended on June 26, 2015.

In fiscal year 2016, the Company's fiscal quarters end on September 25, 2015 (first quarter), December 25, 2015 (second quarter), March 25, 2016 (third quarter) and June 24, 2016 (fourth quarter).

In fiscal year 2015, the Company's fiscal quarters ended on September 26, 2014 (first quarter), December 26, 2014 (second quarter), March 27, 2015 (third quarter) and June 26, 2015 (fourth quarter).

Principles of Consolidation. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany accounts and transactions have been eliminated.

6

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no changes in the Company's significant accounting policies for the three and nine months ended March 25, 2016 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended June 26, 2015.

Recently Issued Accounting Standards.

Improvement to Employee Share-Based Payment Accounting. In March 2016, the Financial Accounting Standards Board ("FASB") issued guidance to simplify the accounting for share-based payment transaction, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016 including interim periods within those annual periods. Early adoption of this guidance is permitted in any interim or annual period. If any entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period and must elect to early adopt all the amendments in the same period. The new guidance is effective for the Company beginning in fiscal 2018.  The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.

Accounting Standard Update, Leases, (Topic 842). In February 2016, the FASB issued guidance which amends the existing accounting standards for leases. Consistent with existing guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize right-of-use assets and lease liabilities on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption of this guidance is permitted. The new guidance is effective for the Company beginning in fiscal 2020.  The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.

Simplifying the Presentation of Deferred Income Taxes. In November 2015, the FASB issued guidance to simplify the presentation of the deferred income taxes. The amendments in this update apply to all entities that present a classified statement of financial position and require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, for public entities. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance will be effective for the Company in fiscal 2018. The Company does not expect to have an impact to its condensed consolidated balance sheet upon adopting this amended guidance.

Simplifying the Measurement of Inventory. In July 2015, the FASB issued guidance to simplify the accounting for inventory and to more closely align their guidance with international accounting standards. The amendments in this update apply to companies which use inventory valuation methods other than last in, first-out and the retail inventory method to change the way that they subsequently measure the value of inventory on their balance sheet.  Under the new guidance, inventory should be valued at the lower of cost and net realizable value rather than the lower of cost and market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and for interim periods beginning after December 15, 2017. This guidance will be effective for the Company in fiscal 2018. The Company does not expect to have an impact to its consolidated financial statements upon adopting this amended guidance, as the new guidance aligns with the Company's current practice.

Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets. In April 2015, the FASB issued guidance which permits the entity with a fiscal year-end that does not coincide with a month-end, to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year for all plans. The amendments in ASU 2015-04 are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This guidance will be effective for the Company in fiscal 2017. The Company is currently evaluating the effects, if any, which the adoption of this guidance will have on the Company’s consolidated financial statements.

7

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early application not permitted. This guidance will be effective for the Company in fiscal 2019.

4. DIVESTITURE OF MINESET, INC.

On February 5, 2016, the "Closing Date", the Company consummated a stock purchase agreement to sell 100% of the issued and outstanding shares of Mineset, Inc. ("Mineset"), a wholly-owned subsidiary, to ESI Group for approximately $4.7 million in cash, subject to certain adjustments provided for in the agreement.  In connection with this transaction, the Company transferred all assets and liabilities related to the Mineset business to ESI Group as of the closing date. The Company recognized a gain of $4.4 million for the sale of this asset, net of all related costs.

5. FINANCIAL INSTRUMENTS AND FAIR VALUE

The Company measures its assets and liabilities at fair value based upon the expected exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value reflects the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.

The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

• Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

• Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

• Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The Company’s assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are a few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, the Company or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

8

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company's assets that are measured at fair value on a recurring basis (in thousands):

	March 25, 2016
	Carrying		Fair Value Measured Using						Total
	Value		Level 1		Level 2		Level 3		Balance
Assets
Money market funds	$	130	$	130	$	—	$	—	$	130
Pension investments held by insurance companies - German Plan	1,955		—		1,955		—		1,955
Pension investments held by insurance companies - Japan Plan	2,436		—		2,436		—		2,436
Derivative assets	604		—		604		—		604
Total assets measured at fair value	$	5,125	$	130	$	4,995	$	—	$	5,125
Liabilities
Derivative liabilities	$	3,797	$	—	$	3,797	$	—	$	3,797
Total liabilities measured at fair value	$	3,797	$	—	$	3,797	$	—	$	3,797

	June 26, 2015
	Carrying		Fair Value Measured Using						Total
	Value		Level 1		Level 2		Level 3		Balance
Assets
Money market funds	$	130	$	130	$	—	$	—	$	130
Pension investments held by insurance companies - German Plan	2,222		—		2,222		—		2,222
Pension investments held by insurance companies - Japan Plan	2,539		—		2,539		—		2,539
Derivative assets	6,467		—		6,467		—		6,467
Total assets measured at fair value	$	11,358	$	130	$	11,228	$	—	$	11,358
Liabilities
Derivative liabilities	$	5,443	$	—	$	5,443	$	—	$	5,443
Total liabilities measured at fair value	$	5,443	$	—	$	5,443	$	—	$	5,443

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during both the three and nine months ended March 25, 2016 and March 27, 2015. The Company’s cash equivalents, consisting of money market funds, are classified within Level 1 of the fair value hierarchy as they were valued using quoted market prices of the identical underlying securities in active markets.

Level 2 assets include investments that are pooled with other investments held by insurance companies within their general funds for our pension plans.  The investments held by the insurance companies are valued by taking the percentage owned by the plan in the underlying net asset value of the insurance company's general fund. The valuation of the underlying net assets of the insurance company's general fund is based on quoted market prices of the investments in active markets or for quoted market prices in active markets of similar assets. The market inputs used to value these instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources include industry standard data providers, security master files from large financial institutions and other third party sources. Our derivative financial instruments are classified within Level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.

The fair values of accounts receivable, accounts payable, and accrued liabilities and borrowings under short-term credit lines due within one year approximate their carrying values because of their short-term nature. The fair value of our Term Loan was approximately $64.3 million and $70.6 million as March 25, 2016 and June 26, 2015, respectively and are classified within Level 2 of the fair value hierarchy. Other non-current assets include life insurance contracts related to our pension plans. These life insurance contracts are carried at cash surrender values, which due to their ability to be converted to cash at that amount, approximate their fair values.

9

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

The Company does not have any assets or liabilities measured at fair value on a non-recurring basis as of March 25, 2016 and June 26, 2015.

6. DERIVATIVES

The Company is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As part of the Company's risk management strategy, the Company uses derivative instruments, primarily forward contracts to hedge economic exposures resulting from changes in foreign currency exchange rates.

Cash Flow Hedges

The Company implements a cash flow hedging strategy to protect anticipated non-functional currency revenues and expenses. The Company uses forward contracts designated as cash flow hedges to hedge a portion of future forecasted non-U.S. Dollar ("USD") cash flows. In general, these foreign exchange contracts, carried at fair value, have maturities between one and twelve months. As of March 25, 2016, the Company had8 open hedges in an aggregate notional amount in USD equivalent to approximately $41.9 million. The Company hedges the euro, British pound, the Australian dollar, and Japanese yen. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. All amounts related to gains / losses on designated hedges, currently in accumulated other comprehensive income ("AOCI") are expected to be reclassified into earnings over the next 12 months.

For derivative instruments that are designated and qualify as cash flow hedges under Accounting Standards Codification ("ASC") No. 815-Derivatives and Hedging, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive (loss) income and reclassified into earnings into the same financial statement line as the item being hedged. SGI assesses the prospective and retrospective effectiveness of its hedge programs using statistical analysis. The Company uses the spot-to-spot method to measure ineffectiveness in the hedge relationship. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. For derivative instruments that are not designated as hedging instruments under ASC No. 815 or that have been de-designated following recognition of the hedge item, gains and losses are recognized in other income (expense), net.

Balance Sheet Hedges

Additionally, the Company enters into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of its subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other income (expense), net, in the condensed consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities. As of March 25, 2016, the Company had 5 open non-designated hedges in an aggregate USD-equivalent notional amount totalling approximately $13.0 million.

The before tax effect of derivative instruments for foreign exchange contracts designated as hedging instruments and non-designated hedging instruments in our condensed consolidated statement of operations during the three and nine months ended March 25, 2016 and March 27, 2015 was as follows (in thousands):

10

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

		Three Months Ended						Nine Months Ended
	Location	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
Designated Derivatives
Cash Flow Hedges:
Foreign exchange contracts (Effective portion)	Amount recognized in AOCI	$	(1,112	)	$	968		$	(958	)	$	1,713
Foreign exchange contracts (Effective portion)	Net revenues	191			599			(62		)	1,645
Foreign exchange contracts (Effective portion)	Cost of goods sold	(23		)	—			(23		)	—
Foreign exchange contracts (Effective portion)	Operating expenses	—			(238		)	—			(807		)
Foreign exchange contracts (Effective portion)	Other income (expense), net	(20		)	(146		)	(172		)	(142		)
Total		$	(964	)	$	1,183		$	(1,215	)	$	2,409
Non-designated Derivatives
Foreign exchange contracts	Other income (expense), net	$	(1,756	)	$	881		$	(1,112	)	$	2,072
Total		$	(1,756	)	$	881		$	(1,112	)	$	2,072

The Company's use of derivative instruments exposes it to non-performance risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions which are selected based on their credit ratings and other factors. The Company has established policies and procedures for mitigating non-performance risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties. Therefore, the Company does not consider counterparty non-performance risk a material risk at this time.

A number of the Company's derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on the Company's corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of March 25, 2016, was $3.2 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of March 25, 2016.

Derivative instruments are subject to master netting arrangements and are disclosed gross in the statement of financial position. The gross fair values and location of derivative instruments included in the condensed consolidated statement of financial position as of March 25, 2016 and June 26, 2015, were as follows (in thousands):

Offsetting of Derivative Assets
	Gross Amount Offset In the Statement of Financial Position						Gross Amounts Not Offset in the Statement of Financial Position
As of March 25, 2016	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount
Derivatives
Foreign currency forward contracts	$	604	$	—	$	—	$	(604	)	$	—	$	—
Total	$	604	$	—	$	—	$	(604	)	$	—	$	—
As of June 26, 2015
Derivatives
Foreign currency forward contracts	$	6,467	$	—	$	—	$	(5,443	)	$	—	$	1,024
Total	$	6,467	$	—	$	—	$	(5,443	)	$	—	$	1,024

11

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Offsetting of Derivative Liabilities
	Gross Amount Offset In the Statement of Financial Position							Gross Amounts Not Offset in the Statement of Financial Position
As of March 25, 2016	Gross Amount of Recognized Liabilities			Gross Amount Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Pledged		Net Amount
Derivatives
Foreign currency forward contracts	$	(3,796	)	$	—	$	—	$	604	$	—	$	(3,192	)
Total	$	(3,796	)	$	—	$	—	$	604	$	—	$	(3,192	)
As of June 26, 2015
Derivatives
Foreign currency forward contracts	$	(5,443	)	$	—	$	—	$	5,443	$	—	$	—
Total	$	(5,443	)	$	—	$	—	$	5,443	$	—	$	—

The gross fair value and location of derivative instruments held in the condensed consolidated statement of financial position as of March 25, 2016 and June 26, 2015 were as follows (in thousands):

Fair Values of Derivative Instruments
Asset Derivatives					Liability Derivatives
Location	March 25, 2016		June 26, 2015		Location	March 25, 2016		June 26, 2015
Designated Derivatives:
Foreign exchange contracts					Foreign exchange contracts
Other current assets	$	—	$	167	Other current liabilities	$	1,351	$	628
Non- designated Derivatives:
Foreign exchange contracts					Foreign exchange contracts
Other current assets	604		6,300		Other current liabilities	2,445		4,815
Total derivatives	$	604	$	6,467		$	3,796	$	5,443

The following table provides the balances and changes in the accumulated other comprehensive loss (income) related to derivative instruments during the nine months ended March 25, 2016 (in thousands):

	Amount
AOCI - Beginning balance of losses	$	408
Unrecognized gain on derivatives	958
Unrealized loss on derivative instruments reclassified to income	(85		)
AOCI - Ending balance of losses	$	1,281

12

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. INVENTORIES

Inventories consist of the following (in thousands):

	March 25, 2016		June 26, 2015
Finished goods	$	13,953	$	36,772
Work in process	16,161		25,562
Raw materials	21,677		20,498
Total inventories	$	51,791	$	82,832

Finished goods include inventory in transit, at customer sites undergoing installation, or testing prior to customer acceptance; such amounts were $7.1 million at March 25, 2016 and $30.2 million at June 26, 2015.

8. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

	March 25, 2016		June 26, 2015
Value-added tax receivable	$	3,313	$	5,179
Derivatives (see Note 6)	604		6,467
Prepaid taxes	255		178
Prepaid expenses	3,839		4,221
Other assets	4,723		1,502
Total prepaid expenses and other current assets	$	12,734	$	17,547

9. GOODWILL AND INTANGIBLE ASSETS, NET

The following table represents the goodwill allocated to the Company's reportable segments as of and during the nine months ended March 25, 2016 (in thousands):

	Product		Service		Total
Goodwill as of June 26, 2015	$	7,508	$	1,076	$	8,584
Goodwill arising from acquisitions	—		—		—
Goodwill as of March 25, 2016	$	7,508	$	1,076	$	8,584

The Company reviews goodwill for impairment annually in the fourth quarter of its fiscal year, or more frequently if impairment indicators arise. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using the income approach that uses discounted cash flows. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss.

As of September 25, 2015 there was a substantial decline in the market capitalization of the Company from June 26, 2015, the end of the Company's most recent fiscal year. Based on this impairment indicator, the Company performed a formal impairment analysis of the carrying value of goodwill as of September 25, 2015. As part of its analysis, the Company reconciled the computed fair values of its reporting units to our overall market capitalization and the Company concluded that the computed fair value of each of its reporting units was well in excess of the net book value, and accordingly no impairment existed as of September 25, 2015. As of March 25, 2016, there were no further impairment indicators. As such, the Company did not perform a formal impairment analysis of the carrying value of goodwill as of March 25, 2016. The Company will continue to evaluate goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 

13

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

No impairment was recorded for both of the three and nine months ended March 25, 2016 and March 27, 2015.

Intangible assets by major asset class consist of the following (in thousands):

Intangible Asset Class	Weighted Average Useful Life (in Years)	March 25, 2016
		Gross Carrying Amount		Accumulated Amortization and Impairment			Net
Customer relationships	5	$	7,300	$	(7,300	)	$	—
Purchased technology	5	12,200		(12,025		)	175
Customer backlog	(a)	10,540		(10,465		)	75
Trademark/trade name portfolio	5	3,767		(3,767		)	—
Patents and other	(b)	1,967		—			1,967
Total		$	35,774	$	(33,557	)	$	2,217

Intangible Asset Class	Weighted Average Useful Life (in Years)	June 26, 2015
		Gross Carrying Amount		Accumulated Amortization and Impairment			Net
Customer relationships	5	$	7,300	$	(7,300	)	$	—
Purchased technology	5	12,200		(11,600		)	600
Customer backlog	(a)	10,540		(10,388		)	152
Trademark/trade name portfolio	5	3,767		(3,767		)	—
Patents and other	(b)	2,097		(130		)	1,967
Total		$	35,904	$	(33,185	)	$	2,719

(a) The customer backlog intangible asset is amortized as revenue recognition criteria is met for a particular customer order, reflecting the use of the asset.

(b) Includes in-process Research and Development for which amortization has not commenced.

The Company reviews the carrying values of long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the assets to the estimated undiscounted future cash flows expected to be generated by the assets.

As a result of a decision made in the second quarter of fiscal 2015 to cease selling and supporting certain storage products, the Company determined that intangible assets related to these products were impaired. The Company recorded an impairment charge of $1.1 million in the second quarter of fiscal 2015, impacting cost of revenue by $0.8 million and sales expense by $0.3 million.

Intangible assets amortization and impairment expense was $0.2 million and $0.1 million in the three months ended March 25, 2016 and March 27, 2015, respectively. Intangible assets amortization and impairment expense was $0.5 million and $1.6 million in the nine months ended March 25, 2016 and March 27, 2015, respectively.

As of March 25, 2016, expected amortization expense for intangible assets with a finite life was as follows (in thousands):

Fiscal Year	Amortization Expense
2016 (remaining three months)	$	194
2017	56
	$	250

14

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. OTHER NON-CURRENT ASSETS

Other non-current assets consist of the following (in thousands):

	March 25, 2016		June 26, 2015
Long-term service inventory	$	15,413	$	16,015
Restricted pension plan assets	6,780		6,726
Deferred tax assets	758		758
Long-term refundable deposits	1,850		1,763
Other assets	2,491		634
Total other non-current assets	$	27,292	$	25,896

11. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following (in thousands):

	March 25, 2016		June 26, 2015
Accrued sales and use tax payable	$	6,423	$	8,670
Accrued professional services fees	2,951		3,597
Accrued warranty, current portion	3,379		3,402
Accrued interest payable	1,508		1,159
Accrued restructuring and severance	990		2,239
Derivatives (see Note 6)	3,796		5,443
Other current liabilities	8,061		8,670
Total other current liabilities	$	27,108	$	33,180

12. OTHER NON-CURRENT LIABILITIES

Other non-current liabilities consist of the following (in thousands):

	March 25, 2016		June 26, 2015
Accrued warranty, non-current portion	$	1,721	$	1,374
Deferred rent	5,091		5,526
Other non-current liabilities	1,111		971
Total other non-current liabilities	$	7,923	$	7,871

15

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. WARRANTY RESERVE

Activity in the warranty reserve, which is included in other current and non-current liabilities, was as follows (in thousands):

	Three Months Ended						Nine Months Ended
	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
Balance at beginning of period	$	5,020		$	5,133		$	4,776		$	6,044
Current period provision	949			617			2,896			2,048
Warranty expenditures incurred	(973		)	(1,292		)	(2,834		)	(3,654		)
Changes in accrual for pre-existing warranties	104			(102		)	262			(82		)
Balance at end of period	$	5,100		$	4,356		$	5,100		$	4,356

14. SEVERANCE ACTIVITY

During the three and nine months ended March 25, 2016, the Company incurred approximately $0.7 million and $2.4 million of severance charges, respectively, associated with planned worldwide cost reductions. During the three and nine months ended March 27, 2015, the Company incurred approximately $0.7 million and $5.5 million of severance charges, respectively, associated with planned worldwide cost reductions. As of March 25, 2016, the remaining liability for these cost reduction programs was approximately $1.0 million.

15. SHORT-TERM DEBT

Term Loan

As of March 25, 2016, the Company's short-term debt includes the current portion of the outstanding loan balance of $63.9 million with Morgan Stanley Senior Funding, Inc. and Tennenbaum Capital Partners, LLC of $0.7 million, net of unamortized debt issuance costs of $1.1 million.

Japan Loans

The Company has unsecured unguaranteed loans with various Japanese banks ("Japan Loans") amounting to 300 million yen or $2.7 million at rates ranging from TIBOR (Tokyo Interbank Offered Rate) plus 1.0% to 1.75% per annum, of which approximately $2.2 million was classified as short-term debt as of March 25, 2016. During the nine months ended March 25, 2016, the Company entered into two new loans for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 250 million yen amounting to approximately $2.2 million toward the loans.

The Company also secured a four year Private Placement Bond from Mizuho Bank (“Japan Private Placement Bond”) for 500 million yen or $4.4 million at 0.8% per annum, of which approximately $1.1 million was classified as short-term debt as of March 25, 2016.

16. LONG-TERM DEBT

Term Loan

On January 27, 2015, the Company entered into a credit agreement (the "Term Loan") among the Company, certain lenders and Morgan Stanley Senior Funding, Inc., as administrative and collateral agent and lead arranger. The Term Loan provided an aggregate principal amount of $70.0 million with a term of three and a half years, bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a 1.0% minimum, plus 9.0% per annum. The Term Loan provided $66.2 million of cash, net of borrowing and origination costs of approximately $3.8 million, which was used to pay off the prior credit facility and provide cash and cash equivalents sufficient to fund working capital requirements, capital expenditures and operations. The Company was in compliance with all covenants under the Term Loan, as of March 25, 2016.

16

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Pursuant to the Term Loan, certain wholly-owned domestic subsidiaries of the Company (the “Guarantors”) have guaranteed the obligations of the Company under the Term Loan. The Term Loan and related loan documents replaced the Company’s prior Credit Agreement dated December 5, 2011, by and among the Company, certain lenders party thereto, and Wells Fargo Capital Finance, LLC, as administrative agent (as amended from time to time, the “Prior Credit Facility”). All commitments under the Prior Credit Facility were terminated and all borrowings thereunder were repaid, effective January 27, 2015. The remaining obligations of Company and guarantor party to the Prior Credit Facility and related loan documents are limited to certain remaining contingent indemnification obligations under such facility.

The Term Loan and related loan documents contain covenants that limit the ability of the Company and certain of its subsidiaries, among other things, to:

• issue any preferred stock;

• incur or guarantee indebtedness;

• create, incur, assume, or permit liens to exist;

• consummate asset sales, acquisitions or mergers;

• dispose of property;

• pay dividends or repurchase stock;

• make investments;

• enter into transactions with affiliates; or

• enter into or permit certain type of agreements to exist.

The Term Loan also requires compliance with a minimum adjusted current ratio and a $10.0 million minimum unrestricted cash balance, calculated as set forth in the Term Loan.

The Term Loan contains customary events of default, including:

• failure to make required payments;

• material breaches of representations and warranties;

• failure to comply with certain agreements or covenants;

• failure to pay, or default under, certain other indebtedness;

• certain events of bankruptcy and insolvency;

• failure to pay certain judgments; and

• a change of control.

The Company may not prepay the loan during the first year and may only prepay the loan during the second year at a premium. After such time, the Company may prepay the loan without penalty.

During the nine months ended March 25, 2016, we made $5.7 million total cash payments to Morgan Stanley Senior Funding, Inc. and Tennenbaum Capital Partners, LLC, reducing the Term Loan's outstanding balance to $63.9 million.

As of March 25, 2016, the Company had an outstanding principal balance on the Term Loan, of which was classified as follows:

	Term Loan
	Long-Term			Short-Term			Total
	(in thousands)
Principal amount	$	62,100		$	1,750		$	63,850
Less unamortized debt issuance costs	(1,427		)	(1,075		)	(2,502		)
	$	60,673		$	675		$	61,348

Japan Loans

As of March 25, 2016, the Company has unsecured unguaranteed loans with various Japanese banks amounting to 300 million yen or $2.7 million at rates ranging from TIBOR plus 1.0% to 1.75% per annum, of which approximately $0.5 million was classified as long-term debt as of March 25, 2016. During the nine months ended March 25, 2016, the Company entered into two new loans for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 250 million yen amounting to approximately $2.2 million toward the loans.

17

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The Company also secured a four year Private Placement Bond from Mizuho Bank (“Japan Private Placement Bond”) for 500 million yen or $4.4 million at 0.8% per annum, of which approximately $3.2 million, net of unamortized debt issuance costs of $0.1 million was classified as long-term debt as of March 25, 2016.

17. CREDIT FACILITY

On December 5, 2011, the Company entered into a 5-year senior secured credit facility with aggregate principal amount of $25.0 million, as amended. The credit facility included a $10.0 million letter of credit subfacility.

The Company paid off the outstanding balance of $15.0 million on the December 2011 credit facility with the net proceeds received from the new Term Loan entered into on January 27, 2015 and terminated the December 2011 agreement.

See Note 16, Long-term Debt, for more information regarding the Term Loan.

18. SHARE-BASED COMPENSATION

The Company granted restricted stock units to employees under its equity incentive plans and issued shares of the Company's common stock to participating employees under its employee stock purchase plan during both the three and nine months ended March 25, 2016 and March 27, 2015.  Stock options were not granted during these respective periods. 

Total share-based compensation expense was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	March 25, 2016		March 27, 2015		March 25, 2016		March 27, 2015
Cost of revenue	$	405	$	559	$	1,342	$	1,591
Research and development	567		663		1,768		1,881
Sales and marketing	407		717		1,376		2,282
General and administrative	1,569		1,957		5,536		5,812
Total share-based compensation expense	$	2,948	$	3,896	$	10,022	$	11,566

Determining Fair Value The fair value of share-based awards was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods:

	Three Months Ended		Nine Months Ended
	March 25, 2016	March 27, 2015	March 25, 2016	March 27, 2015
ESPP Plan shares
Risk-free interest rate	0.6%	0.4%	0.5%	0.2%
Volatility	72.8%	50.0%	64.2%	49.0%
Weighted average expected life (in years)	1.25	1.25	1.25	1.25
Expected dividend yield	—	—	—	—
Weighted average fair value	$2.70	$3.46	$2.09	$3.24

18

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Stock Option Activity

A summary of stock option activity for the nine months ended March 25, 2016 was as follows:

	Options Outstanding
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual term in years	Aggregate Intrinsic Value
						(in thousands)
Balance at June 26, 2015	1,386,570		$	10.41
Options granted	—		—
Options exercised	(26,877	)	5.34
Options cancelled	(223,978	)	13.17
Balance at March 25, 2016	1,135,715		$	9.98	4.20	$	344
Vested and expected to vest at March 25, 2016	1,135,474		$	9.98	4.19	$	344
Exercisable at March 25, 2016	1,132,151		$	9.99	4.19	$	343

The total intrinsic value of options exercised in the nine months ended March 25, 2016 was immaterial. The total intrinsic value of options exercised in the nine months ended March 27, 2015 was $0.2 million. The total fair value of shares vested during the nine months ended March 25, 2016 and March 27, 2015 was $0.6 million and $1.1 million, respectively.

As of March 25, 2016, unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 0.58 years, was immaterial.

Restricted Stock Unit Activity

The following table summarizes the Company's activity with respect to restricted stock units (“RSUs”) for the nine months ended March 25, 2016:

	Number of Shares
Balance at June 26, 2015	1,706,073
Awarded	1,479,151
Released	(789,945	)
Forfeited	(258,148	)
Balance at March 25, 2016	2,137,131
Vested and expected to vest at March 25, 2016	1,635,856

In the first half of fiscal 2016, the Company granted time-based RSUs and performance-based RSUs (“PSUs”) to members of the Company's executive management team.  Generally, the RSUs begin immediate, quarterly vesting over a period of four years. The PSUs initially vest as to one-fourth of their amount on the day following Compensation Committee review of Company goal attainment for the fiscal year ending June 24, 2016.  The PSU grants may be increased or decreased depending on the level of attainment by the Company of the performance metrics established by the Compensation Committee.  The shares of common stock subject to these awards will be earned based on the performance as measured against the following metrics related to (i) total stockholder return (50% weighting) and (ii) two strategic objectives related to revenue and gross margin (50% weighting).  Achievement of the aforementioned performance criteria results in a vesting percentage determined in accordance with a payout matrix. At attainment of below 75%, PSU vesting would be 0%. At 75% attainment, vesting would be 50%. At 100% attainment, vesting would be 100%. Attainment at 125% and above would result in 150% vesting. If the conditions for initial vesting of the PSUs are met, the remaining portion of the PSU grant would vest in twelve equal, successive quarterly installments over an additional three years, subject to continued service through each vesting date. The Company estimated the fair value of its 2015 executive PSUs using a Monte Carlo simulation model with the assumptions discussed above, along with the fair value at the date of grant.

For purposes of reporting and determining the share-based compensation expense as of March 25, 2016, the Company estimated that 75% of the PSUs will be awarded. The Company assesses the achievement of these performance metrics on a quarterly basis.

19

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

As of March 25, 2016, there was $5.2 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 1.34 years.

RSUs are converted into common stock upon vesting. Upon the vesting of restricted stock, the Company uses the net share settlement approach, which withholds a portion of the shares to cover the applicable taxes and decreases the shares issued to the employee by a corresponding value. The withholding tax obligations are based upon the fair market value of the Company's common stock on the vesting date. The number and the value of the shares netted for employee taxes are summarized in the table below (in thousands except share amounts):

	Three Months Ended				Nine Months Ended
	March 25, 2016		March 27, 2015		March 25, 2016		March 27, 2015
RSUs shares withheld for taxes	91,845		93,546		263,273		219,747
RSUs amounts withheld for taxes	$	517	$	890	$	1,431	$	2,086

Employee Stock Purchase Plan

At March 25, 2016, the total unrecognized compensation cost related to options to purchase the Company's common stock under the employee stock purchase plan ("ESPP") was approximately $1.6 million. This cost will be amortized on a straight-line basis over approximately 1.9 years. The following table shows the shares issued and their respective weighted-average purchase price per share, pursuant to the ESPP, during the three and nine months ended March 25, 2016 and March 27, 2015.

	Three Months Ended				Nine Months Ended
	March 25, 2016		March 27, 2015		March 25, 2016		March 27, 2015
Shares issued	418,639		247,494		795,208		457,125
Weighted-average purchase price per share	$	4.17	$	7.64	$	4.34	$	7.58

19. STOCK REPURCHASE PROGRAM

In January 2013, the Company's board of directors approved a plan for the Company to repurchase shares of its common stock with a market value of up to $15.0 million. In November 2013, the Company announced an increase in the authorized repurchased amount to $30.0 million and in November 2014, the Company announced that it had extended its repurchase program through December 31, 2015. The Company's common stock may be repurchased in the open market or through negotiated transactions, including 10b5-1 trading plans that would enable the Company to repurchase its shares during periods outside of its normal trading windows. Purchases will cease if the authorized funds are spent or the program is discontinued. The Company is not obligated to acquire any particular amount of stock, and the program may be suspended or terminated at any time at the Company's discretion.

Since the inception of the repurchase plan in January 2013, the Company has repurchased approximately 1,566,000 shares of its common stock for approximately $18.0 million. This purchase program expired as of December 31, 2015 and the Company's board has not extended the Company's repurchase program beyond December 31, 2015. There were no shares repurchased during the nine months ended March 25, 2016.

20. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is computed by dividing unaudited consolidated net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing unaudited consolidated net income (loss) by the weighted average number of common shares outstanding and dilutive common shares outstanding during the period. For the three months ended March 25, 2016, the dilutive effect of outstanding options and RSUs is reflected in diluted net income per share but not diluted loss per shares, by application of treasury stock method. For both the three and nine months ended March 27, 2015, as well as for the nine months ended March 25, 2016, the effect of outstanding options, RSUs and PSUs were anti-dilutive to loss per share and were therefore excluded from the calculation of diluted loss per share.

20

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The dilutive effect of outstanding options and RSUs is reflected in diluted net income per share, but not diluted loss per share, by application of the treasury stock method. As the Company had a net loss in both the three and nine months ended March 27, 2015, as well as for the nine months ended March 25, 2016, basic and diluted net loss per share are the same for these periods.

The following table sets forth the computation of basic and diluted net income (loss) per share for the three and nine months ended March 25, 2016 and March 27, 2015 (in thousands, except per share amount):

	Three Months Ended					Nine Months Ended
	March 25, 2016		March 27, 2015			March 25, 2016			March 27, 2015
Numerator:
Net income (loss)	$	739	$	(8,762	)	$	(11,312	)	$	(29,533	)
Denominator:
Weighted-average common shares - basic	35,954		34,586			35,553			34,462
Effect of dilutive potential common shares	1,074		—			—			—
Weighted-average common shares - dilutive	37,028		34,586			35,553			34,462
Basic net income (loss) per share	$	0.02	$	(0.25	)	$	(0.32	)	$	(0.86	)
Diluted net income (loss) per share	$	0.02	$	(0.25	)	$	(0.32	)	$	(0.86	)

The following potentially dilutive securities have been excluded from the dilutive net income (loss) per share calculations, as their effect would have been anti-dilutive (in thousands):

	Three Months Ended		Nine Months Ended
	March 25, 2016	March 27, 2015	March 25, 2016	March 27, 2015
Options, RSUs, PSUs and ESPP	2,438	4,102	3,371	4,107

21. RETIREMENT BENEFIT PLAN

Defined Benefit Plans

The Company sponsors defined benefit plans covering certain of its employees in Germany ("German plan") and Japan ("Japan plan").

The net periodic benefit cost of the German and Japan plans were comprised of the following components (in thousands):

	Three Months Ended						Nine Months Ended
	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
Net periodic benefit cost
Service cost	$	78		$	92		$	234		$	279
Interest expense	72			97			214			312
Expected return on plan assets	(35		)	(34		)	(104		)	(107		)
Amortization of actuarial losses	2			60			6			194
Net periodic benefit cost	$	117		$	215		$	350		$	678

21

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

22. INCOME TAXES

The Company recorded a tax provision of $0.4 million and $1.0 million for the three and nine months ended March 25, 2016, respectively. The tax expense primarily was comprised of tax liability computed based on the Company’s projected foreign financial results for the year ending June 24, 2016, state taxes, interest for unrecognized tax benefits and U.S. deferred tax liability related to nondeductible goodwill, partially offset by tax benefits from expiring statute of limitations. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 25, 2016, primarily due to the tax rate differential of the Company's foreign operations and utilization of net operating losses not previously recognized.

The Company recorded a tax provision of $0.1 million and $0.6 million for the three and nine months ended March 27, 2015, respectively. The tax expense primarily was comprised of tax liability computed based on the Company’s projected foreign financial results for the year ended June 26, 2015, state taxes, interest for unrecognized tax benefits and U.S. deferred tax liability related to nondeductible goodwill, partially offset by tax benefits from expiring statute of limitations and tax refunds in foreign jurisdictions. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 27, 2015, primarily due to the tax rate differential of the Company's foreign operations and utilization of net operating losses not previously recognized.

As of March 25, 2016, the Company has provided a partial valuation allowance against its net deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and related valuation allowance. If management's assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.

The Company had $6.1 million of gross unrecognized tax benefit as of March 25, 2016, of which $1.5 million will impact the effective tax rate when recognized. The Company recognizes interest expense and penalties related to the unrecognized tax benefits within income tax expense. As of March 25, 2016, the Company also had $6.9 million of interest and penalties attributable to the gross unrecognized tax benefits. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits.

23. SEGMENT INFORMATION

The Company's operating segments are determined based upon several criteria including: the Company's internal organizational structure; the manner in which the Company's operations are managed; the criteria used by the Company's Chief Operating Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the Company's availability of separate financial information.

A description of the Company's two reportable segments is as follows:

Product—The Product segment is comprised of our Compute and Storage solutions. Compute solutions include our scale-out computing, scale-up computing and software solutions. Compute solutions also include integrated third-party hardware and software products that we sell to provide a single source solution for our customers. Our compute solutions are designed to minimize the number and complexity of interconnects for power and data transfer to improve reliability, speed of implementation and serviceability. Storage solutions include both hardware and software offerings to address virtually every type of data storage and management requirement. Products range from entry-level disk arrays to complex storage systems, with innovative technology and hardware. Our storage solutions are designed to provide extreme scale, broad flexibility and to minimize the cost to store data.

Service—The Service segment is comprised of customer service support and professional services. Our customer support organization provides ongoing maintenance and technical support for our products and some third-party products, as well as contracted maintenance services, hardware deployment services (install and de-install), time and materials-based services and spare parts. Our professional services organization provides value added services associated with technology consulting, project management and customer education, all of which help our customers realize the full value of their information technology investments.

The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally allocated based on the type of products and service provided to our customers. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A portion of the segments' expenses arise from shared services and infrastructure that the Company provides to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development and other corporate infrastructure expenses. The corporate charges that are directly

22

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

attributable to the segments are allocated and are reassessed on a periodic basis. The allocations have been determined on a basis that the Company considers to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. The profitability of each of the segments is measured after excluding share-based compensation expenses, amortization and impairment of intangibles, restructuring charges, general and administration charges, other unallocated corporate charges and other items as noted in the reconciliation below as management does not include this information in its measurement of the performance of the operating segments.

Segment Results

Summary information by operating segment for the three and nine months ended March 25, 2016 and March 27, 2015 is as follows (in thousands):

	Three Months Ended				Nine Months Ended
	March 25, 2016		March 27, 2015		March 25, 2016		March 27, 2015
Total net revenue
Product	$	96,432	$	82,398	$	305,518	$	257,688
Service	35,651		36,106		104,698		110,667
Total net revenue	$	132,083	$	118,504	$	410,216	$	368,355
Operating profit from reportable segments
Product	$	8,780	$	3,390	$	20,463	$	9,469
Service	14,117		14,293		40,783		43,833
Total operating profit from reportable segments (1)	$	22,897	$	17,683	$	61,246	$	53,302

(1) The profitability of each of the segments is measured excluding unallocated corporate charges, restructuring and severance, amortization and impairment of intangibles, share-based compensation expenses, and other items as noted in the reconciliation below.

The following table reconciles segment results to our total company results from operations before taxes:

	Three Months Ended						Nine Months Ended
	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
	(in thousands)
Total reportable segments' operating profit	$	22,897		$	17,683		$	61,246		$	53,302
All other corporate charges:
Unallocated operating expenses	17,583			18,960			52,004			58,796
Restructuring and severance	723			708			2,397			5,592
Amortization and impairment of intangibles	191			106			475			1,631
Share-based compensation	2,948			3,896			10,022			11,566
Other	(3,463		)	458			(784		)	2,276
Total all other corporate charges	17,982			24,128			64,114			79,861
Income (loss) from operations, as reported	$	4,915		$	(6,445	)	$	(2,868	)	$	(26,559	)

The segment information is presented on the basis which the Company's CODM evaluates the performance of its operating segments.

The Company's assets are located primarily in the United States and are not allocated to any specific region. The Company does not measure the performance of its business segments on any asset-based metrics. Therefore, reportable segment information is presented only for revenue and operating profit.

Customer information

A significant portion of the Company's revenue was generated from a limited number of customers. For the three months ended March 25, 2016, two customers, accounted for approximately 36% of the Company's revenue. For the three months

23

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

ended March 27, 2015, the United States government, excluding system integrators (collectively, U.S. government), accounted for approximately 15% of the Company's revenue.

For the nine months ended March 25, 2016, the U.S. government accounted for approximately 23% of the Company's revenue. For the nine months ended March 27, 2015, the U.S. government accounted for approximately 19% of the Company's revenue.

At March 25, 2016, one customer accounted for approximately 11% of the Company's accounts receivable. At June 26, 2015, four customers accounted for approximately 56% of the Company's accounts receivable.

Geographic Information

The following table presents revenue by geographic region for the three and nine months ended March 25, 2016 and March 27, 2015 (in thousands except percentages):

	Three Months Ended						Nine Months Ended
	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
Americas	$	54,603		$	72,585		$	217,126		$	227,870
As a percent of total net revenue	41.3		%	61.3		%	52.9		%	61.9		%
EMEA	44,150			13,764			88,254			48,241
As a percent of total net revenue	33.4		%	11.6		%	21.5		%	13.1		%
APJ	33,330			32,155			104,836			92,244
As a percent of total net revenue	25.3		%	27.1		%	25.6		%	25.0		%
Total revenue	$	132,083		$	118,504		$	410,216		$	368,355

The Americas geographic region includes both North and South America. The Europe geographic region ("EMEA") includes European countries. The Asia-Pacific geographic region ("APJ") includes Australia, Japan and all other Asian countries.

International sales to Japan, the only single foreign country which accounted for 10% or more of total revenue, were $28.4 million or 21% and $92.8 million or 23% for the three and nine months ended March 25, 2016, respectively. International sales to Japan, the only single foreign country which accounted for 10% or more of total revenue, were $24.0 million or 20% and $64.8 million or 18% for the three and nine months ended March 27, 2015, respectively. No other individual foreign country's revenue accounted for 10% or more of revenues in the three and nine months ended March 25, 2016 and March 27, 2015.

24. FINANCIAL GUARANTEES

The Company has issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for value-added tax and other taxes and to various other parties to support payments in advance of future delivery on goods and services. The majority of the Company's financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at March 25, 2016 was $4.4 million for which the Company has $4.3 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash in the accompanying unaudited condensed consolidated balance sheets.

25. COMMITMENTS AND CONTINGENCIES

Off Balance Sheet Arrangement

As of March 25, 2016, the Company had a $2.0 million outstanding letter of credit with Wells Fargo Bank to back the Company's obligation to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods or services to a supplier.

24

SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Indemnification Agreements

The Company enters into standard indemnification agreements with its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that the Company's product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third-party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of March 25, 2016. As a result, the Company believes the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to such indemnifications as of March 25, 2016.

Contingencies

The Company may, from time to time, be involved in legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, domestic and international federal, state and local tax reviews and audits and other matters. The Company also may be subject to litigation and/or adverse rulings or judgments as a result of certain contractual indemnification obligations. The Company records a provision for a liability when management believes that it is both probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Third parties in the past have asserted, and may in the future assert, intellectual property infringement claims against the Company, and such future claims, if proven, could require the Company to pay substantial damages or to redesign its existing products or pay fees to obtain cross-license agreements. Litigation may be necessary in the future to enforce or defend the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of its proprietary rights or the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm the Company's business, operating results and financial condition. Further, many of the Company's current and potential competitors have the ability to dedicate substantially greater resources to enforcing and defending their intellectual property rights than the Company.

Additionally, from time to time, the Company receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any given case that such informal review will not lead to further proceedings involving the Company in the future.

The Company is not aware of any pending disputes, including those outlined above, that would be likely to have a material adverse effect, either individually or in the aggregate, on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages, cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods.

Other Commitments

For a description of significant leases and purchase commitments see Note 24 of the Company's Annual Report on Form 10-K filed with the SEC on September 9, 2015.

25

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included or incorporated by reference in this Form 10-Q other than statements of historical fact, are forward-looking statements. Investors can identify these and other forward-looking statements by the use of words such as “estimate,” “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to such statements.

Our actual results could differ materially from those projected in the forward-looking statements included herein as a result of a number of factors, risks and uncertainties, including, among others, the risks discussed in this Part I, Item 2 -"Management's Discussion and Analysis of Financial Condition and Results of Operations,” the risk factors set forth in Part II, Item 1A- "Risk Factors” and elsewhere in this Form 10-Q and the risk factors set forth in our Annual Report on Form 10-K for the year ended June 26, 2015 filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2015 (our “Annual Report”). The information included herein is as of the filing date of this Form 10-Q with the SEC and future events or circumstances could differ materially from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. Unless required by law, we expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written or oral forward-looking statements attributable to SGI or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Readers are urged to carefully review and consider the various disclosures made in this report and other documents we file from time to time with the SEC to advise interested parties of the risks and factors that may affect our business.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 in this Form 10-Q and with our financial statements and notes thereto for the year ended June 26, 2015 contained in our Annual Report.

Overview

SGI is a global leader in high performance solutions for compute, data analytics and data management, that enable customers to accelerate time to discovery, innovation and profitability. We are focused on helping customers solve their most demanding business and technology challenges.

We develop, market and sell a broad line of low cost, mid-range and high-end scale-out and scale-up servers, enterprise-class storage hardware, differentiating software and designed-to-order solutions for large-scale deployments, coupled with global support and highly experienced professional services. SGI solutions are designed to deliver high impact results with lower total costs of ownership and to achieve industry-leading speed, scale and efficiency.

SGI solutions are utilized by scientific, business and government communities to fulfill highly compute intensive application needs in petascale and exascale environments. Delivering industry-leading computing power and fast and efficient data movement, both within the computing system and to and from large-scale data storage installations, SGI systems enable customers to access, analyze, transform, manage and visualize information in real and near real-time.

Our goal is to accelerate time to results in key markets including federal government, defense and strategic systems, weather and climate, physical and life sciences, energy (including oil and gas), aerospace, automotive manufacturing, internet, financial services, education and research institutions, and media and entertainment.

We are focused on building upon the success in our existing high performance solution for compute business as well as increasing our service business with an emphasis on professional services. With our enhanced go-to-market capability, which include large partners and resellers, we believe we will penetrate the higher margin in-memory market that will largely target commercial enterprise businesses and have begun to see positive traction in the market. In addition, we entered into a non-exclusive Outsourced Manufacturing Agreement with Hewlett Packard Enterprise Company ("HPE") effective as of February 4, 2016, pursuant to which HPE will incorporate the our UV technology into a new 8-socket system manufactured by HPE. Our SGI UV for SAP Hana is designed to streamline database management for single large node environments, which require extremely high capacity and scale to meet the needs of in-memory databases. Our management continues to focus on opportunities to enhance operational efficiency to reduce costs that will enable profitability while maintaining appropriate levels of investment as well as cash generation. We believe that this strategic plan will help create a strong foundation for our business results in the long-term.

We continue to have a strong international presence with 61.7% and 49.4% of total revenue from sales outside of the U.S. in the three and nine months ended March 25, 2016, respectively. Total revenue from sales outside of the U.S. in the three and nine months ended March 27, 2015 were 44.2% and 41.0% of total revenue, respectively. In addition, our customer base continues to expand in various sectors, including the public and manufacturing sectors.

26

Significant Events

Our financial results during the three and nine months ended March 25, 2016 and March 27, 2015 were affected by certain significant events that should be considered in comparing the periods presented.

Divestiture of Mineset, Inc.

On February 5, 2016, the "Closing Date", we consummated a stock purchase agreement to sell 100% of the issued and outstanding shares of Mineset, Inc. ("Mineset"), a wholly-owned subsidiary, to ESI Group for approximately $4.7 million in cash, subject to certain adjustments provided for in the agreement.  In connection with this transaction, we transferred all assets and liabilities related to the Mineset business to ESI Group as of the closing date. The Company recognized a gain of $4.4 million for the sale of this asset, net of all related costs.

Term Loan

On January 27, 2015, we entered into a credit agreement (the "Term Loan") among the Company, certain lenders and Morgan Stanley Senior Funding, Inc., as administrative and collateral agent and lead arranger. The Term Loan provided an aggregate principal amount of $70.0 million with a term of three and a half years, bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a 1.0% minimum, plus 9.0% per annum. The Term Loan provided $66.2 million of cash, net of borrowing and origination costs of approximately $3.8 million, which was used to pay off the prior credit facility and provide cash and cash equivalents sufficient to fund working capital requirements, capital expenditures and operations. As of March 25, 2016, we had $61.3 million, net of unamortized debt issuance costs of $2.5 million outstanding principal balance owed on the Term Loan, of which approximately $60.7 million, net of unamortized issuance costs of $1.4 million, was recorded as long-term debt and approximately $0.7 million, net of unamortized issuance costs of $1.1 million, was recorded as short-term debt. We were in compliance with all covenants under the Term Loan, as of March 25, 2016.

Japan Loans

As of March 25, 2016, we have unsecured unguaranteed loans with various Japanese banks ("Japan Loans") amounting to 300 million yen or $2.7 million at rates ranging from TIBOR (Tokyo Interbank Offered Rate) plus 1.0% to 1.75% per annum, of which approximately $2.2 million and $0.5 million were classified as short-term debt and long-term debt, respectively, as of March 25, 2016. During the nine months ended March 25, 2016, we entered into two new loans for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 250 million yen amounting to approximately $2.2 million toward the loans.

During the third quarter of fiscal 2016, we also secured a four year Private Placement Bond from Mizuho Bank ("Japan Private Placement Bond") for 500 million yen or $4.4 million at 0.8% per annum, of which approximately $1.1 million and $3.2, net of unamortized debt issuance costs of $0.1 million, were classified as short-term debt and long-term debt, respectively, as of March 25, 2016.

Impairment of Intangible Assets

During the second quarter of fiscal 2015, we ceased selling and supporting products related to an asset acquisition acquired in fiscal 2014 and determined that the remaining intangible assets related to this acquisition were impaired. We recorded an impairment charge of $1.1 million in the second quarter of fiscal 2015, impacting cost of revenue by $0.8 million and sales expense by $0.3 million.

Results of Operations

Summarized below are the results of our operations for the three and nine months ended March 25, 2016 as compared to the three and nine months ended March 27, 2015.

27

Financial Highlights

• Our total revenue for the three months ended March 25, 2016 was $132.1 million, an increase of $13.6 million or 11.5%, from the comparable period in fiscal 2015. Revenue increased $41.9 million or 11.4% in the nine months ended March 25, 2016 from $368.4 million in the nine months ended March 27, 2015. The increase in both the three and nine months of fiscal 2016 compared to the same periods in fiscal 2015, were due primarily to higher products revenue, particularly in our international operations, offset by a slight reduction in service revenue. The increase in product revenue for both periods are consistent with our strategic decision to focus our investments in strategic areas of HPC and High Performance Data Analytics ("HPDA"). We have been successful in winning large strategic projects and have seen good traction in our HPDA business. During the nine months ended, we experienced a significant increase in revenue from the U.S. government as a result of these large programs, however, during the three months ended March 25, 2016, we have seen a decline in revenue from our U.S. government contracts compared to the same period a year ago. The slight decrease in our service revenue for both periods is due to the lower volume of products sold over the last few years requiring service needs and the timing of professional services provided. In addition, we experienced a decline in our support revenue associated with initial product sales as our customers refresh their technology to newer generation products. The warranty period for our products is generally one to three years, as such the amount of support and maintenance revenue is expected to be lower given that products are still under warranty.

• Our overall gross margin was 28.6% in the three months ended March 25, 2016, a slight increase of 0.2 percentage points from 28.4% in the three months ended March 27, 2015. The change in our overall gross margin percentage in the three months ended March 25, 2016 was primarily due to higher product margin resulting from a higher UV mix compared to the comparable quarter last year, however, this was offset by a lower mix of service revenue. Our UV products and service typically generate a much higher margin than our other products. We also benefited from lower severance and share based compensation costs during the three months ended March 25, 2016 compared to the same period in fiscal 2015.

• Our overall gross margin was 26.1% in the nine months ended March 25, 2016, a decrease of 1.8 percentage points from 27.9% in the nine months ended March 27, 2015. The change in our overall gross margin percentage in the nine months ended March 25, 2016 was primarily driven by unfavorable mix compared to the comparable period last year, with a much lower mix of service revenue, which typically has a higher gross margin. This decrease was offset by lower severance costs and impairment charges during the nine months ended March 25, 2016 compared to the same period in fiscal 2015. We recognized an impairment charge of $0.8 million related to our decision to discontinue selling and supporting certain storage products during the nine months ended March 27, 2015. In addition, during the nine months ended March 25, 2016, we were also negatively impacted as a result of one large program where we recognized revenue at a much lower margin than our typical run rate business. 

• Our research and development, selling and general and administrative expenses were $37.3 million in the three months ended March 25, 2016 compared to $40.1 million in the prior year comparable quarter, a decrease of approximately $2.8 million. We benefited from lower compensation and related expenses due to reductions in headcount, lower share-based compensation charges and a reduction in spending due to tight expense controls.

• Our research and development, selling and general and administrative expenses were $114.4 million in the nine months ended March 25, 2016 compared to $129.3 million in the prior year comparable period, a decrease of approximately $14.9 million. We benefited from lower compensation and related expenses due to reductions in headcount, lower share-based compensation, severance and impairment charges along with lower spending due to tight expense controls. As indicated above, we took an impairment charge in the second quarter of 2015 related to an acquisition made in 2014. This was slightly offset by an increase in bad debt reserves.

• We recognized a gain of $4.4 million from the sale of Mineset, $4.4 million, during the three and nine months ended March 25, 2016, as discussed above.

• Total headcount as of March 25, 2016 was 1,071, which reflected a net reduction of 33 employees or approximately 3%, from 1,104 as of March 27, 2015 primarily due to cost reduction actions occurring over the last fiscal year.

• During the three and nine months ended March 25, 2016, we incurred approximately $0.7 million and $2.4 million, respectively, of severance charges associated with planned cost reductions. During the three and nine months ended March 27, 2015, we incurred approximately $0.7 million and $5.5 million, respectively, of severance charges associated with planned cost reductions.

• Interest expense, net was approximately $2.0 million and $6.0 million for the three and nine months ended March 25, 2016 compared to $1.6 million and $1.7 million in the comparable three and nine month periods in March 27, 2015. As indicated above, on January 27, 2015, we entered into a credit agreement providing an aggregate principal amount of $70.0 million with a term of three and a half years, bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a 1.0% minimum, plus 9.0% per annum.

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• Other expense, net was approximately $1.8 million and $1.4 million for the three and nine months ended March 25, 2016 compared to $0.6 million and $0.7 million in the comparable three and nine month periods in March 27, 2015. During the three and nine months ended March 25, 2016, we experienced an unfavorable foreign exchange impact relating to balance sheet hedge contracts as a result of the Japanese yen strengthening against the U.S. dollar.

• Net income for the three months ended March 25, 2016 was $0.7 million, or a $9.5 million improvement compared to a net loss of $8.8 million in the comparable quarter last year. Net loss for the nine months ended March 25, 2016 was $11.3 million or an $18.2 million improvement compared to the net loss of $29.5 million for the nine months ended March 27, 2015. The decrease in net loss for both the three and nine month periods ended March 25, 2016 compared to the comparable periods last year was primarily driven by higher revenue and lower operating expenses as well as the $4.4 million gain for the sale of the Mineset business. This was offset by higher interest expense due to the Term Loan obtained in January 2015 and unfavorable foreign exchange impact relating to balance sheet hedge contracts as a result of the Japanese yen strengthening against the U.S. dollar.

• We continue to streamline our operations and maintain tight controls over spending in order to help achieve our long-term operating targets and goals, as well as to enable increased new investment in new products and emerging technologies.

Net Revenue

	Three Months Ended						Change	Nine Months Ended						Change
	March 25, 2016			March 27, 2015				March 25, 2016			March 27, 2015
	($ in thousands)							($ in millions)
Net revenue from products:	96,432			82,398			14,034	305,518			257,688			47,830
As a percent of total net revenue	73.0		%	69.5		%	3.5 ppts	74.5		%	70.0		%	4.5 ppts
Net revenue from services	35,651			36,106			(455)	104,698			110,667			(5,969)
As a percent of total net revenue	27.0		%	30.5		%	(3.5) ppts	25.5		%	30.0		%	(4.5) ppts
Total net revenue	$	132,083		$	118,504		$13,579	$	410,216		$	368,355		$41,861

Revenue. We derive revenue from the sale of products and services directly to end-users as well as through resellers and system integrators. Product revenue is derived from the sale of mid-range to high-end computing servers and data storage systems as well as software. We enter into sales contracts to deliver multiple products and/or services. In accordance with our revenue recognition policy, certain sales contracts are deferred and recognized over the service period. Service revenue is generated from the sale of standard maintenance contracts as well as custom maintenance contracts that are tailored to individual customers' needs. We recognize service revenue ratably over the service periods. Maintenance contracts are typically between one to three years in length, and we actively pursue renewals of these contracts. We also generate professional services revenue related to implementation of and training on our products.

We continuously make revisions to our product offerings and improvements of our product's performance and data storage capacity. Accordingly, we are unable to directly compare our products from period to period and are therefore unable to quantify the changes in pricing of our products from period to period. We believe that our on-going revisions to product offerings and product feature improvements help mitigate competitive pricing pressures by shifting the competitive landscape to differentiated value rather than price. Among other things, the timing of our revenue is primarily dependent upon the funding and implementation schedule of our customers. A significant portion of our revenue relates to large IT projects, which can have long sales cycles and long build-out and acceptance schedules. In addition, we derive a significant portion of our revenue from the U.S. government and from system integrators and educational institutions that receive funding from the U.S. government. Protracted federal budget deliberations, government shutdowns and other disruptions in the timely funding or acceptance of government-related programs can impact the timing of our revenue.

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The following table presents revenue by geographic region for the three and nine months ended March 25, 2016 and March 27, 2015 (in thousands except percentages):

	Three Months Ended						Change	Nine Months Ended						Change
	March 25, 2016			March 27, 2015				March 25, 2016			March 27, 2015
Americas	$	54,603		$	72,585		$(17,982)	$	217,126		$	227,870		$(10,744)
As a percent of total net revenue	41.3		%	61.3		%	(20.0) ppts	52.9		%	61.9		%	(9.0) ppts
EMEA	44,150			13,764			30,386	88,254			48,241			40,013
As a percent of total net revenue	33.4		%	11.6		%	21.8 ppts	21.5		%	13.1		%	8.4 ppts
APJ	33,330			32,155			1,175	104,836			92,244			12,592
As a percent of total net revenue	25.3		%	27.1		%	(1.8) ppts	25.6		%	25.0		%	0.6 ppts
Total revenue	$	132,083		$	118,504		$13,579	$	410,216		$	368,355		$41,861

The Americas geographic region includes both North and South America. The Europe geographic region ("EMEA") includes European countries. The Asia-Pacific geographic region ("APJ") includes Australia, New Zealand, Japan and all other Asian countries.

Revenue generated in the Americas represented 41.3% of total revenue during the third quarter of fiscal 2016, or a decrease of 20.0 percentage points from 61.3% during the comparable quarter last year. Revenue generated in the Americas represented 52.9% of total revenue during nine months ended March 25, 2016, or a decrease of 9.0 percentage points from 61.9% during the comparable period last year. The decrease in revenue in the Americas for the three months ended March 25, 2016 was primarily driven by a reduction in U.S. government contracts compared to the comparable periods in fiscal 2015. However, for both the three and nine months ended March 25, 2016, we are seeing a significant increase in revenue from our commercial and international customers with an increasing number of large programs, particularly in EMEA and Japan, reflecting our efforts to win large strategic projects.

Our revenue mix by geography illustrates that we continue to have strong international presence representing 61.7% and 49.4%, of our total revenue for the three and nine months ended March 25, 2016. Revenue from sales outside of the U.S. was 44.2% and 41.0% in the three and nine months ended March 27, 2015, respectively.

For the three months ended March 25, 2016, two customers accounted for approximately 36% of total revenue. For the three months ended March 27, 2015, the U.S. government accounted for approximately 15% total revenue.

For the nine months ended March 25, 2016, the U.S. government accounted for approximately 23% of the Company's revenue. For the nine months ended March 25, 2016, the U.S. government accounted for approximately 19% of the Company's revenue.

Cost of revenue and gross profit

Cost of revenue and gross profit for the three and nine months ended March 25, 2016 and March 27, 2015 were as follows (in thousands except percentages):

	Three Months Ended						Change			Nine Months Ended						Change
	March 25, 2016			March 27, 2015			$		%	March 25, 2016			March 27, 2015			$		%
Total cost of revenue	$	94,315		$	84,845		$	9,470	11.2%	$	303,159		$	265,515		$	37,644	14.2%
Total gross profit	$	37,768		$	33,659		$	4,109	12.2%	$	107,057		$	102,840		$	4,217	4.1%
Total gross margin	28.6		%	28.4		%			0.2 ppts	26.1		%	27.9		%			(1.8) ppts

Cost of revenue consists of costs associated with direct material, labor, manufacturing overhead, shipment of products, inventory write downs and share-based compensation. Cost of revenue also includes personnel costs for providing maintenance and professional services. Our manufacturing overhead and professional services personnel costs are fixed or semi-variable. Our gross margins are impacted by changes in customer and product mix, pricing actions by our competitors and commodity prices that comprise a significant portion of cost of revenue from period to period. In addition, when certain sales contracts are deferred in accordance with our revenue recognition policy, the related cost of revenue is deferred and recognized upon recognition of revenue.

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Our cost of revenue and gross profit are impacted by price changes, product configuration, revenue mix and product material costs. Our service cost of revenue and gross margin are impacted by timing of support service initiations and renewals, and incremental investments in our customer support infrastructure.

Overall gross profit increased by $4.1 million to $37.8 million in the three months ended March 25, 2016 from $33.7 million in the three months ended March 27, 2015. During the third quarter of fiscal 2016, we recognized higher revenue of $13.6 million compared to the prior comparable period and we benefited from lower severance, share-based compensation and excess and obsolete charges. Our overall gross margin also increased to 28.6% in the three months ended March 25, 2016 from 28.4% in the three months ended March 27, 2015. The slight increase in gross margin for the three months ended March 25, 2016 was primarily driven by the factors discussed above. In addition, we recognized higher product margin resulting from a higher UV mix compared to the comparable quarter last year, however, this was offset by a lower mix of service revenue. Our UV products and service typically generate a much higher margin than our other products.

Overall gross profit increased by $4.2 million to $107.1 million in the nine months ended March 25, 2016 from $102.8 million in the nine months ended March 27, 2015. During the nine months ended March 25, 2016, we recognized higher revenue of $41.9 million compared to the prior year comparable period, and we benefited from lower severance, share-based compensation and impairment charges. As indicated above, we took an impairment charge of $1.1 million, during the nine month ended March 27, 2015, related to an acquisition made in 2014, of which $0.8 million impacted cost of revenue. However, during the nine months ended March 25, 2016, we were negatively impacted as a result of one large program where we recognized revenue at a much lower margin than our typical run rate business.  Our overall gross margin decreased to 26.1% in the nine months ended March 25, 2016 from 27.9% in the nine months ended March 27, 2015. The decrease in gross margin for the nine months ended March 25, 2016 was primarily driven by the large low margin deal discussed above as well as an unfavorable product mix with lower service revenue, which typically generates higher gross margin. This was slightly offset by the cost savings described above.

Operating Expenses

Operating expenses for the three and nine months ended March 25, 2016 and March 27, 2015 were as follows (in thousands except percentages):

	Three Months Ended					Change					Nine Months Ended					Change
	March 25, 2016			March 27, 2015		$			%		March 25, 2016			March 27, 2015		$			%
Research and development	$	12,744		$	13,016	$	(272	)	(2.1	)%	$	38,911		$	40,995	$	(2,084	)	(5.1)%
Sales and marketing	12,308			14,248		(1,940		)	(13.6	)%	38,702			46,889		(8,187		)	(17.5)%
General and administrative	12,226			12,840		(614		)	(4.8	)%	36,737			41,399		(4,662		)	(11.3)%
Gain from sale of assets	(4,425		)	—		(4,425		)	NA		(4,425		)	—		(4,425		)	NA
Restructuring	—			—		—			N/A		—			116		(116		)	(100.0)%
Total operating expense	$	32,853		$	40,104	$	(7,251	)	(18.1	)%	$	109,925		$	129,399	$	(19,474	)	(15.0)%

Research and development. Research and development expense consists primarily of personnel and related costs, contractor fees, new component testing and evaluation, test equipment, new product design and testing, other product development activities, share-based compensation, and facilities and information technology costs.

Research and development expense decreased $0.3 million or 2.1% to $12.7 million in the three months ended March 25, 2016 from $13.0 million in the three months ended March 27, 2015. We continued to invest in new product design and development activities in order to enhance our products and product portfolio. We received an increase in third-party funding of approximately $0.1 million and also benefited from lower third party costs due to the timing of development activities and lower share-based compensation expense of $0.1 million.

Research and development expense decreased $2.1 million or 5.1% to $38.9 million in the nine months ended March 25, 2016 compared to $41.0 million in the nine months ended March 27, 2015. We continued to invest in new product design and development activities in order to enhance our products and product portfolio. We received an increase in third-party funding of approximately $0.5 million and also benefited from lower severance expense of $0.7 million and lower facility costs.

Sales and marketing. Sales and marketing expense consists primarily of salaries, bonuses and commissions paid to our sales and marketing employees, amortization of intangible assets, share-based compensation, and facilities and information technology costs. We also incur marketing expenses for activities such as trade shows, direct mail and advertising.

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Sales and marketing expense decreased $1.9 million, or 13.6%, to $12.3 million in the three months ended March 25, 2016 from $14.2 million in the three months ended March 27, 2015. This decrease was primarily due to lower commissions and bonus expense of $1.2 million reflecting lower achievement of sales commission and bonus targets. We also benefited from lower share-based compensation costs of $0.3 million and travel and entertainment of $0.2 million compared to last year.

Sales and marketing expense decreased $8.2 million, or 17.5%, to $38.7 million in the nine months ended March 25, 2016 from $46.9 million in the nine months ended March 27, 2015. This decrease was primarily due to lower commissions and bonus expense of $2.5 million, reflecting lower achievement of sales commissions and bonus targets, lower severance of $1.8 million, and lower compensation and related expenses of $2.1 million as a result of decreased headcount. We also benefited from lower travel and entertainment costs of $0.4 million compared to last year. In addition, during the nine months ended March 27, 2015, as a result of a decision made to discontinue selling and support certain storage products, we recorded an impairment charge of $0.3 million impacting sales expense.

We will continue to deploy our sales and support organizations to focus on key vertical markets such as defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive manufacturing, media and entertainment, semiconductor design, manufacturing, financial services, data centers and business intelligence and data analytics. In addition, we are also investing in our marketing functions in order to ensure that we are in markets and technologies that will provide us with growth in our target segments.

General and administrative. General and administrative expense consists primarily of personnel costs, legal and professional service costs, depreciation, bad debt expense, share-based compensation, and facilities and information technology costs.

General and administrative expense decreased $0.6 million, or 4.8%, to $12.2 million in the three months ended March 25, 2016 from $12.8 million in the three months ended March 27, 2015. We benefited from lower compensation and related expenses of $0.3 million as a result of decreased headcount, lower facility costs as a result of tight spending and facility closures compared to a year ago. In addition, our share-based compensation expense during the third quarter of fiscal 2016 was $0.4 million lower compared to the same period last year. This decrease was partially offset by higher third party and severance costs compared to the third quarter of fiscal 2015.

General and administrative expense decreased $4.7 million, or 11.3%, to $36.7 million in the nine months ended March 25, 2016 from $41.4 million in the nine months ended March 27, 2015. We also experienced a decrease in third party expenses of $2.3 million, a decrease in facility costs of $1.9 million as a result of tight spending and facility closures compared to the same period a year ago and a decrease in our compensation and related expenses of $1.8 million as a result of decreased headcount. This decrease was slightly offset by higher severance.

Gain from sale of assets. On February 5, 2016, the "Closing Date", we consummated a stock purchase agreement to sell 100% of the issued and outstanding shares of Mineset, Inc. ("Mineset"), a wholly-owned subsidiary, to ESI Group for approximately $4.7 million in cash, subject to certain adjustments provided for in the agreement.  The Company recognized a gain of $4.4 million for the sale of this asset, net of all related costs.

Restructuring. Total restructuring expense related to our fiscal 2012 restructuring action was immaterial for both the three and nine months ended March 25, 2016 and March 27, 2015 as this restructuring action has been completed.

Total other expense, net

Total other expense, net for the three and nine months ended March 25, 2016 and March 27, 2015 were as follows (in thousands except percentages):

	Three Months Ended						Change					Nine Months Ended						Change
	March 25, 2016			March 27, 2015			$			%		March 25, 2016			March 27, 2015			$			%
Interest expense, net	$	(1,988	)	$	(1,614	)	$	(374	)	23.2	%	$	(6,044	)	$	(1,714	)	$	(4,330	)	252.6%
Other expense, net	(1,812		)	(575		)	(1,237		)	215.1	%	(1,375		)	(679		)	(696		)	102.5%
Total other expense, net	$	(3,800	)	$	(2,189	)	$	(1,611	)	73.6	%	$	(7,419	)	$	(2,393	)	$	(5,026	)	210.0%

Interest expense, net. Interest expense, net primarily consists of interest expense relating to our Term Loan, as well as interest earned on our interest-bearing investment accounts. During the three and nine months ended March 25, 2016, we recorded $2.0 million and $6.0 million of interest expense primarily related to our Term Loan which we entered into in January 2015.

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Other expense, net. Other income, net during the nine months ended March 25, 2016 consisted of foreign exchange gains (losses) as a result of the exchange rates primarily for the Euro, British Pound, Czech Koruna, Japanese Yen, Canadian dollar and Australian dollar against the U.S. Dollar. We have a hedging strategy that is intended to mitigate the effect of exchange rate fluctuations on certain foreign currency balance sheet accounts and cash flows. During the three and nine months ended March 25, 2016, we recognized an unfavorable foreign exchange impact relating to balance sheet hedge contracts as a result of the Japanese Yen strengthening against the U.S. dollar.

Income tax provision

Income tax provision for the three and nine months ended March 25, 2016 and March 27, 2015 were as follows (in thousands except percentages):

	Three Months Ended				Change				Nine Months Ended				Change
	March 25, 2016		March 27, 2015		$		%		March 25, 2016		March 27, 2015		$		%
Income tax provision	$	376	$	128	$	248	193.8	%	$	1,025	$	581	$	444	76.4%

We recorded a tax provision of $0.4 million and $1.0 million for the three and the nine months ended March 25, 2016, respectively. The tax provision primarily was comprised of tax liability computed based on the Company’s projected full-year foreign taxes, state taxes, interest for unrecognized tax benefits and U.S. deferred tax liability related to nondeductible goodwill, partially offset by tax benefits from expiring statute of limitations. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 25, 2016 primarily due to the tax rate differential of the Company's foreign operations and utilization of net operating losses not previously recognized.

We recorded a tax provision of $0.1 million and $0.6 million for the three and nine months ended March 27, 2015, respectively. The tax expense was primarily comprised of tax liability computed based on the Company’s projected foreign financial results for the year ended June 26, 2015, state taxes, interest for unrecognized tax benefits and U.S. deferred tax liability related to nondeductible goodwill, partially offset by tax benefits from expiring statute of limitations and tax refunds in foreign jurisdictions. The effective tax rate differed from the combined federal and net state statutory income tax rate for the three and nine months ended March 27, 2015 primarily due to the tax rate differential of the Company's foreign operations and utilization of net operating losses not previously recognized.

As of March 25, 2016, we have provided a partial valuation allowance against our net deferred tax assets. We continue to evaluate the realizability of deferred tax assets and related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which management makes the determination.

Segment Operating Performance

The Company's operating segments are determined based upon several criteria including: the Company's internal organizational structure; the manner in which the Company's operations are managed; the criteria used by the Company's Chief Operating Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the Company's availability of separate financial information.

The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally allocated based on the type of products and services provided to our customers. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A portion of the segments' expenses arise from shared services and infrastructure that the Company provides to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development and other corporate infrastructure expenses. These corporate charges are allocated to the segments and are reassessed on a periodic basis. The allocations have been determined on a basis that the Company considers to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. The profitability of each of the segments is measured after excluding share-based compensation expenses, amortization and impairment of intangibles, restructuring charges, general and administration charges, other unallocated corporate charges and other items as management does not include this information in its measurement of the performance of the operating segments.

Product:

Our product segment include our scale-out computing, scale-up computing and software solutions. Compute solutions include integrated third-party hardware and software products that we sell to provide a single source solution for our customers. Our Compute solutions are designed to minimize the number and complexity of interconnects for power and data transfer to improve reliability, speed of implementation and serviceability. Our Storage solutions include both hardware and software offerings to address virtually every type of data storage and management requirement. Products range from entry-level disk

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arrays to complex storage systems, with innovative technology and hardware. Our Storage solutions are designed to provide extreme scale, broad flexibility, and to minimize the cost to store data.

Operating results for our product segment for the three and nine months ended March 25, 2016 and March 27, 2015 were as follows (in thousands except percentage):

	Three Months Ended						Change			Nine Months Ended						Change
	March 25, 2016			March 27, 2015			$		%	March 25, 2016			March 27, 2015			$		%
Net revenue	$	96,432		$	82,398		$	14,034	17.0%	$	305,518		$	257,688		$	47,830	18.6%
Operating profit	$	8,780		$	3,390		$	5,390	159.0%	$	20,463		$	9,469		$	10,994	116.1%
Operating margin	9.1		%	4.1		%			5.0 ppts	6.7		%	3.7		%			3.0 ppts

Revenue for our product segment increased $14.0 million, or 17.0%, to $96.4 million in the three months ended March 25, 2016 from $82.4 million during the three months ended March 27, 2015. The increase in revenue in the three months ended March 25, 2016 compared to the three months ended March 27, 2015 was due primarily to an increase in the number of large programs, particularly in EMEA, as a result of our focus to win more strategic large projects. We experienced an increase in revenue for our HPDA solutions with our new UV products. We have been successful in gaining traction in the HPDA market and expect this market to be an area of growth for the Company.

For the nine months ended March 25, 2016, revenue for our product segment increased $47.8 million, or 18.6%, to $305.5 million from $257.7 million during the nine months ended March 27, 2015. The increase in revenue in the nine months ended March 25, 2016 compared to the nine months ended March 27, 2015 was due primarily to an increase in the number of large programs, particularly in Japan and EMEA as well as for the U.S. government, as a result of our focus to win more strategic large projects. We also experienced an increase in revenue for our HPDA solutions with our new UV products, as discussed above.

Overall operating profit for our product segment increased by $5.4 million to an operating profit of $8.8 million in the three months ended March 25, 2016 from $3.4 million operating profit in the three months ended March 27, 2015. The increase in operating profit for the three months ended March 25, 2016 compared to the comparable period last year was mainly driven by higher revenue along with a more favorable mix of higher margins product sales particularly with our UV product line. In addition, during the three months ended March 25, 2016, we benefited from lower operating expenses due to reductions in headcount resulting in lower compensation and related expenses, lower commissions and bonuses, as well as tight spending controls.

Overall operating profit for our product segment increased by $11.0 million to an operating profit of $20.5 million in the nine months ended March 25, 2016 from $9.5 million operating profit in the nine months ended March 27, 2015. The increase in operating profit for the nine months ended March 25, 2016 compared to the comparable period last year was mainly driven by higher revenue along with a more favorable mix of higher margin product sales. We also benefited from lower operating expenses due to reductions in headcount resulting in lower compensation and related expenses, lower commissions and bonuses, as well as tight spending controls. However, this was partially offset by the impact of one large deal that occurred during the nine months ended March 25, 2016 where we recognized revenue at a much lower margin than our typical run rate business. 

Service:

The Service segment is comprised of customer service support and professional services. Our customer service support organization provides ongoing maintenance and technical support for our products and some third-party products, as well as contracted maintenance services, hardware deployment services (install and de-install), time and materials-based services and spare parts. Our professional services organization provides value added services associated with technology consulting, project management and customer education, all of which help our customers realize the full value of their information technology investments.

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Operating results for our Service segment for the three and nine months ended March 25, 2016 and March 27, 2015 were as follows (in thousands except percentage):

	Three Months Ended						Change				Nine Months Ended						Change
	March 25, 2016			March 27, 2015			$			%	March 25, 2016			March 27, 2015			$			%
Net revenue	$	35,651		$	36,106		$	(455	)	(1.3)%	$	104,698		$	110,667		$	(5,969	)	(5.4)%
Operating profit	$	14,117		$	14,293		(176		)	(1.2)%	$	40,783		$	43,833		$	(3,050	)	(7.0)%
Operating margin	39.6		%	39.6		%				—%	39.0		%	39.6		%				(0.6) ppts

Our service revenue will typically fluctuate due to timing of when services were performed on consulting and product integration services. Our service revenue is typically recognized ratably over the respective service periods. Revenue for our Service segment slightly decreased $0.5 million or 1.3%, to $35.7 million in the three months ended March 25, 2016 from $36.1 million in the three months ended March 27, 2015. Revenue for our Service segment decreased $6.0 million or 5.4%, to $104.7 million in the nine months ended March 25, 2016 from $110.7 million in the nine months ended March 27, 2015. The decreases for both the three and nine months ending March 25, 2016 were primarily due to the lower volume of products sold requiring service needs and the timing of professional services provided. In addition, we experienced a decline in our support revenue associated with initial product sales as our customers refresh their technology to newer generation products. The warranty period for our products is generally one to three years, as such the amount of support and maintenance revenue is expected to be lower given that products are still under warranty.

Overall operating profit slightly decreased by $0.2 million for our Service segment during the three months ended March 25, 2016 compared to the three months ended March 27, 2015 and decreased by $3.1 million in the nine months ended March 25, 2016 compared to the nine months ended March 27, 2015. The decreases for both the three and nine month periods ended March 25, 2016 compared to the comparable periods was primarily driven by the lower revenue volumes as total operating expenses remained about flat.

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Liquidity and Capital Resources

We had $99.0 million of unrestricted cash and cash equivalents at March 25, 2016 and $67.2 million at June 26, 2015. As of March 25, 2016, $29.4 million of cash was held outside the United States. Historically, we have required capital principally to fund our working capital needs. If we invest any of our cash outside of non-interest-bearing operating accounts, it is our investment policy to invest in a manner that preserves capital, provides liquidity, maintains appropriate diversification and optimizes after-tax yield and return within our policy's framework and stipulated benchmarks. Adherence to our policy requires the assets to be liquid on and before their maturity dates. This liquidity requirement means that the holder of the assets must be able to pay us, upon our demand, the cash value of the assets invested.

At March 25, 2016 and June 26, 2015, we had restricted cash of $4.3 million and $4.4 million, respectively, pledged as collateral for various guarantees issued to cover rent on leased facilities and equipment, to government authorities for value-added tax (“VAT”) and other taxes, and to certain vendors to support payments in advance of delivery of goods and services.

On January 27, 2015, we entered into a credit agreement (the "Term Loan") among the Company, certain lenders and Morgan Stanley Senior Funding, Inc., as administrative and collateral agent and lead arranger. The Term Loan provided an aggregate principal amount of $70.0 million for a term of three and a half years bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a 1.0% minimum, plus 9.0% per annum. The Term Loan provided $66.2 million of cash, net of borrowing and debt issuance costs of approximately $3.8 million, which was used to pay off the prior credit facility, as mentioned above, and provide cash and cash equivalents sufficient to fund working capital requirements, capital expenditures and operations. All commitments under the December 2011 credit facility were terminated. During the nine months ended March 25, 2016, we made $5.7 million of principal payments to Morgan Stanley Senior Funding, Inc. and Tennenbaum Capital Partners, LLC, of which $4.4 million represented prepayments. As of March 25, 2016, the Company had an outstanding principal balance of $63.9 million on the Term Loan of which approximately $1.8 million and $62.1 million were recorded as short-term debt and long-term debt, respectively. We may not prepay the loan during the first year and may only prepay the loan during the second year at a premium. After the second year, we may prepay the loan without penalty. We are currently assessing various financing alternatives including a prepayment of all or portion the Term Loan. We were in compliance with all covenants under the Term Loan, as of March 25, 2016 and expect to be in compliance for the next 12 months.

We also have unsecured unguaranteed loans with various Japanese banks amounting to 300 million yen or $2.7 million at rates raging from TIBOR plus 1.0% to 1.75% per annum, of which approximately $2.2 million and $0.5 million were classified as short-term debt and long-term debt, respectively, as of March 25, 2016. During the nine months ended March 25, 2016, the Company entered into two new loans for an aggregate total of 250 million yen or approximately $2.1 million, of which $1.3 million and $0.8 million, were classified as short-term debt and long-term debt, respectively. We also repaid a total of 250 million yen amounting to approximately $2.2 million toward the loans during the nine months ended March 25, 2016.

During the third quarter of fiscal 2016, we also secured a four year Private Placement Bond from Mizuho Bank ("Japan Private Placement Bond") for 500 million yen or $4.4 million at 0.8% per annum, of which approximately $1.1 million and $3.2 million, net of unamortized debt issuance costs of $0.1 million, were classified as short-term debt and long-term debt, respectively, as of March 25, 2016.

We have intensified our cash management processes related to monitoring, projecting and controlling procedures to operate our business and are more broadly requiring advance and milestone payments for certain large projects that would otherwise involve a significant lag between our payments to vendors for equipment and materials and the installation, acceptance, billing and collection from the customer. We believe our current cash and cash equivalents will be sufficient to fund working capital requirements, anticipated capital expenditures and other operations for the next twelve months. We do not anticipate paying dividends or repurchasing stock while the Term Loan is outstanding. See Note 15 and 16, Short-term Debt and Long-term Debt, respectively, for more information on the Term Loan agreement.

The adequacy of these resources to meet our liquidity needs beyond the next twelve months will depend on our success in receiving advance and milestone payments, our ability to continue winning larger program awards, our operating results and capital expenditures required to meet our business needs. We have experienced an increase in the number of large programs that have been awarded to us and are continuing to focus on winning large programs to help drive our revenue growth. With many of these large programs, we may experience a one to two quarter lag between our payments to vendors for equipment and materials and the accompanying installation, acceptance, billing and collection from the customer. If we fail to generate cash from our operations on a timely basis or do not generate cash from our operations sufficient to service our outstanding debt obligations, we may not have the cash resources required to run our business and we may need to seek additional sources of funds.

If we require additional capital resources to expand our business internally or to acquire complementary products, technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities or obtain other debt financing.  The sale of additional equity or debt securities could result in more dilution to our stockholders.  Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.

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As indicated above, we are assessing various financing alternatives and may prepay all or a portion of the Term Loan. On January 27, 2015, we filed with the SEC a universal shelf Registration Statement on Form S-3 to issue and sell on a current, delayed or continuous basis up to $75 million of Company securities in one or more offerings within or outside the United States, whether for cash or through the exchange of other forms of consideration (the “Shelf Registration Statement”). Upon being declared effective by the SEC and pursuant to the Shelf Registration Statement, the Company may issue an indeterminate number of shares of common stock, preferred stock, debt securities and/or warrants at various times and at indeterminate prices. The sale of any additional equity or debt securities could result in dilution to our stockholders. The Company currently does not have any immediate plans to use the Shelf Registration Statement.

The following is a summary of cash activity (in thousands):

	Nine Months Ended
	March 25, 2016			March 27, 2015
Consolidated statements of cash flows data:
Net cash provided by (used in) operating activities	$	31,312		$	(87,227	)
Net cash used in investing activities	(1,092		)	(5,299		)
Net cash provided by financing activities	797			66,569
Effect of exchange rate changes on cash and cash equivalents	751			(3,418		)
Net increase (decrease) in cash	$	31,768		$	(29,375	)

Operating Activities

Cash provided by operating activities was $31.3 million for the nine months ended March 25, 2016. Our net loss was $11.3 million for the nine months ended March 25, 2016. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $8.3 million and share-based compensation expense of $10.0 million, gain on sale of Mineset of $4.4 million, and $0.6 million of other items. Net change in operating assets and liabilities of $28.2 million contributed to the increase in cash from operating activities. The primary sources of cash in operating activities were decreases in accounts receivables, inventory and prepaid and other assets. The decrease in inventory reflects the timing of shipments of large sales contracts that we had won in the past few quarters. The primary uses of cash in operating activities were decreases in deferred revenue, accounts payable, and other operating liabilities, as well as increases in deferred costs of revenue.

For the nine months ended March 25, 2016, accounts receivable decreased $39.7 million reflecting the timing of revenue recognition and collections of the trade receivables. In addition, inventory decreased $25.2 million reflecting the timing of customer shipments and acceptance of sales contracts. Prepaid expenses and other assets decreased by $3.9 million also contributing to the increase in cash from operating activities.

For the nine months ended March 25, 2016, deferred revenue decreased by $27.3 million and deferred cost of revenue increased by $2.6 million, primarily due to the timing of revenue recognition on sales transactions that were required to be recognized in accordance with our revenue recognition policy. Additionally, accounts payable and other liabilities decreased by $1.8 million and $8.8 million, respectively, primarily due to the timing of revenue recognition and payments to our suppliers.

Cash used in operating activities was $87.2 million for the nine months ended March 27, 2015. Our net loss was $29.5 million for the nine months ended March 27, 2015. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $8.3 million, share-based compensation expense of $11.6 million, asset impairment charges of $1.1 million, and $0.8 million of other items. Net change in operating assets and liabilities of $79.5 million contributed to the decrease in cash from operating activities. The primary uses of cash in operating activities were for increases in inventory and accounts receivable, and decreases in accounts payable and other operating liabilities. The increase in inventory reflects the timing of purchases to meet demands of large sales contracts that we anticipate shipping over the next few quarters. The primary sources of cash in operating activities were decreases in prepaid and other assets and deferred cost of revenue, and increases in deferred revenue.

For the nine months ended March 27, 2015, inventory increased $58.8 million reflecting the timing of customer shipments and acceptance of sales contracts, and accounts payables decreased $7.2 million primarily due to the timing of payments to our supplier. The increase in accounts receivable of $14.7 million reflecting the timing of revenue recognition and collections of the trade receivables. Additionally, other liabilities decreased by $14.2 million primarily due to the timing of payments to our suppliers.

For the nine months ended March 27, 2015, prepaid expenses and other assets decreased by $7.6 million and deferred cost decreased by $0.6 million. Deferred revenue increased by $7.1 million primarily due to the timing of revenue recognition on sales transactions that were required to be recognized in accordance with our revenue recognition policy.

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Investing Activities

Cash used in investing activities was $1.1 million in the nine months ended March 25, 2016, primarily due to purchases of property and equipment of $5.3 million offset by the net proceeds from the sale of Mineset of $4.2 million.

Cash used in investing activities was $5.3 million in the nine months ended March 27, 2015, primarily due to purchases of property and equipment of $4.5 million and other investment activities of 0.8 million.

Financing Activities

Cash provided by financing activities was $0.8 million for the nine months ended March 25, 2016, primarily due to proceeds from the Japan loans of $6.5 million, issuance of stock under our employee stock purchase plan and stock option exercises of $3.6 million. This was offset by the repayment of loan principal of $5.7 million for our Term Loan, of which $4.4 million represented prepayments, payments of Japan loans of $2.2 million, and the funding of restricted stock units withheld for taxes of $1.4 million.

Cash provided by financing activities was $66.6 million for the nine months ended March 27, 2015, primarily due to proceeds from our new Term Loan of $70.0 million, proceeds from our line credit facility of $15.0 million, proceeds from the Japan line of credit of $2.5 million, issuance of stock under our employee stock purchase plan and stock option exercises of $3.9 million. This was offset by the repurchase of shares of our common stock of $4.2 million and the funding of restricted stock units withheld for taxes of $2.0 million. During the nine months ended March 27, 2015, we terminated and paid off the $15.0 million outstanding balance on our credit facility with the proceeds from our Term Loan and also paid borrowing and origination costs of $3.6 million as described above.

We expect to continue to invest in the business including working capital, capital expenditures and operating expenses. We intend to fund these activities with our cash reserves and cash generated from operations, if any. Increases in operating expenses may not result in an increase in our revenue and our anticipated revenue may not be sufficient to support these increased expenditures. We anticipate that operating expenses and working capital will constitute a material use of our cash resources.

Contractual Obligations and Commitments

Operating Leases—We lease certain real and personal property under non-cancelable operating leases. Certain leases require us to pay property taxes, insurance and routine maintenance and include renewal options and escalation clauses.

As of March 25, 2016, we had total outstanding commitments on non-cancelable operating leases of our real properties of $26.2 million, of which $20.8 million related to our domestic leases. These domestic leases include our headquarters in Milpitas, California and our warehouse facility in Chippewa Falls, Wisconsin. A significant portion of our domestic leases will expire in fiscal 2024. The remainder of our domestic leases will expire in fiscal 2016 through 2023. As of March 25, 2016, we had total outstanding commitments of $5.4 million in non-cancelable international real property operating leases. The total outstanding commitments included $4.4 million relating to our leased facilities in Japan. Our major facility leases in our international locations are generally for terms of two to four years and generally do not provide renewal options.

As of March 25, 2016, personal property under operating lease was comprised primarily of automobiles and office equipment. Total outstanding commitments under such leases totaled approximately $0.6 million at March 25, 2016.

Purchase Commitments—From time to time, we issue purchase orders to our suppliers for the procurement of materials to be used for upcoming orders, particularly for those components that have long lead times. These purchase orders vary in size depending on our projected requirements. If we do not consume these materials on a timely basis or if our relationship with one of our contract manufacturers was to terminate, we could experience an abnormal increase to our inventory carrying amount and related accounts payable.

In connection with supplier agreements, we agreed to purchase certain units of inventory and non-inventory. As of March 25, 2016, there were remaining commitments of approximately $17.9 million, of which $12.6 million is expected to be paid in the next 12 months.

Other than the contractual obligations and commitments described above, we have no significant unconditional purchase obligations or similar instruments. We are not a guarantor of any other entities' debt or other financial obligations.

Term Loan—On January 27, 2015, we entered into a three and a half year credit agreement with an aggregate principal amount of $70.0 million. As of March 25, 2016, the Company had an outstanding principal balance of $63.9 million on the Term Loan of which approximately $1.8 million and $62.1 million were recorded as short-term debt and long-term debt, respectively. See Note 15 and 16, Short-term Debt and Long-term Debt, respectively, for more information regarding the secured Term Loan.

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Credit Facility—On December 5, 2011, we entered into a five-year senior secured credit facility with an aggregate principal amount of $25.0 million, as amended. The availability under the credit facility was limited to a borrowing base, subject to meeting certain conditions set forth in the credit facility. The credit facility included a $10.0 million letter of credit subfacility. We paid off the outstanding balance of $15.0 million on the December 2011 credit facility with the net proceeds received from the new Term Loan entered into on January 27, 2015, and terminated the December 2011 agreement.

Japan Loans—As of March 25, 2016, we also have unsecured unguaranteed loans with various Japanese banks amounting to 300 million yen or $2.7 million at rates ranging from TIBOR plus 1.0% to 1.75% per annum, of which approximately $2.2 million and $0.5 million were classified as short-term debt and long-term debt, respectively, as of March 25, 2016. During the third quarter of fiscal 2016, we also secured a four year Private Placement Bond from Mizuho Bank ("Japan Private Placement Bond") for 500 million yen or $4.4 million at 0.8% per annum, of which approximately $1.1 million and $3.2 million, net of unamortized debt issuance costs of $0.1 million, were classified as short-term debt and long-term debt, respectively, as of March 25, 2016.

Uncertain Tax Positions—As of March 25, 2016, the net recorded tax liability for uncertain tax positions was $13.0 million, including interest and penalties. We cannot conclude on the range of cash payments that will be made within the next twelve months associated with our uncertain tax positions.

Guarantees and Indemnifications—We have issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for VAT and other taxes, and to various other parties to support payments in advance of future delivery on goods and services. The majority of our financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at March 25, 2016 was $4.4 million, for which we have $4.3 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash in the unaudited condensed consolidated balance sheets.

Additionally, we enter into standard indemnification agreements with our customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that our product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. We have not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of March 25, 2016. As a result, we believe the estimated fair value of these indemnification agreements, if any, to be immaterial and, accordingly, no liability has been recorded with respect to such indemnifications as of March 25, 2016.

Off-Balance Sheet Arrangements— As of March 25, 2016, we have a $2.0 million outstanding letter of credit from Wells Fargo Bank to back our obligation to pay or perform when required to do so pursuant to the requirements of an underlying agreement for the provision of goods or services to a supplier.

We had no other off-balance sheet arrangements as of March 25, 2016.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements. We periodically evaluate our material estimates and judgments based on the terms of underlying agreements, the expected course of development, historical experience and other factors that we believe are reasonable under the circumstances. However, actual future results may vary from our estimates.

We believe that the accounting policies discussed under Part I, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report are significantly affected by critical accounting estimates and that they are both highly important to the portrayal of our financial condition and results and require difficult management judgments and assumptions about matters that are inherently uncertain. Certain of these significant accounting policies are considered to be critical accounting policies.

Our critical accounting policies and estimates are as follows:

• Revenue recognition;

• Share-based compensation;

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• Inventory valuation;

• Impairment of intangibles and long-lived assets;

• Impairment of goodwill;

• Retirement benefit obligations; and

• Accounting for income taxes.

There have been no significant changes in the Company's significant accounting policies for the nine months ended March 25, 2016 as compared to those discussed under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report except as noted below.

Recent Accounting Pronouncements

See Note 3 to our unaudited condensed consolidated financial statements in this Form 10-Q for a description of recent accounting pronouncements, including our expected adoption dates and estimated effects on our results of operations, financial condition and cash flows.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk for investments associated with interest rate movements, liquidity risks, credit risks, and foreign exchange market risk associated with currency rate movements on non-U.S. Dollar denominated assets and liabilities. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.

Investment Risk

We invest our excess cash in various fixed-income securities and money market funds.  The primary objectives of our investment activities are to preserve principal and maintain short-term liquidity while maximizing the income we receive from our investments. The market value of these securities can vary depending upon prevailing interest rates, and if we were forced to liquidate our position in a security before its maturity date we could suffer loss of principal.  We also are exposed to credit and liquidity risk related to these securities.  If the issuer of a security were to default on its obligations, we would suffer loss of principal.  If there were disruptions in the pricing and trading of securities in the financial markets, it is possible that there would not be a liquid market for our securities, which could limit our ability to meet cash requirements.  To preserve principal and maintain short-term liquidity, our investment policy dictates that we maintain our portfolio of cash, cash equivalents, and investments in high credit quality, readily liquid securities, of relatively short duration. Our portfolio of investments have a range of original maturities and typically have average remaining maturities of less than one year.

We actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated securities with relatively short maturities. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated as there are circumstances outside of our control that could have a material adverse affect on our financial position.

Interest Rate Risk

Our exposure to market risks for changes in interest rates relates primarily to our investment portfolio and our credit facility. As of March 25, 2016, our cash and cash equivalents of $99.0 million consisted primarily of cash and money market funds. We believe that the exposure of our principal to interest rate risk is minimal, although our future interest income is subject to reinvestment risk.

Given the short term nature of our cash and cash equivalents, the risk of loss in fair value resulting from interest rate changes is minimal. At March 25, 2016, we had no interest rate forward contracts or option contracts.

The interest expense on outstanding cash borrowings under some of our loans are based on variable interest rates and are therefore affected by changes in market interest rates. If interest rates rise significantly, our results from operations and cash flows may be materially affected. As of March 25, 2016, we had $71.0 million outstanding principal balance from our loans. A 1% increase or decrease in the interest rate, with all other variables held constant, would have impacted our interest expense by approximately $0.7 million per year.

Foreign Exchange Risk

As of March 25, 2016, foreign currency cash accounts totalled $25.5 million, primarily in Euros, Australian Dollar, British Pound and Japanese Yen.

Foreign currency risks are associated with our cash and cash equivalents, investments, receivables and payables denominated in foreign currencies. Fluctuations in exchange rates will result in foreign exchange gains and losses on these foreign currency assets and liabilities, which are included in other income, net, in our consolidated statements of operations. Our exposure to foreign currency exchange rate risk relates to sales commitments, anticipated sales, purchases and other expenses and assets and liabilities denominated in foreign currencies. For most currencies, we are a net receiver of the foreign currency and are adversely affected by a stronger U.S. dollar relative to the foreign currency. Our balance sheet hedging strategy is intended to mitigate our currency exposures related toremeasuring monetary assets and liabilities by entering into foreign currency forward contracts that have maturities generally of three month or less. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated balance sheet accounts.  Additionally, our cash flow hedging strategy use forward contracts designated as cash flow hedges to hedge a portion of future forecasted non-USD cash flows to further mitigate the effect of exchange rate fluctuations for these currencies. 

We assessed the risk of loss in fair values from the impact of hypothetical changes in foreign currency exchange rates. For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $2.5 million change in the value of our foreign currency cash accounts as of March 25, 2016.

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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The evaluation considered the procedures designed to ensure that the information included in reports we file under the Exchange Act, is recorded, processed, summarized and reported within the appropriate time periods and that information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were effective as of March 25, 2016.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarter ended March 25, 2016, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

We are involved in various legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, domestic and international federal, state and local tax reviews and audits and other matters. We may also be subject to litigation and/or adverse rulings or judgments as a result of certain contractual indemnification obligations. We do not know whether we will prevail in these matters, nor can we assure that any remedy or resolution will be reached on commercially reasonable terms, if at all. We intend to defend ourselves vigorously in these actions. Based on currently available information, we believe that we have meritorious defenses and that the resolution of these cases, individually or in the aggregate, is not likely to have a material adverse effect on our business, financial condition or future results of operations. We record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

From time to time, we may be involved in litigation or other legal proceedings relating to claims arising out of our day-to-day operations or otherwise. Litigation is inherently uncertain, and we could experience unfavorable judgments or rulings or choose to settle outstanding litigation in the future. Should we experience an unfavorable judgment or ruling or make a settlement payment, there exists the possibility of a material adverse impact on our financial condition, results of operations, cash flows or on our business for the period in which the judgment, ruling of payment occurs and/or future periods.

ITEM 1A. Risk Factors

The risk factors presented below update the risk factors previously disclosed in our Annual Report. The following factors, along with those in the Annual Report and those described above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be reviewed carefully, in conjunction with the other information contained in this Form 10-Q and our financial statements. These factors, among others, could cause actual results to differ materially from those currently anticipated and contained in forward-looking statements made in this Form 10-Q and presented elsewhere by our management from time to time. See the discussion of forward-looking statements in "Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

U.S. Government Sales—We derive a significant portion of our revenue from customers who directly or indirectly receive funding from the U.S. government. If our U.S. government-related sales decrease, or our ability to do business with the U.S. government or entities funded by the U.S. government is disrupted or limited, our operating performance could be adversely affected.

We generally derive a significant portion of our revenue directly from U.S. government entities, from education and research institutions funded by the U.S. government and from system integrators that sell to the U.S. government. For the three months ended March 25, 2016, such sales represented approximately 30% of our total revenue. These sales present risks in addition to those involved in sales to commercial customers, including potential disruptions and delays due to changes in appropriation and spending priorities by the U.S. government. In addition, the U.S. government can terminate or modify its contracts with us at any time for its convenience. A significant reduction in such sales could adversely affect our operating performance.

Our U.S. government business is also subject to specific procurement regulations and a variety of other requirements applicable to companies doing business with the U.S government. Sales to the defense sector require us to comply with additional defense-specific regulations, including maintaining a compliant security program, obtaining security clearances for employees and passing various inspections. Failure to comply with applicable regulations and requirements could lead to our suspension or debarment from U.S. government contracting or subcontracting for a period of time as well as fines against the Company.

Any disruption or limitation in our ability to do business with the U.S. government or entities funded by the U.S. government could materially adversely affect our revenue and operating results.

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Customer Concentration—A relatively small number of customers that purchase our products in large quantities have historically accounted for a significant portion of our revenues. If we are unable to maintain or replace our relationships with such customers and/or diversify our customer base, our revenue may fluctuate or decline and our growth may be limited.

Historically, a significant portion of our revenue has come from a limited number of customers. There can be no guarantee that we will be able to sustain our revenue levels from these customers. For the three months ended March 25, 2016, our top five customers worldwide accounted for approximately 49% of our total revenues, with various agencies of the U.S. government, excluding system integrators, accounting for approximately 6% of total revenue.

This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or reduction of business from one or a combination of our significant customers, for example as a result of a customer's capital expenditure budget reductions or U.S. government spending reductions, could materially adversely affect our revenues, financial condition and results of operations.

Strong Competition—We face competition from the leading enterprise computing companies in the world as well as from emerging companies. Some of our competitors have greater name recognition and capital resources than we do. If we are unable to compete effectively, we might not be able to achieve sufficient market penetration, revenue growth or profitability.

The markets for compute server products and storage products are highly competitive. In addition to intensely competitive smaller companies, we face challenges from some of the most established companies in the computer server market, such as Dell Inc., Hewlett-Packard Company ("HP"), International Business Machines Corporation, Cray, Inc. and Oracle Corporation. In the storage market, we compete primarily with EMC Corporation, HP, Hitachi Data Systems, Inc. and NetApp, Inc. Our largest competitors have several advantages over us, such as:

• substantially greater market presence and greater name recognition;

• substantially greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources;

• longer operating histories;

• a broader offering of products and services;

• more established relationships with customers, suppliers and other technology companies; and

• the ability to acquire technologies or consolidate with other companies in the industry to compete more effectively.

Because these competitors may have greater financial strength than we do and are able to offer a more diversified bundle of products and services, they may have the ability to severely undercut the pricing of our products or provide additional products or servicing at little or no cost, which would make us less competitive or force us to reduce our selling prices, negatively impacting our margins. We have had transactions where one or more competitors undercut our prices causing us to reduce our price, which negatively impacted our gross margin on that transaction and our overall gross margin. In addition, we have, on occasion, lost sales opportunities due to a competitor undercutting the pricing of our products or maintaining superior brand recognition. These competitors may be able to develop products that are superior to the commercially available components that we incorporate into our products, or may be able to offer products that provide significant price advantages over those we offer. For instance, a competitor could use its resources to develop proprietary motherboards with specifications and performance that are superior in comparison with the platforms that are currently available to the marketplace, which could give that competitor a distinct technological advantage. In addition, if our competitors' products become more widely accepted than our products, our competitive position will be impaired.

The intense competition we face in the sales of our products and services and general economic and business conditions can put pressure on us to change our prices. If our competitors offer deep discounts on certain products or services or develop products that the marketplace considers more valuable, we may need to lower prices or offer other favorable terms in order to compete successfully. Any such changes may reduce margins and could adversely affect operating results.

As the enterprise computing industry evolves, we expect to encounter additional competitors, including companies in adjacent technology businesses such as storage and networking infrastructure and management, companies providing technology that is complementary to ours in functionality, such as data center management software, contract manufacturers and other emerging companies that may announce server product offerings. Moreover, our current and potential competitors, including companies with whom we currently have strategic alliances, may establish cooperative relationships among themselves or with other third parties. If this occurs, new competitors or alliances may emerge that could negatively impact our competitive position.

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Unproven Go-to-Market Strategy—We lack experience in marketing solutions to large enterprise customers. If we are not successful in increasing sales of our solutions into enterprise customers, our growth opportunities will be limited.

Despite our historical success in growing our revenue from certain agencies of the U.S. government as well as higher education, we have had limited success in broadening our base of enterprise customers. We have modified our go-to-market strategy and have invested in sales and marketing personnel and programs to increase penetration of our HPC, and High Performance Data Analytics solutions among enterprise customers, including original equipment manufacture (OEM) arrangements. If we are not successful in increasing sales of our solutions into enterprise customers, our growth opportunities may be limited.

Fluctuations in Operating Results—Among other things, the timing of our revenue is primarily dependent upon the funding and implementation schedules of our customers, particularly as it relates to large IT projects where we can have long sales cycles and long build-out and acceptance schedules. Our periodic operating results have fluctuated significantly in the past and will continue to fluctuate in the future, which could cause our stock price to decline.

Our quarterly and annual periodic operating results have fluctuated significantly in the past, and we believe that they will continue to fluctuate in the future, due to a number of factors, many of which are beyond our control. We expect that our revenue, gross margin and earnings per share will fluctuate on a periodic basis in future periods. Factors that may affect our periodic operating results include the following:

• fluctuations in the buying patterns and sizes of customer orders from one quarter to the next;

• increased competition causing us to sell our products or services at low margins;

• location and timing requirements for the delivery of our products and services;

• lengthy acceptance cycles of our products by certain customers;

• development or product delivery delays, delays in obtaining necessary components from our suppliers, or delays resulting from contractual provisions or other reasons;

• customer delays in the acceptance of our product once delivered;

• addition of new customers or loss of existing customers;

• gross margin pressures from the sales of products and services due to discounted pricing, especially to our largest customers;

• lack of reliability of our estimates to forecast sales and trends in our business to generate a sales pipeline;

• uncertainty regarding our sales pipeline and resulting customer contracts; our ability to align our product and service offerings and cost structure with customer needs;

• our ability to reduce operating expenses and total costs in procurement, which may involve delays in the anticipated timing of activities related to our cost savings plans and higher than expected or unanticipated costs to implement the plans;

• changes in the mix of products sold due to differences in profitability among our products;

• write-off of excess and obsolete inventory;

• impairment and shortening of the useful life of assets;

• unexpected changes in the price for, and the availability of, components from our suppliers;

• our ability to enhance our products with new and better designs and functionality;

• our ability to timely bring new capabilities to market combining our products and technologies with those produced by our strategic partners and original equipment manufacturers ("OEMs") to address new market opportunities;

• costs associated with obtaining components to satisfy customer demand;

• productivity and growth of our sales force;

• actions taken by our competitors, such as new product announcements or introductions or changes in pricing;

• market acceptance of newer products,

• technology regulatory compliance, certification and intellectual property issues associated with our products;

• the payment of unexpected legal fees and potential damages or settlements resulting from protecting or defending our intellectual property or other matters;

• the payment of significant damages, settlements or contractual penalties resulting from faulty or malfunctioning products or the provision of services unsatisfactory to our customers;

• compliance costs associated with new laws, rules and regulations, including environmental regulations;

• the payment of unexpected intellectual property licensing royalties to third parties who successfully assert that our product(s) infringe their intellectual property rights;

• the departure and acquisition of key management and other personnel; and

• general economic trends, including changes in information technology spending or geopolitical events such as war or incidents of terrorism.

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Lengthy Sales Cycle—Our sales cycle requires us to expend a significant amount of resources, and could have an adverse effect on the amount, timing and predictability of future revenue and cash collection.

The sales cycle of our products, beginning with our first customer contact to the closing of a sale, often ranges from six to nine months and it may be even longer before we are able to collect cash on our sales. We may expend significant resources during the sales cycle and ultimately fail to close the sale. The success of our product sales process is subject to factors over which we have little or no control, including:

•the timing of our customers' budget cycles and approval processes;

•our customers' existing use of, or willingness to adopt, open standard server products, or to replace their existing

servers or expand their processing capacity with our products;

•the announcement or introduction of competing products; and

•established relationships between our competitors and our potential customers.

We expend substantial time, effort and money educating our current and prospective customers as to the value of our products. Even if we are successful in persuading essential decision makers within our customers' organizations of the benefits of our products, senior management might nonetheless elect not to buy our products after months of sales efforts by our employees or resellers. If we are unsuccessful in closing sales after expending significant resources, our revenue, operating expenses and cash position may be adversely affected.

Even if we are successful in closing sales, several large transactions that we have entered into require us to invest cash up front to fund working capital without collecting cash for several quarters. Recently, we have found success in our strategy of focusing on large deals to help drive our revenue growth and have been awarded by customers a greater number of large installation programs. Such transactions require significant up-front capital investment. To further support our needs and to offset these declines in our cash position, we secured $70 million in term loan financing in January 2015. Nonetheless, during the nine months ended March 25, 2016, we generated approximately $31.3 million in cash from our operating activities. If we are unable to collect cash and negotiate more favorable cash collection terms in the future, or if we are unable to secure additional financing on acceptable terms, our liquidity and ability to fund our operations could be adversely affected.

International Sales and Operations—The global nature of our operations exposes us to increased risks and compliance obligations, which may adversely affect our business.

During the three months ended March 25, 2016, we derived approximately 62% of our revenue from sales outside of the United States. Our international business operations require us to recruit and retain qualified technical and managerial employees, manage multiple remote locations and ensure intellectual property protection outside of the United States. Our international operations subject us to increased risks, including:

• supporting multiple languages;

• recruiting sales and technical support personnel internationally with the skills to design, manufacture, sell and support our products;

• complying with governmental regulations, including obtaining required import or export approval for our products;

• increased complexity and costs of managing international operations;

• increased exposure to foreign currency exchange rate fluctuations;

• commercial laws and business practices that favor local competition;

• longer sales cycles and manufacturing lead times;

• financial risks such as longer payment cycles and difficulties in collecting accounts receivable;

• difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;

• ineffective legal protection of intellectual property rights;

• more complicated logistics and distribution arrangements;

• additional taxes and penalties;

• inadequate local infrastructure that could result in business disruptions;

• global political and economic instability; and

• other factors beyond our control such as natural disasters, terrorism, civil unrest, war and infectious diseases.

If any of the foreign economies in which we do business deteriorate or if we fail to effectively manage our global operations, our business and results of operations would be harmed.

In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. If we or our employees, contractors or agents violate these laws and regulations, we could be subject to fines, penalties or criminal sanctions and may be prohibited from conducting business in one or more countries. Any violation individually or in the aggregate could have a material adverse effect on our operations and financial condition.

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Volatile Stock Price—Our stock price in the past has been volatile, and may continue to be volatile or may decline regardless of our operating performance, and investors may not be able to resell shares at or above the price at which they purchased the shares.

Our stock price has experienced high volatility. For example, during the nine months ended March 25, 2016, our stock price fluctuated from a high of $7.61 to a low of $3.93. Investors may not be able to sell shares at or above the price at which they purchased them. The market price of our common stock may fluctuate significantly in response to numerous factors, including without limitation:

• price and volume fluctuations in the overall stock market;

• the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

• actual or anticipated fluctuations in our operating results;

• changes in operating performance and stock market valuations of other technology companies generally, or those that sell enterprise computing products in particular;

• changes in financial estimates by any securities analysts who follow our company, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock;

• rating downgrades by any securities analysts who follow our company;

• the public's response to our press releases or other public announcements, including our filings with the SEC;

• increases in the total short position in our common stock;

• announcements by us or our competitors of significant technical innovations, customer wins or losses, acquisitions, strategic partnerships, joint ventures or capital commitments;

• introduction of technologies or product enhancements that reduce the need for our products;

• market conditions or trends in our industry or the economy as a whole;

• the loss of one or more key customers;

• the loss of key personnel;

• the development and sustainability of an active trading market for our common stock;

• lawsuits threatened or filed against us;

• future sales of our common stock by our officers, directors and significant stockholders; and

• other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock markets, and in particular the NASDAQ Stock Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. We could become involved in securities litigation in the future, which could have substantial costs and divert resources and the attention of management from our business.

Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

Foreign Currency Fluctuations—We may experience foreign currency gains and losses.

We have significant exposure to revenues, expenses and certain asset and liability balances denominated in currencies other than the U.S. Dollar. Changes in the exchange rates of major foreign currencies, particularly the Japanese Yen, Euro, British Pound and Australian Dollar, relative to the U.S. Dollar, can significantly affect revenues and our operating results. Our revenues and operating results are adversely affected when the U.S. Dollar strengthens relative to other currencies and are positively affected when the U.S. Dollar weakens. Although we engage in foreign currency hedging activity, we may be unable to hedge all of our foreign currency risk, which could have a negative impact on our results of operations. For the three months ended March 25, 2016, our revenue from our EMEA and APJ regions was $44.2 million and $33.3 million, respectively. As of March 25, 2016, the balance in our foreign currency cash accounts was $25.5 million. An increase in the value of the U.S. Dollar relative to foreign currencies could make our products more expensive and, thus, not competitively priced in foreign markets. On the other hand, a decrease in the value of the U.S. Dollar relative to foreign currencies could increase our operating costs in foreign locations. In the future, a larger portion of our international revenue may be denominated in foreign currencies, which will subject us to additional risks associated with fluctuations in those foreign currencies. In addition, we may be unable to successfully hedge against any such fluctuations.

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Our balance sheet hedging strategy is intended to mitigate our currency exposures related to remeasuring monetary assets and liabilities by entering into foreign currency forward contracts that have maturities generally of six months or less. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated balance sheet accounts. Additionally, our cash flow hedging strategy uses forward contracts designated as cash flow hedges to hedge a portion of future forecasted non-USD cash flows to further mitigate the effect of exchange rate fluctuations for these currencies. 

Information Security—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 and unauthorized access is obtained, we may 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 our company. Although we have designed and employed security measures to protect this information from unauthorized access, our security measures may be breached as a result of third-party action, including computer hackers, employee error, malfeasance or otherwise, and 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, harm to our reputation and other harm to our business.

Cost of Materials—Our products have incorporated or have been dependent upon, open standards, commoditized components and materials that we obtain in spot markets, and, as a result, our cost structure and our ability to respond in a timely manner to customer demand are sensitive to volatility of the market prices for these components and materials.

A significant portion of our cost of revenue is directly related to the pricing of commoditized materials and components utilized in the manufacture of our products, such as memory, hard drives, central processing units (“CPUs”), or power supplies. As part of our procurement model, we generally do not enter into long-term supply contracts for these materials and components, but instead purchase these materials and components in a competitive bid purchase order environment with suppliers or on the open market at spot prices. As a result, our cost structure is affected by the availability and price volatility in the marketplace for these components and materials, including new versions of hard drives and CPUs that are introduced by our suppliers. This volatility makes it difficult to predict expense levels and operating results and may cause them to fluctuate significantly. Further, if we are successful in growing our business, we may not be able to continue to procure components solely on the spot market, which would require us to enter into contracts with component suppliers to obtain these components.

In addition, because our procurement model involves our ability to maintain low inventory and to acquire materials and components as needed, and because we do not enter into long-term supply contracts for these materials and components, our ability to effectively and efficiently respond to customer orders may be constrained by the then-current availability or the terms and pricing of these materials and components. We may experience other shortages or delays of critical components as a result of strong demand, capacity constraints, supplier financial weaknesses, inability of suppliers to borrow funds in the credit markets, disputes with suppliers (some of whom are also customers), disruptions in the operations of component suppliers, natural disasters, other problems experienced by suppliers or problems faced during the transition to new suppliers.

The price of components may increase due to potential shortages or delays, and we may be exposed to quality issues or the components may not be available at all. We may therefore not be able to secure enough components at reasonable prices or of acceptable quality to build products or provide services in a timely manner in the quantities or according to the specifications needed. Accordingly, our revenue and gross margin could suffer as we could lose time-sensitive sales, incur additional freight costs or be unable to pass on price increases to our customers. If we cannot adequately address supply issues, we may have to reengineer some products or service offerings, resulting in further costs and delays.

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In order to secure components for the provision of products or services, at times we may enter into non-cancelable commitments with vendors. In addition, we may purchase components strategically in advance of demand to take advantage of favorable pricing or to address concerns about the availability of future components. If we fail to anticipate customer demand properly, a temporary oversupply could result in excess or obsolete components. Further, we compete in an industry that is characterized by rapid technological advances in hardware with frequent introduction of new products. With new product introductions, we face risks in predicting customer demand for the new products as well as the transition from existing products. If we do not make an effective transition from existing products to future products, we could have an oversupply of components. For example, DRAM can represent a significant portion of our cost of revenue, and both the price and availability of various kinds of DRAM are subject to substantial volatility in the spot market. Additionally, if any of our suppliers of CPUs, such as Intel, or GPUs such as, NVIDIA were to increase the costs to us for components we use, we would either pass these price increases on to our customers, which could cause us to lose business from these customers, or we would need to absorb these price increases, which would cause our margins to decrease, either of which could adversely affect our business and financial results.

In addition to the component parts, we currently integrate application-specific integrate circuit ("ASIC") in many of our products. The development of an ASIC is costly and may take up to many months to develop. A large portion of these costs typically are expensed as incurred as research and development costs and will cause volatility in our operating results and may cause them to fluctuate significantly.

Supplier Relationships—If we fail to maintain or expand our relationships with our suppliers, in some cases single-source suppliers, we may not have adequate access to new or key technology necessary for our products, which may impair our ability to deliver leading-edge products.

In addition to the technologies we develop, our suppliers develop product innovations at our direction that are requested by our customers. In many cases, we retain the ownership of the intellectual property developed by these suppliers. Further, we rely heavily on our component suppliers, such as Intel and NVIDIA, to provide us with leading-edge components on time and in accordance with a product roadmap. If we are not able to maintain or expand our relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to deliver leading-edge products in a timely manner may be impaired and we could be required to incur additional research and development expenses.

Channel Sales—We are continuing to develop and execute upon a channel strategy to generate additional sales and revenue, and the failure to successfully expand channel sales might affect our ability to sustain revenue growth and may harm our business and operations.

An increasing portion of our sales strategy is to develop our sales efforts through the use of resellers and other third parties to sell our systems, such as OEMs. We may not be successful in building or expanding relationships with these third parties. Further, even if we do develop and expand these relationships, they may conflict with our direct sales efforts in some territories. Ineffective marketing of our products by our resellers or disruptions in our distribution channels could lead to decreased sales or slower than expected growth in revenue and might harm our business and operations.

Term Loan—We are subject to a Term Loan that may limit our ability to engage in favorable business activities or finance future operations or capital needs; and we may have difficulty repaying such loan in the event of a default which could result in the acceleration of the indebtedness.

On January 27, 2015, we entered into a three and a half year term loan in the aggregate principal amount of $70.0 million. Pursuant to the terms of the agreement, certain of our subsidiaries have guaranteed or will guaranty our obligations under the loan. In addition, our obligations under the agreement are secured by a lien on substantially all of our assets and those of our subsidiary guarantors.

The Term Loan contains various covenants that limit our ability and the ability of our subsidiaries to, among other things, do the following:

• issue any preferred stock;

• incur or guarantee indebtedness;

• create, incur, assume, or permit liens to exist;

• consummate asset sales, acquisitions or mergers;

• dispose of property;

• pay dividends or repurchase stock;

• make investments;

• enter into transactions with affiliates; or

• enter into or permit certain types of other agreements to exist.

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The Term Loan also requires compliance with a minimum adjusted current ratio and a $10.0 million minimum unrestricted cash balance, calculated as set forth in the agreement, and contains customary events of default, including the following:

• failure to make required payments;

• material breaches of representations and warranties;

• failure to comply with certain agreements or covenants;

• failure to pay, or default under, certain other indebtedness;

• certain events of bankruptcy and insolvency;

• failure to pay certain judgments; and

• a change of control.

We may not prepay the loan during the first year and may only prepay the loan during the second year at a premium. After such time, we may prepay the loan without penalty. If we were unable to repay the loan, we could not terminate the facility and we would be subject to its covenants and conditions. As a result of these covenants we may be restricted in the manner in which we conduct our business.  In addition, we may be unable to engage in favorable business activities or finance future operations or capital needs, including without limitation, funding acquisitions or repurchasing our stock. This indebtedness may also adversely affect our ability to access sources of capital or incur certain liens.  Accordingly, these restrictions may limit our ability to successfully operate our business. A failure to comply with these restrictions could lead to an event of default, which could result in an acceleration of the indebtedness and could adversely affect our cash flow, working capital and operating results. If any of our indebtedness is accelerated, we may not have sufficient funds available to repay such indebtedness.

Dependence on Key Personnel—If we are unable to retain and attract adequate qualified personnel, we may not be able to execute on our business strategy.

During the past few fiscal years, we have experienced changes in our most senior managers. Our future success depends in large part upon the continued service and enhancement of our management team and our employees. If there are further changes in management, such changes could be disruptive and could negatively affect our operations, our culture and our strategic direction.

Our employees may terminate their employment with us at any time. Our U.S. employees are “at will,” while outside of the U.S., notice or severance may be required if we wish to terminate an employee. The failure of our management team to seamlessly manage employee transitions, or the loss of services of one or more members of our executive management or sales team or other key employees could seriously harm our business. Competition for qualified executives is intense and if we are unable to continue expanding our management team, or successfully integrate new additions to our management team in a manner that enables us to scale our business and operations effectively, our ability to operate effectively and efficiently could be limited or negatively impacted.

Additionally, to help attract, retain and motivate certain qualified employees, we use share-based incentive awards such as restricted stock units. If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate employees could be weakened, which could harm our results of operations.

Contract Manufacturing—We are dependent on contract manufacturers and partners to assemble and test certain of our products, and our failure to successfully manage our relationships with these contract manufacturers and partners could impair our ability to deliver systems that meet our and/or our customers’ expectations, which could damage our relationships with our customers and decrease our revenue.

We have historically relied on a small number of contract manufacturers and partners to assemble and test certain of our products. None of these third-party contract manufacturers or partners are obligated to perform services or supply products to us for any specific period, or in any specific quantities, except as may be provided in a particular purchase order. For example, we design custom silicon chips for ASICs, but rely on a third-party to manufacture the ASICs for us. None of our contract manufacturers has provided contractual assurances to us that adequate capacity will be available to us to meet future demand for our products.

If we fail to properly manage our relationships with our contract manufacturers or partners, or if one or more of them are not able to meet our manufacturing or capacity requirements, maintain our high standards of quality or experience delays or disruptions in their service delivery, our ability to deliver quality products to our customers on a timely basis may decline, which would damage our relationships with customers, decrease our revenue and negatively impact our growth.

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Acquisition Strategy—We may not be able to realize the potential financial or strategic benefits of acquisitions that we may complete in the future, or find suitable target businesses or technologies to acquire, which could impair our ability to grow our business, develop new products or sell our products.

If appropriate opportunities present themselves, we may consider acquiring or making investments in companies, assets or technologies that we believe are strategic. In addition, our Term Loan contains various covenants that limit our ability to acquire assets or make certain investments. Acquisitions are difficult, time consuming and pose a number of risks, including:

• the acquired products may fail to achieve projected sales or operating margin targets;

• the acquired business, asset or technology may not further our business strategy or we may not realize expected synergies or cost savings;

• we might overpay for the acquired business, asset or technology;

• we might experience difficulties integrating the acquired assets, technologies, operations or personnel or retaining the key personnel of the acquired company;

• disruption of ongoing business, including diversion of management's attention;

• we might experience difficulties entering and competing in new product or geographic markets in which we are not experienced;

• assumption of unknown liabilities, including tax and litigation or problems with product quality, and the related expenses and diversion of resources;

• potential downward pressure on operating margins due to lower operating margins of acquired businesses, increased headcount costs and other expenses associated with adding and supporting new products;

• potential negative impact on our relationships with customers, distributors and business partners; and

• potential negative impact on our earnings per share/negative impact on our earnings resulting from the application of ASC No. 805, Business Combinations, which became applicable to us in January 2009.

In addition, if we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, existing stockholders might be diluted and earnings per share might decrease. In addition, acquisitions and investments may result in the incurrence of debt, large one-time write-offs and restructuring charges.

If we do not appropriately manage these risks, any acquisitions that we complete may have an adverse effect on our business and financial condition. Additionally, if we determine that we cannot use or sell the acquired products or technology, we will be required to write down the associated intangible assets, which would negatively impact our operating results.

Financial Reporting Risks—We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our results of operations. In addition, changes in accounting standards could also adversely affect our reported operating results.

In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on experience and other factors. Our most critical accounting estimates are described in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. If these estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our results of operations, and we may be required to restate our financial results for prior periods which could cause our stock price to decline.

We prepare our consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP"). These principles are subject to interpretation by the SEC, the Financial Accounting Standards Board (FASB) and various other bodies formed to interpret and create appropriate accounting principles and guidance. A change in existing principles or guidance can have a significant effect on our reported results and may retroactively affect previously reported results. Additionally, proposed accounting standards could have a significant impact on our operational processes, revenue and expenses, and could cause unexpected financial reporting fluctuations.

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Environmental Laws and Liabilities—Unforeseen environmental costs could impact our future net earnings.

We are subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our products and the recycling, treatment and disposal of our products. In particular, we face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and materials composition of our products, their safe use, the energy consumption associated with those products, and climate change laws and regulations. We could incur substantial costs, our products could be restricted from entering certain jurisdictions, and we could face other sanctions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws. Our potential exposure includes fines and civil or criminal sanctions, third-party property damage, personal injury claims, compliance-related costs and clean-up costs. Further, liability under some environmental laws relating to contaminated sites can be imposed retroactively, on a joint and several basis, and without any finding of noncompliance or fault. The amount and timing of costs under environmental laws are difficult to predict and such costs could have a negative effect on our profitability. If we are found to be in violation of any environmental laws, costs associated with such liability may have an adverse effect on our financial results.

Geographic Business Concentrations—Business disruptions could affect our operating results.

A significant portion of our manufacturing, research and development activities and certain other critical business operations is concentrated in a few geographic areas. We are a highly automated business and a disruption or failure of our systems could cause delays in completing sales and providing services. A major earthquake, fire, tornado or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be materially and adversely affected.

Further, we maintain a program of insurance coverage for various types of property, casualty and other risks. We place our insurance coverage with various carriers in numerous jurisdictions. However, there is a risk that a claim may go unpaid, such as in the event of a widespread catastrophic event that materially affects the resources of our insurer. The types and amounts of insurance that we obtain vary from time to time and from location to location, depending on availability, cost and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. Losses not covered by insurance may be substantial and may increase our expenses, which could harm our results of operations and financial condition.

Tax Exposure—Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.

We are subject to income taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory, services, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes, interest and penalties.

We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows.

In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process.

Export Controls—Our international sales may require export licenses and expose us to additional risks.

Our sales to customers outside the United States are subject to U.S. export regulations. Under these regulations, sales of many of our high-end products require approval and export licenses from the U.S. Department of Commerce. Our international sales would be adversely affected if these regulations were tightened, or if they are not adjusted over time, as technology changes, to reflect the increasing compute performance of our systems. Delay or denial in the approval of any required licenses could make it more difficult to sell to non-U.S. customers. In addition, we could be subject to regulations, fines and penalties for violations of import and export regulations if we were found in violation of these regulations. End users could circumvent end-user documentation requirements that are intended to aid in our compliance with export regulations, potentially causing us to violate these regulations. These violations could result in penalties, including prohibitions from exporting our products to one or more countries, and could materially harm our business, including our sales to the U.S. government.

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Weak Global Economy—Weak or unstable global market and economic conditions may have serious adverse consequences on our business.

The global economy has experienced significant uncertainty, stock market volatility, tightened credit markets, concerns about both deflation and inflation, reduced demand for products, lower consumer confidence, reduced capital spending, liquidity concerns and business insolvencies. Declines and uncertainty about economic conditions could negatively impact our customers' businesses, causing our customers to postpone their decision-making or decrease their spending or affecting our customers' ability to pay for our products, which would harm our operating results. In addition, if one or more of our current service providers, manufacturers and other partners go out of business, it could directly affect our ability to attain our operating goals on schedule and on budget.

If the global economy experiences uncertainty, our ability to obtain credit on favorable terms could be jeopardized. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our financial performance and stock price and could require us to change our business plans. Furthermore, should any of our banking partners declare bankruptcy or otherwise default on their obligations, it could adversely affect our financial results and our business.

Intellectual Property Enforcement—If we are unable to protect our intellectual property adequately, we may not be able to compete effectively.

Our intellectual property is critical to our success and our ability to compete. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology. Unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology despite our efforts to protect our intellectual property. In addition, we license our technology and intellectual property to third parties, including in some cases, our competitors, which could under some circumstances make our patent rights more difficult to enforce. Third parties could also obtain licenses to some of our intellectual property as a consequence of a merger or acquisition. Also, our participation in standard setting organizations or industry initiatives may require us to license our patents to other companies that adopt certain standards or specifications. As a result of such licensing, our patents might not be enforceable against others who might otherwise be infringing those patents and the value of our intellectual property may be impaired.

Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as the laws of the United States. Any claims or litigation that we have initiated or that we may initiate in the future to protect our proprietary technology could be time consuming and expensive and divert the attention of our technical and management resources whether or not the claims or litigation are decided in our favor. Litigation is inherently uncertain, and there is no assurance that any litigation we initiate will have a successful outcome. Enforcing our rights could subject us to claims that the intellectual property right is invalid, is otherwise not enforceable, or is licensed to the party against whom we are asserting a claim. Also, assertion of our intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own or assert other claims against us, which could harm our business.

We currently have numerous patents issued and a number of patent applications pending in the United States and other countries. These patents may be limited in value in asserting our intellectual property rights against more established companies in the computer technology sector that have sizable patent portfolios and greater capital resources. In addition, patents may not be issued from these patent applications, and even if patents are issued, they may not benefit us or give us adequate protection from competing products. For example, issued patents might be circumvented or challenged, and could be declared invalid or unenforceable. Moreover, if other companies develop unpatented proprietary technology similar to ours or competing technologies, our competitive position will be weakened.

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Intellectual Property Risks—If we are found to have violated the intellectual property rights of others, we could be required to indemnify our customers, resellers or suppliers, redesign our products, pay significant royalties and enter into license agreements with third parties.

Our industry is characterized by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. As we continue our business, expand our product lines and our product functionality, and expand into new jurisdictions around the world, third parties may assert that our technology or products violate their intellectual property rights. Because of technological changes and the extent of issued patents in our industry, it is possible that certain components of our products and business methods may unknowingly infringe existing patents of others. Any claim, regardless of its merits, could be expensive and time consuming to defend against. Such claims would also divert the attention of our technical and management resources. Successful intellectual property claims against us could result in significant financial liability, impair our ability to compete effectively, or prevent us from operating our business or portions of our business. In addition, resolution of claims may require us to redesign our technology, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms or at all, to cease using the technology covered by those rights, and to indemnify our customers, resellers or suppliers. Any of these events could result in unexpected expenses, negatively affect our competitive position and materially harm our business, financial condition and results of operations.

In addition, we are also subject to risks related to ownership of our patentable inventions as a result of recent changes in U.S. patent law under the America Invents Act (“AIA”). As a result of the AIA, the United States is now a “first-to-file” system. For any patent applications that are filed on or after March 16, 2013 and that do not otherwise properly claim the benefit of an application filed before that March 16, 2013 date, said applications will be subject to the new “first-to-file” requirements versus the “first-to-invent” standard of law that existed prior to that date. Accordingly, with respect to patent applications filed on or after March 16, 2013, even if we are the first to invent, we will not obtain ownership of an invention unless we are the first to file a patent application or can establish that such an earlier filing is derived from a previous public disclosure of our inventive work. If we are the first to invent but not the first to file a patent application, we will not be able to fully protect our intellectual property rights and may be found to have violated the intellectual property rights of others if we continue to operate in the absence of a patent issued to us. If we are not the first to file one or more patent applications to protect our intellectual property rights when the new patent regime becomes effective, we may be required to redesign our technology, cease using the related technology or attempt to license rights from another party, any of which could materially harm our business, financial condition and results of operations.

Open Source Software—Our use of open source and third-party software could limit our sales and growth opportunities and impose unanticipated conditions or restrictions on our ability to commercialize our products.

We incorporate open source software into our products. A majority of our server systems run on the Linux^® operating system. Products based on the Linux operating system and sold by other software vendors have been the subject of intellectual property infringement litigation, including litigation by Microsoft Corporation. It is possible that a party could prove a claim for proprietary rights in the Linux operating system or other programs developed and distributed under the GNU General Public License or other open source software licenses. In addition, the GNU General Public License has itself been, and may be in the future, a subject of litigation, and it is possible that a court could hold these licenses to be unenforceable in that litigation. Any ruling by a court that the Linux operating system or significant portions of it may not be copied, modified or distributed, that users or distributors of Linux must pay royalties to Microsoft or others or that these licenses are not enforceable could also impede broader Linux adoption and materially harm our ability to sell our products based on the Linux operating system. Further, because potential customers have often invested significant capital and other resources in existing systems, many of which run mission-critical applications, customers may be hesitant to make dramatic changes to their data center systems. The failure of our customers and potential customers to purchase and adopt open standard-based technologies could have a material adverse impact on our ability to maintain or generate additional revenue.

 In addition,open source software is made available to us and to the public by its authors or other third parties under licenses that impose certain obligations on licensees in the event those licensees re-distribute or make derivative works of the open source software. The terms of many open source licenses have not been interpreted by United States or other courts, and these licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In this event, we could be required to seek licenses from third parties in order to continue offering our products, to make generally available, in source code form, proprietary code that links to certain open source modules, to re-engineer our products, or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which might harm our business, operating results and financial condition.

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IT Infrastructure—Unsuccessful deployment of new transaction processing applications and other systems integration issues could disrupt our internal operations and any such disruption could reduce our expected revenue, increase our expenses and damage our reputation.

Portions of our IT infrastructure may experience interruptions, delays or cessations of service or produce errors in connection with systems integration and implementation of new transaction processing applications, including manufacturing and sales system. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive to remediate. Such disruptions could adversely impact our ability to fulfill orders and negatively impact our business or interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected us in the past, and in the future could adversely affect our financial results, public disclosures and reputation.

Litigation—Adverse litigation results could affect our business.

We may be subject to legal claims or regulatory matters involving consumer, stockholder, competition and other issues on a global basis. Litigation can be lengthy, expensive and disruptive to our operations, and results cannot be predicted with certainty. An adverse decision could include monetary damages or, in cases for which injunctive relief is sought, an injunction prohibiting us from manufacturing or selling one or more of our products. If we were to receive an unfavorable ruling on a matter, our business, operating results or financial condition could be materially harmed. Additional information regarding legal matters is discussed under "Legal Proceedings" in Part II, Item 1 of this Quarterly Report on Form 10-Q.

Global Cost Reduction Efforts—We may not fully realize the anticipated positive impacts to future financial results from our cost reduction efforts.

We have taken in the past and may continue to take cost reduction efforts to streamline operations and reduce operating expenses. Our ability to achieve the anticipated cost savings and other benefits from our cost reduction measures within expected time frames is subject to many estimates and assumptions, and may vary materially based on many factors. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. There can be no assurance that we will fully realize the anticipated positive impacts to future financial results from our current or future cost reduction measures. If our estimates and assumptions are incorrect or if other unforeseen events occur, we may not achieve the cost savings expected from such actions, and our business and results of operations could be adversely affected.

Internal Controls—If we are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and effectively prevent fraud. As a publicly traded company we must maintain effective disclosure controls and procedures and internal control over financial reporting, which can be difficult to do. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A failure to have effective internal controls and procedures for financial reporting in place could result in a restatement of our financial statements, impact our ability to accurately report financial information on a timely basis, make it difficult or impossible to obtain an audit of our financial statements or result in a qualification of any such audit. Any such event could lead to a loss of market confidence in our financial statements, delisting from the NASDAQ Global Select Market, loss of financing sources and litigation, any of which could adversely affect our stock price.

Corporate Governance—We are subject to evolving corporate governance and public disclosure regulations that have increased both our compliance costs and the risk of noncompliance, which could have an adverse effect on our stock price.

We are subject to changing rules and regulations promulgated by a number of governmental and self-regulated organizations, including the SEC, the NASDAQ Global Select Market and the FASB. These rules and regulations continue to evolve in scope and complexity and many new requirements have been created in response to laws enacted by Congress, making compliance more difficult and uncertain. Our efforts to comply with new regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

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Anti-takeover Provisions—Some provisions in our certificate of incorporation and bylaws may deter third parties from acquiring us.

Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:

• limitations on persons authorized to call a special meeting of stockholders;

• our stockholders may take action only at a meeting of stockholders and not by written consent;

• our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and

• advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions they desire.

Conflict Minerals Risks—We are subject to the SEC's rules regarding the use and disclosure of conflict minerals, which we expect will increase our operating and compliance costs and could potentially harm our reputation, causing a decline in our stock price.

The SEC adopted its final rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning conflict minerals in August 2012. The objective of the rule is to reduce funding for armed groups that are abusing human rights in the "conflict region" as defined in the final rule. This new rule requires us to: (1) determine whether conflict minerals (tin, tantalum, tungsten, gold or similar derivatives) are used in our products and, if so, determine if the minerals originated from the Democratic Republic of Congo (DRC) or its immediately adjoining countries; and (2), if so, conduct due diligence regarding the source and chain of custody of these conflict minerals to determine whether the conflict minerals financed or benefited armed groups. The rule requires us to submit forms and reports to the SEC annually that disclose our determinations and due diligence measures. We are currently conducting conflict minerals due diligence with our supply chain partners. Presently, we have not determined how many of our supply chain partners use conflict minerals or how much expense our due diligence exercise will add to our operational cost. If we do not properly assess supply chain partners and appropriately control costs and budget for conflict minerals compliance, our results of operations and profitability in the future could suffer, our reputation could be harmed and our stock price could suffer as a result.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

In January 2013, the Company's board of directors approved a plan for the Company to repurchase shares of its common stock with a market value of up to $15.0 million. In November 2013, the Company announced an increase in the authorized repurchase amount to $30.0 million and in November 2014, the Company announced that it had extended its repurchase program through December 31, 2015. The Company's common stock may be repurchased in the open market or through negotiated transactions, including 10b5-1 trading plans that would enable the Company to repurchase its shares during periods outside of its normal trading windows. Purchases will cease if the authorized funds are spent or the program is discontinued. The Company is not obligated to acquire any particular amount of stock, and the program may be suspended or terminated at any time at the Company's discretion. These repurchases are reflected in our balance sheet as treasury stock and are available for future issuance.

Since the inception of the repurchase plan in January 2013, the Company has repurchased approximately 1,566,000 shares of its common stock for approximately $18.0 million. This purchase program expired as of December 31, 2015 and the Company's board has not extend the Company's repurchase program beyond December 31, 2015. There were no shares repurchased during the nine months ended March 25, 2016.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

See the Exhibit Index.

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EXHIBIT INDEX

Exhibit Number	Exhibit Description	Incorporated by Reference			Filing Date	Filed Herewith
		Form	Ex. No.	File No.
31.1	Certification of Principal Executive Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a).					X
31.2	Certification of Principal Financial Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a).					X
32.1	Certifications of Principal Executive Officer and Principal Financial Officer furnished pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)					X
101.INS**	XBRL Instance Document					X
101.SCH**	XBRL Taxonomy Extension Schema Document					X
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document					X

_______________

** XBRL (eXtensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

SILICON GRAPHICS INTERNATIONAL CORP.
By:	/s/    MEKONNEN P. ASRAT
	Mekonnen P. Asrat Chief Financial Officer (Principal Financial Officer)

Dated: April 29, 2016