UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~

Form 10-Q

(Mark One)

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

~~For the quarterly period ended September 30, 2015~~

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

~~For the transition period to~~



x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended: March 31, 2016
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File ~~No.~~Number 001-33299

MELLANOX TECHNOLOGIES, LTD.

(Exact ~~Name~~name of ~~Registrant~~registrant as ~~Specified~~specified in ~~Its Charter)~~

its charter)

~~ISRAEL~~		~~98-0233400~~

Israel (State or ~~Other Jurisdiction~~other jurisdiction of incorporation or organization)	98-0233400 (I.R.S. Employer
~~Incorporation or Organization)~~	Identification ~~No.)~~

~~BEIT MELLANOX, YOKNEAM, ISRAEL~~	~~20692~~
~~(Address of Principal Executive Offices)~~	~~(Zip Code)~~ Number)

~~Registrant’s Telephone Number, Including Area Code:~~

Beit Mellanox, Yokneam, Israel 20692

(Address of principal executive offices, including zip code)

+~~972-74-723-7200~~

972-4-909-7200

(Registrant's telephone number, including area code)

Indicate by check mark whether the ~~registrant:~~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 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 definitions of ~~“large~~"large accelerated filer,~~” “accelerated filer”~~" "accelerated filer" and ~~“smaller~~"smaller reporting ~~company”~~company" in Rule 12b-2 of the Exchange Act. (Check one):

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

The total number of shares outstanding ~~shares~~ of the ~~registrant’s~~registrant's Ordinary Shares, nominal value of NIS 0.0175 per share, as of ~~October 26, 2015,~~April 25, 2016, was ~~46,809,045.~~

47,649,110.

~~Table of Contents~~

MELLANOX TECHNOLOGIES, LTD.

					~~Page No.~~
	~~PART I~~
PART I		~~FINANCIAL INFORMATION~~		Page No.
FINANCIAL INFORMATION

ITEM 1.	~~Unaudited~~ Condensed Consolidated Financial Statements (Unaudited)		3
	Condensed Consolidated Balance Sheets (Unaudited) ~~– September 30, 2015~~— March 31, 2016 and December 31, ~~2014~~2015		3
	Condensed Consolidated Statements of Operations (Unaudited) –— Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~		4
	Condensed Consolidated ~~Statements~~Statement of Comprehensive (Loss) Income ~~(Loss)~~ (Unaudited) –— Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~		5
	Condensed Consolidated Statements of Cash Flows (Unaudited) ~~– Nine~~— Three Months Ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
ITEM 2.	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations		21 27
ITEM 3.3.	Quantitative and Qualitative Disclosures About Market Risk		32 36
ITEM 4.	Controls and Procedures		32 37

	PART II
	OTHER INFORMATION

ITEM 1.1	Legal Proceedings		34 38
ITEM 1A.	Risk Factors		35 38
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
ITEM 3.3.	Defaults Upon Senior Securities		40
ITEM 4.	Mine Safety Disclosures		40
ITEM 5.	Other Information		40
ITEM 6.	Exhibits		41

PART I. FINANCIAL INFORMATION

ITEM 1 — ~~UNAUDITED~~ CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

December 31,

2015

2014

(In thousands)

ASSETS

Current assets:

Cash and cash equivalents

$
140,511

$
51,326

Short-term investments

345,091

334,038

Restricted cash

—

3,604

Accounts receivable, net

64,693

64,922

Inventories

63,111

44,470

Deferred taxes and other current assets

21,107

18,147

Total current assets

634,513

516,507

Property and equipment, net

97,329

78,827

Severance assets

9,543

9,474

Intangible assets, net

34,744

42,067

Goodwill

200,743

200,743

Deferred taxes and other long-term assets

9,697

15,600

Total assets

$
986,569

$
863,218

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$
42,216

$
39,811

Accrued liabilities

66,729

61,974

Deferred revenue

17,675

14,758

Capital lease liabilities, current

765

1,102

Total current liabilities

127,385

117,645

Accrued severance

12,454

11,850

Deferred revenue

11,398

8,942

Capital lease liabilities

—

494

Other long-term liabilities

26,825

22,535

Total liabilities

178,062

161,466

Commitments and Contingencies (Note 7)

Shareholders’ equity:

Ordinary shares

198

192

Additional paid-in capital

669,954

615,148

Accumulated other comprehensive loss

(1,773
)
(4,020
)
Retained earnings

140,128

90,432

Total shareholders’ equity

808,507

701,752

Total liabilities and shareholders’ equity

$
986,569

$
863,218



	March 31,		December 31,
	2016		2015
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	117,912	$	263,199
Short-term investments	143,926		247,314
Accounts receivable, net	105,114		84,273
Inventories	72,271		62,473
Other current assets	22,907		19,979
Total current assets	462,130		677,238
Property and equipment, net	103,157		100,018
Severance assets	15,787		9,514
Intangible assets, net	308,721		32,154
Goodwill	476,037		200,743
Deferred taxes and other long-term assets	32,627		33,715
Total assets	$	1,398,459	$	1,053,382
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	47,632	$	44,600
Accrued liabilities	106,684		74,296
Deferred revenue	18,948		17,743
Capital lease liabilities, current	217		491
Current portion of term debt	25,905		—
Total current liabilities	199,386		137,130
Accrued severance	19,630		12,464
Deferred revenue	12,197		12,439
Term debt	248,926		—
Other long-term liabilities	26,498		24,668
Total liabilities	506,637		186,701
Commitments and Contingencies (Note 8)
Shareholders’ equity
Ordinary shares	202		200
Additional paid-in capital	713,039		684,824
Accumulated other comprehensive income (loss)	2,423		(1,669		)
Retained earnings	176,158		183,326
Total shareholders’ equity	891,822		866,681
Total liabilities and shareholders' equity	$	1,398,459	$	1,053,382

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

(In thousands, except per share data)

Total revenues

$
171,377

$
120,708

$
481,200

$
322,533

Cost of revenues

49,129

39,377

137,394

107,541

Gross profit

122,248

81,331

343,806

214,992

Operating expenses:

Research and development

65,861

54,220

186,555

152,063

Sales and marketing

24,816

18,863

70,740

56,865

General and administrative

10,944

9,185

31,315

26,861

Total operating expenses

101,621

82,268

288,610

235,789

Income (loss) from operations

20,627

(937
)
55,196

(20,797
)
Other income (loss), net

441

361

(1,116
)
952

Income (loss) before taxes

21,068

(576
)
54,080

(19,845
)
(Provision for) benefit from taxes on income

(1,116
)
1,167

(4,384
)
589

Net income (loss)

$
19,952

$
591

$
49,696

$
(19,256
)
Net income (loss) per share — basic

$
0.43

$
0.01

$
1.08

$
(0.44
)
Net income (loss) per share — diluted

$
0.42

$
0.01

$
1.05

$
(0.44
)
Shares used in per share calculation:

Basic

46,583

44,984

46,158

44,646

Diluted

47,725

46,229

47,542

44,646



	Three Months Ended March 31,
	2016			2015
	(In thousands, except per share data)
Total revenues	$	196,810		$	146,675
Cost of revenues	70,481			41,087
Gross profit	126,329			105,588
Operating expenses:
Research and development	71,034			58,118
Sales and marketing	31,228			22,558
General and administrative	27,938			9,701
Total operating expenses	130,200			90,377
(Loss) income from operations	(3,871		)	15,211
Interest expense	(998		)	—
Other income (loss)	61			(2,469		)
Other loss, net	(937		)	(2,469		)
(Loss) income before taxes on income	(4,808		)	12,742
Provision for taxes on income	2,360			2,246
Net (loss) income	$	(7,168	)	$	10,496
Net (loss) income per share — basic	$	(0.15	)	$	0.23
Net (loss) income per share — diluted	$	(0.15	)	$	0.22
Shares used in computing net (loss) income per share:
Basic	47,358			45,691
Diluted	47,358			47,034

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME ~~(LOSS)~~ (UNAUDITED)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

(In thousands)

Net income (loss)

$
19,952

$
591

$
49,696

$
(19,256
)
Other comprehensive income (loss), net of tax:

Change in unrealized gains/(losses) on available-for-sale securities, net of tax

29

(208
)
242

(192
)
Change in unrealized (losses)/gains on derivative contracts, net of tax

(3,827
)
(2,726
)
2,005

(3,411
)
Net change in other comprehensive (loss)/income, net of tax

(3,798
)
(2,934
)
2,247

(3,603
)
Total comprehensive income (loss), net of tax

$
16,154

$
(2,343
)
$
51,943

$
(22,859
)



	Three Months Ended March 31,
	2016			2015
	(In thousands)
Net (loss) income	$	(7,168	)	$	10,496
Other comprehensive income, net of tax:
Change in unrealized gains/losses on available-for-sale securities, net of tax	600			451
Change in unrealized gains/losses on derivative contracts, net of tax	3,492			374
Other comprehensive income	4,092			825
Total comprehensive (loss) income, net of tax	$	(3,076	)	$	11,321

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

September 30,

2015

2014

(In thousands)

Cash flows from operating activities:

Net income (loss)

$
49,696

$
(19,256
)
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

30,464

28,983

Deferred income taxes

134

(202
)
Share-based compensation expense

37,834

35,434

Gain on investments

(2,193
)
(94
)
Excess tax benefit from share-based compensation

—

(346
)
Impairment of equity investment in a private company

3,189

—

Changes in assets and liabilities

Accounts receivable, net

229

(2,215
)
Inventory

(23,988
)
(3,732
)
Prepaid expenses and other assets

(504
)
(10,040
)
Accounts payable

2,119

7,792

Accrued liabilities and other payables

18,817

(1,174
)
Net cash provided by operating activities

115,797

35,150

Cash flows from investing activities:

Purchase of severance-related insurance policies

(563
)
(597
)
Purchase of short term investments

(219,459
)
(202,818
)
Proceeds from sale of short term investments

148,697

130,652

Proceeds from maturities of short term investments

62,144

39,801

Restricted cash

3,604

(103
)
Purchase of property and equipment

(36,972
)
(21,231
)
Purchase of intangible finite-lived assets

(210
)
—

Purchase of equity investment in a private company

—

(3,691
)
Net cash used in investing activities

(42,759
)
(57,987
)

Cash flows from financing activities

Principal payments on capital lease obligations

(831
)
(1,092
)
Proceeds from exercise of share awards

16,978

15,271

Excess tax benefit from share-based compensation

—

346

Net cash provided by financing activities

16,147

14,525

Increase (decrease) in cash and cash equivalents

89,185

(8,312
)
Cash and cash equivalents at beginning of period

51,326

63,164

Cash and cash equivalents at end of period

$
140,511

$
54,852



	Three Months Ended March 31,
	2016			2015
	(In thousands)
Cash flows from operating activities:
Net (loss) income	$	(7,168	)	$	10,496
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	20,614			9,546
Deferred income taxes	1,265			104
Share-based compensation	18,266			11,718
Loss (gain) on investments, net	112			(309		)
Impairment loss on equity investment in a private company	—			3,189
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable	(4,677		)	9,005
Inventories	4,361			(8,689		)
Prepaid expenses and other assets	2,305			3,895
Accounts payable	3,340			(2,122		)
Accrued liabilities and other liabilities	10,177			8,962
Net cash provided by operating activities	48,595			45,795

Cash flows from investing activities:
Purchase of severance-related insurance policies	(226		)	(186		)
Purchase of short-term investments	(64,908		)	(87,793		)
Proceeds from sales of short-term investments	199,932			37,326
Proceeds from maturities of short-term investments	77,715			17,798
Purchase of property and equipment	(8,283		)	(9,521		)
Purchase of equity investments in private companies	(107		)	—
Acquisition net of cash acquired of $87.5 million	(681,189		)	—
Net cash used in investing activities	(477,066		)	(42,376		)

Cash flows from financing activities:
Proceeds from bank term debt	280,000			—
Debt issuance costs	(5,521		)	—
Principal payments on capital lease obligations	(274		)	(281		)
Proceeds from exercise of share awards	8,979			7,192
Net cash provided by financing activities	283,184			6,911

Net (decrease) increase in cash and cash equivalents	(145,287		)	10,330
Cash and cash equivalents at beginning of period	263,199			51,326
Cash and cash equivalents at end of period	$	117,912		$	61,656

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO ~~UNAUDITED~~ CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE ~~1 —~~ 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Company

Mellanox Technologies, Ltd., an Israeli corporation, (the ~~“Company”~~"Company" or ~~“Mellanox”~~"Mellanox") was incorporated ~~in Israel~~ and commenced operations in March 1999. Mellanox is a supplier of high-performance interconnect products for computing, storage and communications applications.

Principles of presentation

The unaudited condensed consolidated financial statements include the ~~Company’s~~Company's accounts as well as those of its wholly owned subsidiaries after the elimination of all intercompany balances and transactions.

On February 23, 2016, the Company completed its acquisition of EZchip Semiconductor, Ltd. ("EZchip"), a public company formed under the laws of the State of Israel and specializing in network-processing semiconductors. Upon the consummation of the acquisition, EZchip became a wholly owned subsidiary of the Company. The unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q include the results of operations of EZchip commencing as of the acquisition date.

The unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The year-end ~~unaudited condensed~~ balance sheet data was derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United ~~States.~~States ("GAAP"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with ~~U.S. generally accepted accounting principles (“GAAP”)~~GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained in this quarterly report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a quarterly report on Form 10-Q and are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2014,~~2015, filed with the SEC on ~~March 2, 2015.~~February 26, 2016. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, ~~2015~~2016 or thereafter.

~~Certain prior year amounts have been reclassified to conform to 2015 presentation. These changes and reclassifications did not impact net or comprehensive income.~~

~~Revision to Prior Period Financial Statements~~

During the year ended December 31, 2014, the Company became aware of and corrected immaterial errors primarily related to the accounting for liabilities for warranty, certain purchase orders, distributor price adjustment claims and purchase price allocation for the acquisitions of Kotura and IPtronics. The Company evaluated these errors and determined that the impact of the errors was not material to its results of operations, financial position or cash flows in previously issued unaudited condensed consolidated financial statements. The Company has retrospectively revised financial information for all prior periods presented to reflect this correction. The impact of this revision for periods presented within this quarterly report on Form 10-Q is shown in the tables below:

Three Months Ended

Nine Months Ended

September 30, 2014

September 30, 2014

As reported

Adjustments

As revised

As reported

Adjustments

As revised

(in thousands, except per share data)

(in thousands, except per share data)

Statement of operations:

Total revenues

$
120,708

$
—

$
120,708

$
321,987

$
546

$
322,533

Cost of revenues

39,540

(163
)
39,377

107,788

(247
)
107,541

Gross profit

81,168

163

81,331

214,199

793

214,992

Operating expenses:

Research and development

54,220

—

54,220

152,063

—

152,063

Sales and marketing

18,863

—

18,863

56,865

—

56,865

General and administrative

9,185

—

9,185

26,861

—

26,861

Total operating expenses

82,268

—

82,268

235,789

—

235,789

Loss from operations

(1,100
)
163

(937
)
(21,590
)
793

(20,797
)
Other income, net

361

—

361

952

—

952

Loss before taxes on income

(739
)
163

(576
)
(20,638
)
793

(19,845
)
Benefit from taxes on income

1,167

—

1,167

589

—

589

Net income (loss)

$
428

$
163

$
591

$
(20,049
)
$
793

$
(19,256
)
Net income (loss) per share — basic

$
0.01

$
—

$
0.01

$
(0.45
)
$
0.01

$
(0.44
)
Net income (loss) per share — diluted

$
0.01

$
—

$
0.01

$
(0.45
)
$
0.01

$
(0.44
)

Three Months Ended

Nine Months Ended

September 30, 2014

September 30, 2014

As reported

Adjustments

As revised

As reported

Adjustments

As revised

(in thousands)

(in thousands)

Statement of comprehensive loss:

Net loss

$
428

$
163

$
591

$
(20,049
)
$
793

$
(19,256
)
Total comprehensive loss, net of tax

(2,506
)
163

(2,343
)
(23,652
)
793

(22,859
)

Nine Months Ended

September 30, 2014

As reported

Adjustments

As revised

(in thousands)

Statement of cash flows:

Net cash provided by operating activities

$
35,031

$
119

$
35,150

Net cash used in investing activities

(57,984
)
(3
)
(57,987
)
Net cash provided by (used in) financing activities

14,641

(116
)
14,525

Risks and uncertainties

The Company is subject to all of the risks inherent in a company which operates in the dynamic and competitive semiconductor industry. Significant changes in any of the following areas could have a materially adverse impact on the ~~Company’s~~Company's financial position and results of operations: unpredictable volume or timing of customer orders; ordered product mix; the sales outlook and purchasing patterns of the ~~Company’s~~Company's customers based on consumer demands and general economic conditions; loss of one or more of the ~~Company’s~~Company's customers; decreases in the average selling prices of products or increases in the average cost of finished goods; the availability, pricing and timeliness of delivery of components used in the ~~Company’s~~Company's products; reliance on a limited number of subcontractors to manufacture, assemble, package and production test the ~~Company’s~~Company's products; the ~~Company’s~~Company's ability to successfully develop, introduce and sell new or enhanced products in a timely manner; product obsolescence and the ~~Company’s~~Company's ability to manage product transitions; the timing of announcements or introductions of new products by the ~~Company’s~~Company's competitors; and the ~~Company’s~~Company's ability to successfully integrate acquired businesses.

Use of estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. The Company regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns and allowances, investment valuation, warranty reserves, inventory reserves, share-based compensation expense, long-term asset valuations, goodwill and purchased intangible asset valuation, fair value of financial liabilities, hedge effectiveness, deferred income tax asset valuation, uncertain tax positions, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. ~~Actual~~The actual results that the Company experiences may differ materially and adversely from the ~~Company’s~~Company's original estimates. To the extent there are material differences between the estimates and actual results, the ~~Company’s~~Company's future results of operations will be affected.

Significant accounting policies

There have been no changes in the Company’s significant accounting policies that were disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015. See our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 26, 2016, for a discussion of significant accounting policies and estimates.

Concentration of credit risk

The following table summarizes the revenues from customers (including original equipment manufacturers) in excess of 10% of the total ~~revenues for the three and nine months ended September 30, 2015 and 2014:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

Hewlett Packard

14
%
15
%
14
%
11
%
IBM

*

11
%
*

11
%
Dell

*

11
%
*

11
%

revenues:

* Less than 10%



	Three Months Ended March 31,
	2016		2015
Hewlett-Packard	20	%	12	%

The following table summarizes ~~the~~ accounts receivable ~~balance~~balances in excess of 10% of ~~the~~ total accounts ~~receivable for the periods indicated:~~

September 30,
2015

December 31,
2014

Hewlett Packard

20
%
17
%
IBM

*

11
%
Ingram Micro

*

10
%

receivable:

* Less than 10%

March 31, 2016 December 31, 2015
Hewlett Packard 23 % 16 %
Hon Hai Precision Ind. Co. Ltd. *
11 %
Ingram Micro *
15 %
____________________
* Less than 10%

Product warranty

The following table provides ~~the~~ changes in the product warranty accrual for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 and ~~2014:~~

Nine Months Ended

September 30,

2015

2014

(in thousands)

Balance, beginning of the period

$
1,932

$
4,198

New warranties issued during the period

1,869

4,611

Reversal of warranty reserves

(321
)
(1,534
)
Settlements during the period

(1,800
)
(3,672
)
Balance, end of the period

$
1,680

$
3,603

Less: long-term portion of product warranty liability

(416
)
(410
)
Balance, current portion of product warranty liability at end of the period

$
1,264

$
3,193

2015:

Three Months Ended March 31,
2016 2015
(In thousands)
Balance, beginning of the period $ 1,641

$ 1,932
Assumed warranty liability from acquisition 290
—
New warranties issued during the period 369

803
Reversal of warranty reserves (134 )
(67 )
Settlements during the period (348 )
(806 )
Balance, end of the period 1,818

1,862
Less: long term portion of product warranty liability (386 )
(421 )
Balance, end of the period $ 1,432

$ 1,441

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Net income ~~(loss)~~ per share

The following table sets forth the computation of basic and diluted net income ~~(loss)~~ per share for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 and ~~2014:~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

(in thousands except per share data)

Net income (loss)

$
19,952

$
591

$
49,696

$
(19,256
)
Basic and diluted shares:

Weighted average ordinary shares

46,583

44,984

46,158

44,646

Dilutive effect of employee stock option

1,142

1,245

1,384

—

Shares used to compute diluted net income

47,725

46,229

47,542

44,646

Net income (loss) per share — basic

$
0.43

$
0.01

$
1.08

$
(0.44
)
Net income (loss) per share — diluted

$
0.42

$
0.01

$
1.05

$
(0.44
)

2015:



	Three Months Ended March 31,
	2016			2015
	(In thousands, except per share data)
Net (loss) income	$	(7,168	)	$	10,496
Basic and diluted shares:
Weighted average ordinary shares	47,358			45,691
Dilutive effect of employee share options and restricted stock units ("RSUs")	—			1,343
Shares used to compute diluted net (loss) income per share	47,358			$	47,034
Net (loss) income per share — basic	$	(0.15	)	$	0.23
Net (loss) income per share — diluted	$	(0.15	)	$	0.22

The Company excluded ~~707,305~~all outstanding share options and ~~502,419 outstanding shares~~RSUs for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 0.6 million outstanding share options and RSUs for the three months ended March 31, 2015 ~~respectively,~~ from the computation of diluted net income per ~~ordinary~~ share because including ~~these outstanding shares~~them would have had an anti-dilutive effect.

Recent accounting pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718); Improvements to Employee Share-Based Payment Accounting. The ~~Company excluded 1,120,074~~standard requires excess tax benefits to be recognized in the statement of operations as an income tax expense and ~~741,819 outstanding shares~~is applied prospectively by means of a cumulative-effect adjustment of excess tax benefits from equity in the period of adoption. The standard establishes an alternative practical expedient for estimating the ~~three and nine months ended September 30, 2014, respectively, from~~expected term of an award by recognizing the ~~computation~~effects of ~~diluted net income (loss) per ordinary share, because including these outstanding shares would have had an anti-dilutive effect.~~

forfeitures in compensation cost when the forfeitures occur. Adoption of ~~new accounting principles~~

~~In September 2015,~~ the ~~Financial Accounting Standards Board (“FASB”) amended~~alternative practical expedient is applied prospectively on an entity-wide basis. The standard requires that amounts paid to a taxing authority on the accounting standards related to business combinations. These amendments require an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require the acquirer to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any,employee’s behalf as a result of ~~the change~~directly withholding shares for tax-withholding purposes are to ~~the provisional amounts, calculated~~be presented on a retrospective basis as ~~if the accounting had been completed at the acquisition date.~~

~~The amendments require an entity to present separately~~a financing activity on the ~~face~~statement of cash flows. The standard becomes effective for the ~~income statement or disclose in~~Company beginning January 1, 2017. The Company is currently evaluating the ~~notes~~effect that the ~~portion of the amount recorded in current-period earnings by line item that would~~standard will have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. In the third quarter of 2015, we adopted the new standard. The application of this accounting standard did not have any impact to the Company’son its consolidated financial ~~statements.~~

statements and related disclosures.

In ~~April 2015,~~February 2016, the FASB issued ~~guidance requiring debt issuance costs related~~ASU No. 2016-02, Leases (Topic 842). The standard requires lessees to ~~a recognized debt liability to be presented in~~recognize almost all leases on the balance sheet as a ~~direct deduction from the carrying amount of that debt, consistent with debt discounts. In addition, amortization of debt issuance costs are~~right-of-use asset and a lease liability and requires leases to be ~~reported~~classified as ~~interest expense. In the third quarter~~either an operating or a finance type lease. The standard excludes leases of ~~2015, we adopted the new standard.~~ ~~The application of this accounting standard did not have any impact to the Company’s consolidated financial statements.~~

~~See our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015, for a discussion~~intangible assets or inventory. Early adoption of the ~~Company’s additional significant accounting policies and estimates.~~

~~Recent accounting pronouncements~~

~~In July 2015, the FASB issued guidance applying to inventory measured using any method other than the last-in, first-out method. Under this guidance, inventory~~standard is ~~measured at the lower of cost or net realizable value.~~allowed. The net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is applied prospectively and isstandard becomes effective for the Company ~~in its first fiscal quarter~~ beginning January 1, ~~2017. Early adoption~~2019. The Company is ~~permitted. The adoption of this~~currently evaluating the effect that the standard ~~is not expected to~~will have ~~a material impact~~ on ~~the Company’s~~its consolidated financial statements and related disclosures.

In ~~May 2015,~~January 2016, the FASB issued ~~guidance eliminating~~ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10). The standard requires entities to carry all investments in equity securities, with certain exceptions, at fair value with adjustment recorded through net income ("FVTNI"). The standard eliminates the requirement ~~to categorize within~~of recognizing unrealized gains or losses in other comprehensive income for trading or available-for-sale marketable equity securities. The standard requires the total fair value ~~hierarchy investments whose fair values are measured at net asset value (“NAV”). Entities will~~change attributable to instrument-specific credit risk, excluding derivative liability instruments, to be ~~required~~reflected in other comprehensive income. The standard requires the evaluation for the need for a valuation allowance for deferred tax assets related to ~~disclose~~debt securities classified as available-for-sale in combination with the ~~fair values of investments measured at NAV and provide a general description of redemption terms and conditions including the probability these investments will be sold at amounts~~Company's other ~~than NAV.~~deferred tax assets. The ~~guidance is applied retrospectively and is~~standard become effective for the Company ~~in its first fiscal quarter~~ beginning January 1, ~~2016. Early~~2018 and early adoption is ~~permitted.~~allowed. The ~~adoption of this~~Company is currently evaluating the effect that the standard ~~is not expected to~~will have ~~a material impact~~ on ~~the Company’s~~its consolidated financial ~~statements and related disclosures.~~

statements.

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

In May 2014, the FASB issued ~~new accounting guidance related to revenue recognition. This new~~ASU No. 2014-09, Revenue from Contracts with Customers. The updated standard will replace ~~all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new~~most existing revenue recognition ~~standard provides a unified model to determine~~guidance in U.S. GAAP when it becomes effective and ~~how revenue is recognized.~~permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ~~guidance deferring~~an update to defer the effective date of this ~~guidance~~update by one year. ~~This guidance will be~~The updated standard becomes effective for the Company ~~in its first fiscal quarter~~ beginning January 1, 2018, ~~and can be applied either retrospectively~~but allows the Company to ~~each period presented or as a cumulative-effect adjustment at~~adopt the ~~date of adoption. The guidance may be adopted as early as the Company’s first fiscal quarter beginning January 1, 2017, the effective date of the original guidance.~~standard one year earlier if it so chooses. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its ~~consolidated financial statements~~Consolidated Financial Statements and related disclosures.

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 2—BALANCE SHEET COMPONENTS:



	March 31, 2016			December 31, 2015
	(In thousands)
Accounts receivable, net:
Accounts receivable	$	105,746		$	84,894
Less: allowance for doubtful accounts	(632		)	(621		)
	$	105,114		$	84,273
Inventories:
Raw materials	$	8,790		$	8,304
Work-in-process	30,400			25,716
Finished goods	33,081			28,453
	$	72,271		$	62,473
Other current assets:
Prepaid expenses	$	12,450		$	9,948
Derivative contracts receivable	2,545			—
VAT receivable	4,985			7,946
Other	2,927			2,085
	$	22,907		$	19,979
Property and equipment, net:
Computer equipment and software	$	182,456		$	172,176
Furniture and fixtures	4,066			3,886
Leasehold improvements	37,332			36,121
	223,854			212,183
Less: Accumulated depreciation and amortization	(120,697		)	(112,165		)
	$	103,157		$	100,018
Deferred taxes and other long-term assets:
Equity investments in private companies	$	7,846		$	7,739
Deferred taxes	21,956			23,222
Other assets	2,825			2,754
	$	32,627		$	33,715
Accrued liabilities:
Payroll and related expenses	$	66,969		$	43,041
Accrued expenses	35,252			26,431
Derivative contracts payable	—			1,157
Product warranty liability	1,432			1,206
Other	3,031			2,461
	$	106,684		$	74,296
Other long-term liabilities:
Income tax payable	$	21,691		$	20,023
Deferred rent	1,940			1,950
Other	2,867			2,695
	$	26,498		$	24,668

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 3—BUSINESS COMBINATION:

On February 23, 2016, the Company completed its acquisition of EZchip. Under the terms of the Agreement of Merger dated as of September 30, 2015 (as amended on November 17, 2015), by and among the Company, Mondial Europe Sub Ltd. and EZchip Semiconductor Ltd. (the "Merger Agreement") the total consideration was $787.0 million including $1.0 million attributable to assumed RSUs. The net cash purchase price of $698.5 million consisted of a $786.0 million cash payment for all outstanding common shares of EZchip at the price of $25.50 per share and net of $87.5 million cash acquired. In ~~August 2014,~~connection with the ~~FASB issued new guidance~~acquisition, the Company received cash representing the withholding taxes owed related to RSUs from the EZchip acquisition of $17.3 million. The withholding tax is expected to be remitted to the tax authorities during the second quarter of 2016. The Company also assumed 891,822 EZchip RSUs and converted them to 499,894 equivalent Company RSU awards. The fair value of the converted RSUs was determined based on the per share value of the underlying Mellanox ordinary shares of $46.40 per share as of the acquisition date. The 499,894 RSUs had a total aggregate value of $23.2 million, of which $1.0 million was recorded as a component of the purchase price for service rendered prior to the acquisition date and $22.2 million will be recognized as share-based compensation expense over the remaining required service period of up to 2.25 years.

In connection with the acquisition, the Company entered into a $280.0 million variable interest rate Term Debt maturing February 21, 2019. For additional information on the Term Debt, see Note 13 to the unaudited condensed consolidated financial statements.

The Company accounted for the transaction using the acquisition method, which requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their respective estimated fair values as of the acquisition date. The amount of recognized identifiable acquired assets and liabilities assumed are primarily based on provisional fair values and are subject to revision as the Company finalizes its analysis. Final determination of fair values may result in further adjustments to the values presented below. The following summarizes consideration paid for EZchip at the acquisition date:



	(in thousands)
Consideration:
Cash payment for all outstanding common shares of EZchip at $25.50 per share	$	786,047
Fair value of awards attributable to pre-acquisition services	972
Total consideration:	787,019
Less: cash acquired	87,545
Fair value of total consideration transferred, net of cash acquired	$	699,474

The following summarizes the Company's preliminary allocation of the total purchase price, net of cash acquired for the EZchip acquisition after consultation with third party valuation specialists:



	(in thousands)
Short-term investments	$	108,862
Other current assets	34,114
Other long-term assets	9,638
Intangible assets	288,246
Goodwill	275,294
Total assets	716,154

Current liabilities	(10,253		)
Long-term liabilities	(6,427		)
Total liabilities	(16,680		)

Total preliminary purchase price allocation	$	699,474

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 3—BUSINESS COMBINATION (Continued):

Acquisition-related expenses for the EZchip acquisition for the period ending March 31, 2016 were $6.7 million and primarily consisted of investment banking, consulting and other professional fees.

Identifiable finite-lived intangible assets



	Fair value		Weighted Average Useful Life
	(in thousands)		(in years)
Purchased intangible assets:
Trade names	$	5,600	3
Customer relationships	56,400		9
Backlog	11,300		2
Developed technology	181,246		4 - 6
In process research and development ⁽¹⁾	33,700		-
Total purchased intangible assets	$	288,246

⁽¹⁾In-process research and development ("IPR&D") will not be amortized until the underlying products reach technological feasibility. Upon completion, each IPR&D project will be amortized over its useful life.

Trade name represents the fair values of brand and name recognition associated with the marketing of EZchip’s products and services. The Company used the income approach and utilized a discount rate of 10.0% to determine the fair value of trade name assets.

Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to existing customers of the acquired company. The Company used the comparative method ("with/without") of the income approach to determine the fair value of this intangible asset and utilized a discount rate of 10.0%.

Backlog represents the fair value of sales order backlog as of the valuation date. The Company used the income approach to determine the fair value of this intangible asset and utilized a discount rate of 8.0%.

Developed technology represents completed technology that has passed technological feasibility and/or is currently offered for sale to customers. The Company used the income approach to value the developed technology. Under the income approach, the expected future cash flows from each technology are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital and the return on assets. The Company applied a discount rate of 9.0% to value the developed technology assets taking into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.

The in-process research and development ("IPR&D") intangible asset represents the value assigned to an acquired research and development project that, as of the acquisition date had not established technological feasibility. The fair value of IPR&D was determined using a discount rate of 12.0%. This intangible asset will be capitalized on the balance sheet and evaluated periodically for impairment until the project is completed, at which time it will become subject to amortization over its useful life. IPR&D consists of one project related to the ~~disclosures around going concern.~~development of network processors. The ~~new standard provides guidance around management’s responsibility~~project is expected to ~~evaluate whether there~~be completed over the next two years. The estimated remaining costs to complete the IPR&D project was $22.3 million as of the acquisition date, which will be charged to operating expense in the consolidated statements of operations as incurred.

Goodwill

Goodwill arising from the acquisition represents the value of the skilled assembled workforce and projected growth in overall revenues. The EZchip acquisition is ~~substantial doubt about an entity’s~~a step in the Company's strategy to become the leading broad-line supplier of intelligent interconnect solutions for data centers. The addition of EZchip’s products and expertise in network processing enhances the Company's leadership position, and ability to ~~continue as a going concern~~deliver complete end-to-end, intelligent 10, 25, 40, 50, and 100Gb/s interconnect and processing solutions for advanced data center and edge platforms. The combined company will have diverse and robust solutions to ~~provide related footnote disclosures. The new standard will be effective~~enable customers to meet the growing demands of data-intensive applications used in high-performance computing, Web 2.0, cloud, secure data center, enterprise, telecom, database, financial services, and storage environments. These significant factors were the basis for the ~~Company in its first fiscal quarter beginning January 1, 2017. Early adoption is permitted. The adoption~~recognition of ~~this standard~~goodwill. Goodwill is not expected to be deductible for tax

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 3—BUSINESS COMBINATION (Continued):

purposes. Goodwill will not be amortized but instead will be tested for impairment annually or more frequently if certain indicators are present.

Supplemental pro forma data

The following unaudited pro forma data for the three months ended March 31, 2016 and 2015 have ~~a material impact~~been prepared as if the EZchip acquisition had occurred on January 1, 2015, and includes adjustments for depreciation expense, amortization of intangible assets acquired, the effect of purchase accounting adjustments including the step-up of inventory, share-based compensation expense, and interest on the ~~Company’s consolidated financial statements~~Term Debt incurred to partially finance the acquisition. Pro forma results are not indicative of what would have occurred had the acquisition occurred as of January 1, 2015 or of results that may occur in the future.



	Three Months Ended
	March 31,
	2016		2015
	(in thousands, except per share amounts)
Revenues	$	206,734	$	173,580
Net (loss) income	$	3,916	$	(39,480	)
Net (loss) income per share — basic	$	0.08	$	(0.86	)
Net (loss) income per share — diluted	$	0.08	$	(0.86	)

Material non-recurring adjustments included in the unaudited pro forma net income for the three months ended March 31, 2016 for the effect of purchase accounting adjustments includes acquisition-related costs of $13.7 million, composed of $6.7 million incurred by the Company and $7.0 million incurred by EZchip, the stock-based compensation expense related ~~disclosures.~~

to accelerated RSUs from the EZchip acquisition of $4.8 million and the effects related to the step-up of inventory of $3.4 million.

For the three months ended March 31, 2016, the Company recorded $4.8 million of stock-based compensation expense related to accelerated RSUs from the EZchip acquisition as an operating expense.

The Company ~~has evaluated subsequent events through~~immediately integrated EZchip into its ongoing operations. As a result, it is impracticable to determine the effect on revenue and earnings as of the acquisition date ~~that~~for results of EZchip included in the condensed consolidated ~~financial statements were issued.~~

statement of operations for the reporting period.

NOTE ~~2 — BALANCE SHEET COMPONENTS:~~

September 30,

December 31,

2015

2014

(In thousands)

Accounts receivable, net:

Accounts receivable

$
65,304

$
65,594

Less: allowance for doubtful accounts

(611
)
(672
)

$
64,693

$
64,922

Inventories:

Raw materials

$
6,280

$
5,725

Work-in-process

26,511

13,874

Finished goods

30,320

24,871

$
63,111

$
44,470

Deferred taxes and other current assets:

Prepaid expenses

$
8,167

$
8,040

Deferred taxes

2,271

2,271

VAT receivable

6,918

6,117

Other

3,751

1,719

$
21,107

$
18,147

Property and equipment, net:

Computer equipment and software

$
163,539

$
124,370

Furniture and fixtures

3,448

3,256

Leasehold improvements

34,687

33,295

201,674

160,921

Less: Accumulated depreciation and amortization

(104,345
)
(82,094
)

$
97,329

$
78,827

Deferred taxes and other long-term assets:

Equity investments in private companies

$
7,739

$
10,736

Deferred taxes

255

389

Other assets

1,703

4,475

$
9,697

$
15,600

Accrued liabilities:

Payroll and related expenses

$
33,277

$
31,254

Accrued expenses

28,518

21,171

Derivative contracts payable

1,641

3,562

Product warranty liability

1,264

1,508

Other

2,029

4,479

$
66,729

$
61,974

Other long-term liabilities:

Income tax payable

$
22,184

$
18,174

Deferred rent

1,912

2,337

Other

2,729

2,024

$
26,825

$
22,535

~~NOTE 3 —~~ 4—FAIR VALUE ~~MEASUREMENTS:~~

MEASUREMENTS

Fair value ~~hierarchy~~

hierarchy:

The Company measures its ~~financial instruments~~cash equivalents and marketable securities at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. The ~~Company’s~~Company's investments in debt securities and certificates of deposits are classified within Level 2 as the market inputs to value these instruments consist of market yields, reported trades and broker/dealer quotes. In addition, foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Level 3 valuation inputs include the ~~Company’s~~Company's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the ~~instrument’s~~instrument's valuation. ~~At September 30, 2015~~As of March 31, 2016 and December 31, ~~2014,~~2015, the Company did not have any ~~financial instruments~~assets or liabilities valued based on Level 3 valuations.

Financial Liabilities Measured at Fair Value on a Nonrecurring Basis:

As of March 31, 2016, the Company's Term Debt is classified as a Level 2 fair value measurement in the fair value hierarchy. The carrying value of the Term Debt approximates the estimated fair value since it bears an interest rate that is similar to existing market rate measurements that are directly observable and based on the borrowing rate available to the Company for debt with similar terms. At March 31, 2016, the carrying value and the estimated fair value of the Company's Term Debt was $274.8 million.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 4—FAIR VALUE MEASUREMENTS (continued)

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The following table represents the fair value hierarchy of the ~~Company’s~~Company's financial assets measured at fair value ~~at September 30, 2015:~~

Level 1

Level 2

Total

(in thousands)

Money market funds

$
11,979

$
—

$
11,979

Certificates of deposit

—

105,354

105,354

U.S. Government and agency securities

—

33,453

33,453

Commercial paper

—

45,024

45,024

Corporate bonds

—

119,143

119,143

Municipal bonds

—

28,058

28,058

Foreign government bonds

—

14,059

14,059

Total financial assets

$
11,979

$
345,091

$
357,070

Derivative contracts

—

1,641

1,641

Total financial liabilities

$
—

$
1,641

$
1,641

on a recurring basis as of March 31, 2016:



	Level 1		Level 2		Total
	(in thousands)
Money market funds	$	22,548	—		$	22,548
Certificates of deposit	—		40,780		40,780
U.S. Government and agency securities	—		34,133		34,133
Commercial paper	—		10,436		10,436
Corporate bonds	—		53,332		53,332
Foreign government bonds	—		5,245		5,245
	22,548		143,926		166,474
Derivative contracts	—		2,545		2,545
Total financial assets	$	22,548	$	146,471	$	169,019

The following table represents the fair value hierarchy of the ~~Company’s~~Company's financial assets and liabilities measured at fair value aton a recurring basis as of December 31, ~~2014:~~

Level 1

Level 2

Total

(in thousands)

Money market funds

$
4,426

$
—

$
4,426

Certificates of deposit

—

80,275

80,275

U.S. Government and agency securities

—

99,114

99,114

Commercial paper

—

23,019

23,019

Corporate bonds

—

111,736

111,736

Municipal bonds

—

13,104

13,104

Foreign government bonds

—

6,790

6,790

Total financial assets

$
4,426

$
334,038

$
338,464

Derivative contracts

—

3,562

3,562

Total financial liabilities

$
—

$
3,562

$
3,562

2015:



	Level 1		Level 2		Total
	(in thousands)
Certificates of deposit	$	—	$	110,423	$	110,423
U.S. Government and agency securities	—		131,722		131,722
Commercial paper	—		57,214		57,214
Corporate bonds	—		105,482		105,482
Municipal bonds	—		26,208		26,208
Foreign government bonds	—		13,940		13,940
Total financial assets	$	—	$	444,989	$	444,989
Derivative contracts	$	—	$	1,157	$	1,157
Total financial liabilities	$	—	$	1,157	$	1,157

There were no transfers between Level 1 and Level 2 securities during the ~~nine~~three months ended ~~September 30, 2015 or during~~March 31, 2016 and the year ended December 31, ~~2014.~~

2015.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE ~~4 —~~ 5—INVESTMENTS:

Cash, ~~Cash~~cash equivalents and ~~Short-term investments~~

short-term investments:

The short-term investments are classified as available-for-sale securities. The cash, cash equivalents and short-term investments at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 were as follows:

September 30, 2015

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

(in thousands)

Cash

$
128,532

$
—

$
—

$
128,532

Money market funds

11,979

—

—

11,979

Certificates of deposit

105,348

9

(3
)
105,354

U.S. Government and agency securities

33,421

34

(2
)
33,453

Commercial paper

45,013

13

(2
)
45,024

Corporate bonds

119,304

37

(198
)
119,143

Municipal bonds

28,060

18

(20
)
28,058

Foreign government bonds

14,077

3

(21
)
14,059

Total

$
485,734

$
114

$
(246
)
$
485,602

Less amounts classified as cash and cash equivalents

(140,511
)
—

—

(140,511
)

$
345,223

$
114

$
(246
)
$
345,091

December 31, 2014

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value

(in thousands)

Cash

$
46,900

$
—

$
—

$
46,900

Money market funds

4,426

—

—

4,426

Certificates of deposit

80,304

1

(30
)
80,275

U.S. Government and agency securities

99,236

9

(131
)
99,114

Commercial paper

23,017

3

(1
)
23,019

Corporate bonds

112,033

16

(313
)
111,736

Municipal bonds

13,151

—

(47
)
13,104

Foreign government bonds

6,809

—

(19
)
6,790

Total

$
385,876

$
29

$
(541
)
$
385,364

Less amounts classified as cash and cash equivalents

(51,326
)
—

—

(51,326
)

$
334,550

$
29

$
(541
)
$
334,038



	March 31, 2016
	Amortized Cost			Unrealized Gains		Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash	$	95,364		$	—	$	—		$	95,364
Money market funds	22,548			—		—			22,548
Certificates of deposit	40,780			—		—			40,780
U.S. Government and agency securities	34,140			—		(7		)	34,133
Commercial paper	10,436			—		—			10,436
Corporate bonds	53,316			110		(94		)	53,332
Foreign government bonds	5,232			13		—			5,245
Total	261,816			123		(101		)	261,838
Less amounts classified as cash and cash equivalents	(117,912		)	—		—			(117,912		)
	$	143,904		$	123	$	(101	)	$	143,926



	December 31, 2015
	Amortized Cost			Unrealized Gains			Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash	$	65,524		$	—		$	—		$	65,524
Certificates of deposit	110,427			3			(7		)	110,423
U.S. Government and agency securities	131,755			5			(38		)	131,722
Commercial paper	57,214			4			(4		)	57,214
Corporate bonds	105,900			2			(420		)	105,482
Municipal bonds	26,283			—			(75		)	26,208
Foreign government bonds	13,988			—			(48		)	13,940
Total	511,091			14			(592		)	510,513
Less amounts classified as cash and cash equivalents	(263,196		)	(5		)	2			(263,199		)
	$	247,895		$	9		$	(590	)	$	247,314

Realized ~~gains~~ (losses)~~, net upon the sale of marketable securities were $0.2 million and $(1.1) million for the three months ended September 30, 2015 and 2014, respectively. Realized~~ gains, net upon the sale of marketable securities were ~~$2.2~~$(0.1) million and ~~$0.1~~$0.3 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. At September 30, 2015, investments with unrealized losses were not deemed to be other-than-temporarily impaired and the gross unrealized losses were recorded in other comprehensive income, (“OCI”). TheMarch 31, 2016, gross unrealized losses on investments that were in a gross unrealized loss position for greater than 12 months were immaterial.

These investments were not deemed to be other-than-temporarily impaired and the gross unrealized losses were recorded in other comprehensive income (loss), ("OCI").

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 5—INVESTMENTS: (Continued)

The contractual maturities of short-term investments at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 were as follows:

September 30, 2015

December 31, 2014

Amortized

Estimated Fair

Amortized

Estimated Fair

Cost

Value

Cost

Value

(in thousands)

Due in less than one year

$
200,550

$
200,543

$
129,150

$
129,155

Due in one to three years

144,673

144,548

205,400

204,883

$
345,223

$
345,091

$
334,550

$
334,038

~~Restricted cash~~

~~The Company maintains certain cash amounts restricted as to withdrawal or use. It maintained a balance~~



	March 31, 2016				December 31, 2015
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in less than one year	$	85,258	$	85,259	$	148,041	$	147,914
Due in one to three years	58,646		58,667		99,854		99,400
	$	143,904	$	143,926	$	247,895	$	247,314

Investments in privately-held companies:

As of ~~$0 and $3.6 million, respectively, at September 30, 2015~~March 31, 2016 and December 31, ~~2014, designated~~2015, the Company held a total of $7.8 million and ~~paid out for bonus payments~~$7.7 million in ~~the third quarter of 2015 related to acquisitions.~~

~~Investments~~investments in privately-held ~~companies~~

companies.

NOTE 6—GOODWILL AND INTANGIBLE ASSETS:

The carrying value of the Company’s investments in privately held companies that were accounted for under the cost method was $7.7 million and $10.7 million as of September 30, 2015 and December 31, 2014, respectively. These assets are measured at fair value if the Company identifies events or circumstances that have significant impact on the cost basis of the investments. To arrive at the valuation of these assets, the Company considers any significantfollowing table represents changes in the ~~financial metrics~~carrying amount of goodwill:



	(in thousands)
Carrying amount of goodwill at December 31, 2015	$	200,743
Acquisition	275,294
Adjustments	—
Balance as of March 31, 2016	$	476,037

The carrying amounts of intangible assets as of March 31, 2016 were as follows:



	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in thousands)
Licensed technology	$	2,605	$	(1,697	)	$	908
Developed technology	251,074		(45,968		)	205,106
Customer relationships	69,776		(12,441		)	57,335
Backlog	11,300		(5,038		)	6,262
Trade names	5,600		(190		)	5,410
Total finite-lived amortizable intangible assets	340,355		(65,334		)	275,021
In-process research and development	33,700		—			33,700
Total intangible assets	$	374,055	$	(65,334	)	$	308,721

The carrying amounts of intangible assets as of December 31, 2015 were as follows:



	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in thousands)
Licensed technology	$	2,554	$	(1,589	)	$	965
Developed technology	69,828		(40,408		)	29,420
Customer relationships	13,376		(11,607		)	1,769
Total intangible assets	$	85,758	$	(53,604	)	$	32,154

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 6—GOODWILL AND INTANGIBLE ASSETS (continued):

Amortization expense of intangible assets totaled approximately $11.7 million and economic variables, and also uses third-party valuation reports to assist in the valuation as necessary. The fair value measurement of investments in privately held companies was classified as Level 3 because significant unobservable inputs were used in the valuation due to the absence of quoted market prices and inherent lack of liquidity. Significant unobservable inputs, which included the financial condition and near-term prospects of the investees, recent financing activities of the investees, and the investees’ capital structure as well as other economic variables, reflected the assumptions market participants would use in pricing these assets.

~~On April 27, 2015, the Company was informed that one of the privately-held companies intends to discontinue its operations. As a result, the Company concluded that its investment of $3.2~~$2.4 million in this privately-held company was impaired and the impairment of this investment was other than temporary. The impairment loss was included in other loss, net, on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015, and the nine months ended September 30, 2015. Prior to the impairment, the carrying value of the Company’s investment was $3.2 million of which $0.2 million was classified within other current assets and $3.0 million was classified within other long-term assets.

~~NOTE 5 — GOODWILL AND INTANGIBLE ASSETS:~~

~~The following table presents changes in the carrying amount of goodwill (in thousands):~~

Balance at December 31, 2014

$
200,743

Adjustments

—

Balance at September 30, 2015

$
200,743

~~The carrying amounts of intangible assets at September 30, 2015 were as follows:~~

Gross

Net

Carrying

Accumulated

Carrying

Value

Amortization

Value

(in thousands)

Licensed technology

$
2,554

$
(1,436
)
$
1,118

Developed technology

69,828

(38,167
)
31,661

Customer relationships

13,376

(11,411
)
1,965

Total intangible assets

$
85,758

$
(51,014
)
$
34,744

~~The carrying amounts of intangible assets at December 31, 2014 were as follows:~~

Gross
Carrying
Value

Accumulated
Amortization

Net
Carrying
Value

(in thousands)

Licensed technology

$
2,344

$
(917
)
$
1,427

Developed technology

56,064

(32,130
)
23,934

Customer relationships

13,376

(10,434
)
2,942

Total amortizable intangible assets

$
71,784

$
(43,481
)
$
28,303

IPR&D

13,764

—

13,764

Total intangible assets

$
85,548

$
(43,481
)
$
42,067

The balance of IPR&D was transferred to developed technology during the nine months ended September 30, 2015. Amortization expense of intangible assets was $2.6 million and $2.9 million for the three months ended September 30, 2015 and 2014, respectively. ~~Amortization expense of intangible assets was $7.5 million and $9.4 million for the nine months ended September 30, 2015 and 2014, respectively.~~

The estimated future amortization ~~expenses~~expense from amortizable intangible assets ~~are~~is as ~~follows (in thousands):~~

Remaining three months of 2015

$
2,583

2016

9,991

2017

9,928

2018

6,942

2019

3,407

2020 and thereafter

1,893

$
34,744

follows:

(in thousands)
2016 (remaining nine months) $ 43,611
2017 49,782
2018 46,784
2019 41,653
2020 and thereafter 93,191
Total $ 275,021

NOTE ~~6 —~~ 7—DERIVATIVES AND HEDGING ACTIVITIES:

~~At September 30, 2015,~~

As of March 31, 2016, the Company had derivative contracts in place hedging future NIS denominated operating expenses that the Company expects to incur over the next twelve months. In addition, the Company had derivative contracts in place that ~~hedged future flows from operating expenses.~~hedging the fair value NIS denominated net assets. The Company ~~does not use~~recorded gains and losses on both the net assets and the derivative ~~financial instruments for purposes other than cash flow hedges.~~

~~Notional value of derivative contracts~~

~~The notional amounts of outstanding forward~~ contracts ~~at September 30, 2015 and December 31, 2014 were~~designated as ~~follows:~~

Buy Contracts

September 30,
2015

December 31,
2014

(in thousands)

Israeli shekel

$
111,828

$
88,532

~~Fair value of derivative contracts~~

~~The~~ fair value hedges in the consolidated statements of ~~derivative contracts at September 30, 2015 and December 31, 2014 were~~operations as ~~follows:~~

Derivative Liabilities Reported in
Other Current Liabilities

September 30,
2015

December 31,
2014

(in thousands)

Foreign exchange contracts designated as cash flow hedges

$
1,641

$
3,562

Total derivatives designated as hedging instruments

$
1,641

$
3,562

~~Effect~~a component of ~~designated derivative contracts on accumulated~~ other ~~comprehensive income~~

The following table presents the balance of designated derivative contracts as cash flow hedges at September 30, 2015 and December 31, 2014, and their impact on OCI for the nine months ended September 30, 2015 (in thousands):

December 31, 2014

$
(3,646
)
Amount of loss recognized in OCI (effective portion)

(1,578
)
Amount of gain reclassified from OCI to income (effective portion)

3,583

September 30, 2015

$
(1,641
)

(loss) income.

Foreign exchange contracts designated as cash flow hedges relate primarily to operating expenses and the associated gains and losses are expected to be recorded in operating expenses when reclassified out of OCI. The Company expects to realize the accumulated OCI balance related to ~~foreign exchange~~cash flow hedge contracts within the next 12 months.

Fair Value of Derivative Contracts

The fair value of derivatives in the unaudited condensed consolidated balance at March 31, 2016 and December 31, 2015 were as follows:

Other current assets Other accrued liabilities
March 31, 2016 December 31, 2015
(in thousands)
Derivatives designed as hedging instruments
Currency forward contracts $ 2,249
$ 1,157
Derivatives not designed as hedging instruments

Currency forward contracts 296
—
Total derivatives $ 2,545
$ 1,157

The gross notional amounts of derivative contracts were Israeli shekel denominated. The notional amounts of outstanding derivative contracts for at March 31, 2016 and December 31, 2015 were as follows:

March 31, 2016 December 31, 2015
(in thousands)
Derivatives designed as hedging instruments
Currency forward contracts $ 96,147
$ 98,744
Derivatives not designed as hedging instruments
Currency forward contracts $ 36,324
$ —

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 7—DERIVATIVES AND HEDGING ACTIVITIES: (Continued)

Effect of Designated Derivative Contracts on Accumulated Other Comprehensive Income

The following table represents the balance of derivative contracts designated as cash flow hedges as of March 31, 2016 and December 31, 2015 and their impact on OCI for the three months ended March 31, 2016:

(in thousands)
December 31, 2015 $ (1,091 )
Amount of gain recognized in OCI (effective portion) 3,630
Amount of gain reclassified from OCI to income (effective portion) (138 )
March 31, 2016 $ 2,401

Foreign exchange contracts designated as cash flow hedges relate primarily to operating expenses and the associated gains and losses are expected to be recorded in operating expenses when reclassified out of OCI. The Company expects to realize the accumulated OCI balance related to cash flow hedge contracts within the next 12 months.

Effect of Derivative Contracts on the Unaudited Condensed Consolidated Statement of Operations

The effect of derivative contracts on the unaudited condensed consolidated ~~statement~~statements of operations

~~The impact of derivative contracts on total operating expenses~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014 was as follows:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

(in thousands)

(Loss) gain on foreign exchange contracts designated as cash flow hedges

$
(573
)
$
(579
)
$
(3,583
)
$
699

was:



	Derivatives designed as hedging instruments					Derivatives not designed as hedging instruments
	Three Months Ended March 31,
Location of gains (losses)	2016		2015			2016		2015
	(in thousands)
Operating expenses	$	138	$	(2,273	)	$	—	$	—
Other (loss) income	—		—			$	272	—

The net gains or losses relating to the ineffective portion of derivative contracts designed as hedging instruments were not material ~~in the~~ three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 and ~~2014.~~

2015.

NOTE 7— 8—COMMITMENTS AND CONTINGENCIES:

Leases

At ~~September 30, 2015,~~March 31, 2016, future minimum ~~lease~~ payments under non-cancelable operating and capital leases ~~were~~are as follows:

Year Ended December 31,

Capital
Leases

Operating
Leases

(in thousands)

Remaining three months of 2015

$
280

$
6,051

2016

502

12,409

2017

—

9,830

2018

—

6,120

2019

—

4,281

2020 and beyond

—

5,668

Total minimum lease payments

$
782

$
44,359

Less: Amount representing interest

(17
)

Present value of capital lease obligations

$
765

Capital
Leases Operating
Leases
(in thousands)
2016 due in remaining nine months $ 223
$ 15,886
2017 —
16,497
2018 —
11,451
2019 —
7,932
2020 and thereafter —
8,179
Total minimum lease payments 223
$ 59,945
Less: Amount representing interest (5 )
Present value and current portion of capital lease obligations $ 218

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 8—COMMITMENTS AND CONTINGENCIES (CONTINUED)

Purchase commitments

At ~~September 30, 2015,~~March 31, 2016, the Company had the following non-cancelable purchase ~~commitments of $69.3 million, of which future minimum payments of $53.8 million, $14.9 million and $0.6 million were expected~~commitments:



	(in thousands)
2016 due in remaining nine months	$	123,439
2017	2,486
2018	419
2019 and thereafter	9,214
	$	135,558

Term Debt

For information about the Company's Term Debt, see note 13 to ~~be paid in 2015, 2016 and 2017, respectively. The purchase orders are based on~~ the ~~Company’s current manufacturing needs. The Company does not have significant agreements for~~notes to the ~~purchase of raw materials or other goods specifying minimum quantities or set prices that exceed its expected requirements.~~

~~Credit Facility~~

As disclosed in Note 12, the Company entered into a Merger agreement on September 30, 2015 with EZchip Semiconductor Ltd. (“EZchip”), a publicly held company, for a purchase price of approximately $811.0 million. The acquisition is subject to various closing conditions, regulatory approvals, and EZchip shareholder approval. The Company expects to finance the acquisition with cash on hand and $300 million in fully committed term debt financing (“Credit Facility”). The Credit Facility will consist of a variable interest rate $300 million senior secured term loan for the term of three years. The Credit Facility will provide additional term loan borrowing of up to $100 million under certain conditions. The Credit Facility is contingent upon closing the EZchip acquisition.

condensed consolidated financial statements.

Legal proceedings

~~The Company is currently involved in various~~

Settled legal ~~proceedings. Unless otherwise noted below, during the periods presented the Company did not record any accrual for loss contingencies associated with such legal~~ proceedings determine that an unfavorable outcome is probable or reasonably possible, or determine that the amount or range of any possible loss is reasonably estimable. The Company is engaged in other legal actions not described below arising in the ordinary course of its business and, while there can be no assurance, it believes that the ultimate outcome of these actions will not have a material adverse effect on its operating results, liquidity or financial position. Pending legal proceedings as of September 30, 2015 were as follows:

Avago Technologies Fiber (IP) Singapore Pte. Ltd. vs. IPtronics, Inc. and IPtronics A/S.S (the "Parties").

On September 29, 2010, Avago Technologies Fiber (IP) Singapore Pte. Ltd. (“Avago IP”) filed a complaint for patent infringement against IPtronics, Inc. and IPtronics A/S (now Mellanox Technologies Denmark Aps) (collectively, “IPtronics”) now pending in the United States District Court, Northern District of California, San Jose Division (Case No.: 5:10-cv-02863 EJD), asserting infringement of U.S. Patents Number 5,596,456 and 5,359,447. On September 11, 2012, Avago IP along with additional subsidiaries of Avago Technologies Limited (collectively, “Avago”) filed a ~~second amended~~Second Amended and ~~supplemental complaint~~Supplemental Complaint against IPtronics adding allegations that IPtronics engaged in violations of the Lanham Act, Section 43 (A); misappropriated Avago’s trade secrets; engaged in unfair competition against Avago; intentionally interfered with Avago’s contractual relations; and were unjustly enriched by and through the conduct complained of by Avago. ~~A motion to file a third amended complaint was filed but never granted.~~

Avago’s motion to file a Fourth Amended and Supplemental Complaint (the “Complaint”) to add the Company and a new claim for interference with prospective economic advantage against IPtronics was granted. The Company and IPtronics ~~have~~ answered the new ~~complaint and the case is set for trial in May and June 2016. IPtronics’ motion to add~~ ~~an antitrust counterclaim against Avago for pursuing a sham action was denied and, as explained below, that a similar claim is being pursued in a separate action.~~

complaint. Pursuant to a Settlement and Patent License Agreement (the "Settlement") dated March 7, 2016, on March 8, 2016 the ~~Complaint, Avago seeks unspecified damages, treble damages, injunctive relief and any other relief deemed just and proper by~~Parties jointly filed a Stipulation of Dismissal with Prejudice Pursuant to Fed.R.Civ.P. 41(a)(1)(A)(ii), in which the ~~court. Neither~~parties stipulated to the ~~outcome of the proceeding nor the amount and range of potential damages or exposure associated~~dismissal with the proceeding can be assessed with certainty. In the event the Defendants are not successful in defending against the Complaint, the Company could be forced to license technology from Avago and be prevented from importing, selling, offering for sale, advertising, soliciting, using and/or warehousing for distribution the allegedly infringing products. Based on currently available information, the Company believes that the resolutionprejudice of this ~~proceeding is not likely~~action, including all claims alleged in the Fourth Amended and Supplemental Complaint and all counterclaims alleged in the answers thereto, with each party to ~~have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.~~

bear its own costs and attorneys’ fees.

IPtronics, Inc. and Mellanox Technologies Denmark ApS vs. Avago Technologies, Inc., et al.

IPtronics ~~has~~ filed an antitrust Complaint in the United States District Court, Northern District of California, San Jose Division (Case No.: 5:14-cv-05647-BLF (PSG)), against Avago for pursuing what the Company ~~believes~~believed to be a baseless ITC action against IPtronics. Pursuant to the Settlement, the Parties filed a Joint Stipulation of Dismissal with Prejudice Pursuant to Fed.R.Civ.P. 41(a)(1)(A)(ii), in which the parties stipulated to the dismissal of this action with prejudice, with each party to bear its own costs and attorneys’ fees.

Under the settlement the Company and Avago agreed not to sue for a period of 5 years. The contractual patent rights conveyed by the settlement were deemed not contributory to the Company's operations or products sold. As a result, the Company recorded settlement expense in its operating expenses in the amount of $5.1 million during the three months ended March 31, 2016.

Pending legal proceedings

Mellanox Technologies, Ltd. v. Methode Electronics, Inc.

On August 16, 2015, Mellanox filed this action for patent infringement in the federal court for the Northern District of California (Civil Action No. 15-cv-03730-PJH) naming Methode Electronics, Inc. as defendant on claims for infringement of U.S. Patent No. 8,419,444 and U.S. Patent No. 7,934,959. On December 3, 2015, Mellanox filed an Amended Complaint ~~seeks~~asserting infringement of the 959 patent. Methode moved to dismiss the First Amended Complaint. The court granted in part and denied in part that motion with leave to amend, as confirmed in an Order dated March 4, 2016. On March 17, 2016, Mellanox filed a Second Amended Complaint

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 8—COMMITMENTS AND CONTINGENCIES (CONTINUED)

alleging infringement of the 959 patent and seeking unspecified damages inand injunctive relief against Methode. On April 7, 2016 Methode served an ~~amount~~Answer and Counterclaims seeking declaratory judgment that the 959 patent is invalid and not infringed.

NOTE 9—SHARE INCENTIVE PLANS:

Stock Option Plans

The Company has ten option plans. In connection with the EZchip acquisition, the Company assumed the following EZchip plans: the EZchip Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan, the EZchip Semiconductor Ltd. 2007 U.S. Equity Incentive Plan, and the Amended and Restated EZchip Semiconductor Ltd. 2009 Equity Incentive Plan. The Company's other option plans include the 1999 United States Equity Incentive Plan, 1999 Israeli Share Option Plan, 2003 Israeli Share Option Plan (collectively, the "Prior Plans"), the 2006 Global Share Incentive Plan (the "Global Plan"), the Global Share Incentive Assumption Plan 2010 (the "Assumption Plan"), the Kotura, Inc. Second Amended and Restated 2003 Stock Plan (the "Kotura Plan"), the IPtronics, Inc. 2013 Restricted Stock Unit Plan (the "IPtronics Plan"). Concurrent with the assumption of the EZchip plans, the Company reserved for future issuance 499,894 ordinary shares to ~~compensate IPtronics for~~be issuable under the ~~damages resulting from Avago’s conduct.~~ assumed EZchip option plans.

Assumed EZchip restricted stock units

In ~~response~~connection with the acquisition of EZchip, the Company assumed all outstanding 891,822 unvested EZchip RSUs and converted them into 499,894 Mellanox RSUs using an exchange ratio of 0.56. The aggregate value of the 499,894 Mellanox RSUs was $23.2 million of which $1.0 million related to service prior to the ~~Complaint Avago filed a motion to dismiss.~~acquisition date and was included in the EZchip purchase price consideration. The ~~court denied~~remaining fair value of $22.2 million represents post-acquisition share-based compensation expense that ~~motion on August 25, 2015. Avago has since moved to stay~~will be recognized over the ~~case pending resolution~~requisite service period of approximately 2.25 years from the ~~N.D.C patent litigation mentioned above. That motion is pending.~~date of acquisition. The ~~court has set a case calendar leading to a trial in June 2017.~~

~~NOTE 8 — SHARE INCENTIVE PLANS:~~

assumed RSUs retained all applicable terms and vesting periods.

Share option ~~and restricted share units~~ activity

~~The following table summarizes the share~~

Share option activity under the ~~Company’s~~Company's equity incentive plans ~~during~~in the ~~nine~~three months ended ~~September 30, 2015:~~

Options Outstanding

Number
of
Shares

Weighted
Average
Exercise
Price

Outstanding at December 31, 2014

2,467,523

$
29.55

Options exercised

(269,900
)
15.41

Options cancelled

(43,719
)
76.20

Outstanding at September 30, 2015

2,153,904

$
30.37

~~The Company did not grant options during the nine month period ended September 30, 2015.~~ March 31, 2016 is set forth below:



	Options Outstanding
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2015	2,028,595		$	30.81
Options exercised	(103,288	)	$	16.35
Options canceled	(11,766	)	$	85.63
Outstanding at March 31, 2016	1,913,541		$	31.25

The total pretax intrinsic value of options exercised in the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ was ~~$8.9~~$3.4 million and ~~$4.1 million, respectively.~~$2.0 million. This intrinsic value represents the difference between the fair market value of the ~~Company’s~~Company's ordinary shares on the date of exercise and the exercise price of each option. Based on the closing price of the ~~Company’s~~Company's ordinary shares of ~~$37.79~~$54.33 on ~~September 30, 2015,~~March 31, 2016, the total pretax intrinsic value of ~~all~~options outstanding ~~options~~at March 31, 2016 and December 31, 2015 was ~~$35.6 million.~~ $55.4 million and $40.2 million, respectively.

The total pretax intrinsic value of exercisable options at ~~September 30, 2015~~March 31, 2016, was ~~$35.4~~$55.0 million. The total pretax intrinsic value of exercisable options at December 31, ~~2014~~2015 was ~~$50.1~~$39.9 million.

Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 9—SHARE INCENTIVE PLANS (Continued):

Restricted share ~~units (“RSUs”)~~unit activity

RSU activity under the ~~Company’s~~Company's equity incentive plans ~~for~~in the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 is set forth below:

Restricted Share Units Outstanding

Number
of
Shares

Weighted
Average
Grant Date
Fair Value

Non vested restricted share units at December 31, 2014

1,911,166

$
41.61

Restricted share units granted

1,286,655

45.90

Restricted share units vested

(671,994
)
40.35

Restricted share units canceled

(125,488
)
43.48

Non vested restricted share units at September 30, 2015

2,400,339

$
44.16



	Restricted Share Units Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested restricted share units at December 31, 2015	2,205,083		$	44.39
Assumed restricted share units from acquisition	499,894		$	46.40
Restricted share units granted	1,541,042		$	49.93
Restricted share units vested	(193,984	)	$	43.52
Restricted share units canceled	(81,858	)	$	44.36
Non-vested restricted share units at March 31, 2016	3,970,177		$	46.72

The weighted average fair value of RSUs granted in the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015 was $49.93 and ~~2014 was $45.90 and $36.90,~~$45.89, respectively.

The total intrinsic value of all outstanding restricted share units ~~was $90.7 million at September 30, 2015~~as of March 31, 2016 and ~~$81.7 million at~~ December 31, ~~2014.~~

2015 was $215.7 million and $92.9 million, respectively.

Shares reserved for future issuance

The Company had the following ordinary shares reserved for future issuance under its equity incentive plans ~~at September 30, 2015:~~

as of March 31, 2016:

			~~Number~~ of ~~Shares~~

	Number of Shares
Share options outstanding	1,913,541	~~2,153,904~~
Restricted share units outstanding	3,970,177	~~2,400,339~~
Shares authorized for future issuance	932,734	~~1,361,597~~
ESPP shares available for future issuance	267,370	~~486,313~~
Total shares reserved for future issuance ~~at September 30, 2015~~ as of March 31, 2016	7,083,822	~~6,402,153~~

Share-based compensation

The Company accounts for share-based compensation expense based on the estimated fair value of the share equity awards as of the grant dates.

The following weighted average assumptions ~~are~~were used to value ~~share options and~~ ESPP shares issued pursuant to the ~~Company’s equity~~Company's share incentive plans for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 and ~~2014:~~

Employee Share
Options

Employee Share
Purchase Plan

Nine Months Ended September 30,

Nine Months Ended September 30,

2015 *

2014

2015

2014

Dividend yield, %

—

—

—

—

Expected volatility, %

—

56.1

39.2

48.1

Risk free interest rate, %

—

1.98

0.10

0.07

Expected life, years

—

5.77

0.50

0.50

Estimated forfeiture rate, %

—

6.73

—

—

2015:



	Three Months Ended March 31,
	2016		2015
Dividend yield, %	—		—
Expected volatility	37.6	%	33.7	%
Risk free interest rate	0.46	%	0.12	%
Expected life, years	0.50		0.50

Table of Contents

*~~No options were granted in the nine months ended September 30, 2015.~~

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 9—SHARE INCENTIVE PLANS (Continued):

The following table summarizes the distribution of total share-based compensation expense in the unaudited condensed consolidated statements of operations:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2015

2014

2015

2014

(In thousands)

Cost of goods sold

$
592

$
532

$
1,749

$
1,586

Research and development

7,183

6,756

21,504

20,187

Sales and marketing

2,621

2,473

7,765

7,385

General and administrative

2,434

2,088

6,816

6,276

Total share-based compensation expense

$
12,830

$
11,849

$
37,834

$
35,434



	Three Months Ended March 31,
	2016		2015
	(in thousands)
Cost of goods sold	$	475	$	547
Research and development	9,152		6,768
Sales and marketing	3,648		2,394
General and administrative	4,991		2,009
Total share-based compensation expense	$	18,266	$	11,718

For the three months ended March 31, 2016, the Company recorded $4.8 million of stock-based compensation expense related to accelerated RSUs from the EZchip acquisition as an operating expense.

At ~~September 30, 2015,~~March 31, 2016, there was $90.5 million of total unrecognized share-based compensation costs related to non-vested share-based compensation arrangements. The costs are expected to be recognized over a weighted average period of 3.0 years. At December 31, 2014, there was $74.5$153.2 million of total unrecognized share-based compensation costs related to non-vested share-based compensation arrangements. The costs are expected to be recognized over a weighted average period of approximately ~~1.97~~2.5 years.

At December 31, 2015, there was $79.6 million of total unrecognized share-based compensation costs related to non-vested share-based compensation arrangements. The costs are expected to be recognized over a weighted average period of approximately 2.3 years.

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE ~~9 —~~ 10—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 and ~~2014:~~

Unrealized Gains

(Losses) on

Unrealized

Available-for-

Gains (Losses)

Sale Securities

on Derivatives

Total

(in thousands)

Balance at December 31, 2014

$
(374
)
$
(3,646
)
$
(4,020
)
Other comprehensive income/loss before reclassifications

225

(1,578
)
(1,353
)
Amounts reclassified from accumulated other comprehensive income/loss

17

3,583

3,600

Net current-period other comprehensive income, net of taxes

242

2,005

2,247

Balance at September 30, 2015

$
(132
)
$
(1,641
)
$
(1,773
)

Balance at December 31, 2013

$
(6
)
$
1,396

$
1,390

Other comprehensive income before reclassifications

(182
)
(2,712
)
(2,894
)
Amounts reclassified from accumulated other comprehensive income/loss

(10
)
(699
)
(709
)
Net current-period other comprehensive income, net of taxes

(192
)
(3,411
)
(3,603
)
Balance at September 30, 2014

$
(198
)
$
(2,015
)
$
(2,213
)

2015:



	Unrealized Gains / Losses on Available-for- Sale Securities			Gains / Losses on Derivatives			Total
	(in thousands)
Balance at December 31, 2015	$	(578	)	$	(1,091	)	$	(1,669	)
Other comprehensive income/loss before reclassifications	40			3,630			3,670
Amounts reclassified from accumulated other comprehensive income/loss	560			(138		)	422
Net current-period other comprehensive income/loss, net of taxes	600			3,492			4,092
Balance at March 31, 2016	$	22		$	2,401		$	2,423

Balance at December 31, 2014	$	(374	)	$	(3,646	)	$	(4,020	)
Other comprehensive income/loss before reclassifications	454			(1,899		)	(1,445		)
Amounts reclassified from accumulated other comprehensive income/loss	(3		)	2,273			2,270
Net current-period other comprehensive income/loss, net of taxes	451			374			825
Balance at March 31, 2015	$	77		$	(3,272	)	$	(3,195	)

The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2015 and 2014:~~

Amount Reclassified from

Other Comprehensive Income

(Loss)

Details about

Nine Months Ended

Accumulated Other Comprehensive Income (Loss)

September 30,

Affected Line Item in the

Components

2015

2014

Statement of Operations

(in thousands)

Unrealized gains (losses) on Derivatives

$
(3,583
)
$
699

Cost of revenues and Operating expenses:

(244
)
38

Cost of revenues

(2,707
)
535

Research and development

(292
)
62

Sales and marketing

(340
)
64

General and administrative

(3,583
)
699

Unrealized gain (losses) on Available-for-Sale Securities

(17
)
10

Other income, net

Total reclassifications for the period

$
(3,600
)
$
709

Total

March 31, 2016:

Details about Accumulated Other
Comprehensive Income / Loss Components

Amount Reclassified from
Other Comprehensive
Income / Loss
Affected Line Item in the Statement of Operations
Three Months Ended March 31,
2016 2015
(in thousands)
Gains/losses on Derivatives $ 138
(2,273 ) Cost of revenues and Operating expenses
12
(153 ) Cost of revenues
138
(1,690 ) Research and development
21
(175 ) Sales and marketing
(33 ) (255 ) General and administrative
Gains/losses on Available-for-Sale Securities (560 ) 3
Other income, net
Total reclassifications for the period $ (422 ) (2,270 ) Total

NOTE ~~10 —~~ 11—INCOME TAXES:

As of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, the Company had gross unrecognized tax benefits of ~~$23.0~~$36.3 million, of which $9.2 million are attributable to the EZchip acquisition, and ~~$18.0~~$25.4 million, respectively. It is the Company’s policy to classify accrued interest and penalties as part of the unrecognized tax benefits and record the expense in the provision for income taxes. ~~As of September 30, 2015 and December 31, 2014, the~~The amount of accrued interest ~~and~~or penalties related to unrecognized tax benefit totaled $1.2 million at March 31, 2016 and ~~$1.0~~$1.2 million ~~respectively.~~ December 31, 2015.

On January 4, 2016 the Israeli Government legislated a reduction in corporate income tax rates from 26.5% to 25.0%, effective in 2016. Deferred tax assets and liabilities at December 31, 2015 were measured using the 26.5% tax rate. In 2016, the Company measured deferred tax assets and liabilities using the 25.0% tax rate. The immediate change in the corporate income

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE 11—INCOME TAXES (Continued):

tax rates from 26.5% to 25.0% resulted in a reduction of $1.3 million to the Company's deferred tax assets and a corresponding increase in the Company's income tax expense for the three months ended March 31, 2016.

As of ~~September 30, 2015, calendar~~March 31, 2016, the 2012 through 2014 tax years ~~2010 and thereafter~~ are open and may be subject to potential examinations in the United States. The Company has net operating losses in the United States from prior tax periods beginning in 2002 which may be subject to examination upon utilization in future tax periods. As of March 31, 2016 the income tax returns of the Company and one ~~or more jurisdictions.~~ of its subsidiaries in Israel are under examination by the Israeli Tax Authority for certain years from 2011 to 2014. As of March 31, 2016, the 2010 through 2014 tax years are open and may be subject to potential examinations in Denmark.

The Beneficiary Enterprise and Approved Enterprise tax holiday associated with the ~~Company’s~~Company's Yokneam and Tel Aviv operations began in 2011. The tax holiday for the ~~Company’s~~Company's Yokneam operations will expire in ~~2020~~2021 and the ~~Tax Holiday~~tax holiday for the ~~Company’s Tel-Aviv operations~~Company's Tel Aviv operation will expire between the years 2017 and ~~2020.~~2021. The tax holiday has resulted in a cash tax savings of ~~$20.4~~$9.8 and $6.1 million ~~and $2.5 million in~~for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and September 30, 2014,~~ respectively, ~~and increased~~increasing diluted earnings per share by approximately ~~$0.43~~$0.21 and ~~$0.06~~$0.13 in the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014~~ respectively.

The Company’s effective tax rate is highly dependent upon the geographic distribution of its worldwide earnings or losses, tax regulations and tax holiday benefits in Israel, and the effectiveness of the Company’s tax planning strategies. The Company’s effective tax rates were ~~5.3%~~(49.1%) and ~~202.6%~~17.6% for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively. The Company’s effective tax rates were 8.1% and 3.0% for the nine months ended September 30, 2015 and 2014,~~ respectively. The difference between the Company’s effective tax rates and the 35% federal statutory rate resulted primarily from the ~~tax holiday in Israel, reversal of unrecognized tax positions due to the statute of limitations, and foreign earnings taxed at rates lower than the federal statutory rates, partially offset by the~~ accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax positions, the reduction of the Company's deferred tax assets resulting from the reduction in the Israeli corporate income tax as discussed above, non-tax-deductible expenses such as share-based compensation and losses generated from subsidiaries without tax benefit.

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous, and the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. In addition, interpretations of and guidance surrounding income tax laws and regulations are subject to change over time. Any changes in the Company’s subjective assumptions and judgments could materially affect amounts recognized in its consolidated balance sheets and statements of income.

The Company has maintained a valuation allowance against deferred tax assets of certain subsidiaries. The Company assesses its ability to recover its deferred tax assets on an ongoing basis. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considers available positive and negative evidence including its recent cumulative losses, its ability to carry-back losses against prior taxable income and its projected financial results. The Company also considers, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. A valuation allowance may be recorded in the event it is deemed to be more-likely-than-not that the deferred tax asset cannot be realized. Previously established valuation allowances may also be released in the event it is deemed to be more-likely-than-not that the deferred tax asset can be realized. Any release of valuation allowance will be recorded as a tax benefit which will positively impact the Company’s operating results. ~~The Company believes, based~~Management has determined on the basis of the quarterly assessment performed ~~as of September 30, 2015,~~at March 31, 2016, that ~~it is possible that a valuation allowance may~~these deferred tax assets are not more likely than not to be ~~released in the future if sustained levels of profitability are achieved.~~

realized.

NOTE ~~11 —~~ 12—OTHER INCOME (LOSS)~~, NET:~~

Other income (loss), ~~net,~~ is summarized in the following table:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

(In thousands)

Interest income and gain on sale of investments, net

$
725

$
444

$
2,205

$
1,178

Impairment loss on equity investment in a private company

—

—

(3,189
)
—

Foreign exchange loss

(284
)
(83
)
(132
)
(226
)
Total other income (loss), net

$
441

$
361

$
(1,116
)
$
952

Three Months Ended March 31,
2016 2015
(in thousands)
Interest income and loss on sale of investments, net $ 59

$ 663
Impairment loss on equity investment in a private company —
(3,189 )
Foreign exchange gain 2
57
Other income (loss) $ 61
$ (2,469 )

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE ~~12 — BUSINESS COMBINATION:~~

13—TERM DEBT:

In ~~September 2015,~~ connection with the Company’s acquisition of EZchip, on February 22, 2016, the Company entered into ~~an Agreement~~a $280.0 million variable interest rate Term Debt note maturing February 21, 2019. Debt issuance costs on the Term Debt are being amortized to interest expense at the effective interest rate over the contractual term of ~~Merger (the “Agreement”)~~the Term Debt.

The following table presents the Term Debt at March 31, 2016:



	(in thousands)
Term Debt, principal amount	$	280,000
Unamortized debt issuance costs	$	(5,169	)
Term Debt, carrying value	$	274,831
Effective interest rate	3.1		%

Principal on the Term Debt is paid in quarterly installments. Principal payments are made at a rate of (i) 2.50% of the original principal amount beginning on June 30, 2016 and ending on March 31, 2017, (ii) 3.75% of the original principal amount beginning on June 30, 2017 and ending on March 31, 2018 and (iii) 6.25% of the original principal amount beginning on June 30, 2018 and ending on December 31, 2018, with the balance due on February 21, 2019. The Company is also required to ~~acquire EZchip for approximately $811.0 million. EZchip is a public company formed~~make mandatory prepayments of loans under the ~~laws~~Term Debt, subject to specified exceptions, with the proceeds of asset sales, debt issuances and specified other events.

At March 31, 2016, future scheduled principal payable on the Company's Term Debt is summarized as follows:



	(in thousands)
2016 due in remaining nine months	$	21,000
2017	38,500
2018	63,000
2019	157,500
	$	280,000

The Term Debt was issued with $5.5 million in debt issuance costs and bears interest through maturity at a variable rate based upon, at the Company’s option, either the Eurodollar rate or the base rate (which is the highest of (i) the administrative agent’s prime rate, (ii) one-half of 1.00% in excess of the ~~State~~overnight U.S. Federal Funds rate, and (iii) 1.00% in excess of ~~Israel specializing~~the one-month Eurodollar rate), plus in ~~network-processing semiconductors.~~each case, an applicable margin. The ~~EZchip acquisition is~~applicable margin for Eurodollar rate loans ranges, based on the applicable total net leverage ratio, from 1.25% to 2.00% per annum and the applicable margin for base rate loans ranges, based on the applicable total net leverage ratio, from 0.25% to 1.00% per annum.

The Company’s obligations under the Term Debt are guaranteed by all of its domestic and foreign subsidiaries, subject to certain agreed upon exceptions. The obligations under the Term Debt are also, subject to certain agreed upon exceptions, secured by a ~~step in~~lien on substantially all of the Company’s ~~strategy to become the leading broad-line supplier~~and certain of intelligent interconnect solutions for the software-defined data centers. The addition of EZchip’s products and expertise in security, deep packet inspection, video, and storage processing enhances the Company’s leadership position, and ability to deliver complete end-to-end, intelligent 10, 25, 40, 50, and 100Gb/s interconnect and processing solutions for advanced data center and edge platforms. The combined company will have diverse and robust solutions to enable customers to meet the growing demands of data-intensive applications used in high-performance computing, Web 2.0, cloud, secure data center, enterprise, telecom, database, financial services, and storage environments.

~~Under the Agreement, EZchip will become a wholly owned subsidiary of the Company. The acquisition has received the required approvals from both companies’ Boards of Directors; and~~ is subject to various closing conditions, regulatory approvals, and EZchip shareholder approval. The Company expects to close the acquisition during the first quarter of 2016. As of September 30, 2015, the Company incurred approximately $0.7 million in legal, accounting, and consulting fees associated with the transaction.

At the closing of the acquisition, each unvested option and RSU of EZchip will be assumed by the Company, on the same terms and conditions as were applicable to such EZchip option or RSU (including with respect to vesting), and converted to an equivalent equity award to receive the Company’s ordinary shares appropriately adjusted to take into account the transaction consideration. All vested, in-the-money EZchip stock options and RSUs, after giving effect to any acceleration or vesting that occurs as a result of the transaction, will be cashed out. Any vested out-of-the-money EZchip options will be cancelled for no consideration.

The Company expects to finance the cost of the acquisition and related transaction expenses with cash on hand and with $300 million in fully committed debt financing. For additional information regarding the debt financing, see Note 7 to the unaudited condensed consolidated financial statements.

~~On July 1, 2014, Mellanox completed the acquisition of Integrity Project (“Integrity Project”), a privately held business in Ramat-Gan, Israel. The Company acquired Integrity Project for~~ its software expertise. The acquisition helped broaden the Company’s customer base by adding software solutions designed to enable Company customers to achieve optimal performance from all interconnect components. ~~The Company accounted for this transaction using the acquisition method. The purchase price was allocated to~~subsidiaries tangible and intangible ~~assets acquired~~property, including 100% of the Company's equity interest in the ordinary shares of its domestic and ~~liabilities assumed based on their respective estimated fair values on~~certain foreign subsidiaries.

The Term Debt contains a number of covenants and restrictions that among other things, and subject to certain agreed upon exceptions, require the ~~date~~Company and its subsidiaries to satisfy certain financial covenants and restricts the ability of ~~acquisition. The~~the Company ~~recognized goodwill arising from this acquisition which~~and its subsidiaries to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase subordinated debt and amend or otherwise alter debt agreements. A failure to comply with these covenants could permit the lenders under the Term Debt to declare all amounts borrowed under the Term Debt, together with accrued interest and fees, to be immediately due and payable. At March 31, 2016, the Company was ~~primarily~~ ~~attributable to~~in compliance with the ~~assembled workforce. Goodwill is not deductible~~covenants for tax purposes. The Company is not amortizing goodwill but reviews goodwill for impairment annually, or more frequently if impairment indicators arise, in accordance with authoritative accounting guidance.

the Term Debt.

ITEM ~~2 —~~ ~~MANAGEMENT’S~~2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition as of ~~September 30, 2015~~March 31, 2016 and results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ should be read together with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks, uncertainties and assumptions. Words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to us, our business and our management, are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements ~~related to our proposed acquisition of EZchip Semiconductor Ltd., statements~~ that relate to our future revenues, product development and introductions, customer demand, our dependence on key customers for a substantial portion of our revenue, performance of our subcontractors, growth rates, market adoption of our products, competitive factors, gross margins, levels of research, development and other related costs, expenditures, protection of our proprietary rights and patents, tax expenses and benefits, cash flows, management’s plans and objectives for current and future operations, and worldwide economic conditions.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under the section entitled “Risk Factors” in Part II, Item 1A of this report and in the section entitled “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for ~~the~~ fiscal year ended December 31, ~~2014.~~2015. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All forward-looking statements included in this report are based on information available to us on the date of this report, and we assume no obligation to update any forward-looking statements contained in this report. Quarterly financial results may not be indicative of the financial results of future periods.

Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to Mellanox Technologies, Ltd. and its wholly owned subsidiaries. ~~Certain revenue and operating expense categories previously reported in 2014 were reclassified to conform to the 2015 presentation.~~

Overview

General

We are a fabless semiconductor company that designs, manufactures and sells high-performance interconnect products and solutions primarily based on the InfiniBand and Ethernet standards. Our products facilitate efficient data transmission between servers, storage systems, communications infrastructure equipment and other embedded systems. We operate our business globally and offer products to customers at various levels of integration. The products we offer include integrated circuits ~~(“ICs”~~("ICs"), adapter cards, switch systems, cables, modules, software, services and accessories as an integral part of a total end-to-end networking solution focused on computing, storage and communication applications used in multiple markets, including high-performance computing ~~(“HPC”~~("HPC"), Web 2.0, storage, financial services, enterprise data center ~~(“EDC”~~("EDC") and cloud. ~~Our adapters and switch ICs provide per port bandwidth up to 100Gb/s Ethernet and InfiniBand.~~ These solutions ~~are intended to~~ increase performance, application productivity and improve return on investment. Through the successful development and implementation of multiple generations of our products, we have established significant expertise and competitive advantages.

We are one of the pioneers of InfiniBand, an industry-standard architecture for high-performance interconnects. We believe InfiniBand interconnect solutions deliver industry-leading performance, efficiency and scalability for clustered computing and storage systems that incorporate our products. In addition to supporting InfiniBand, our products also support industry-standard Ethernet transmission protocols providing unique product differentiation and connectivity flexibility. Our products serve as building blocks for creating reliable and scalable InfiniBand and Ethernet solutions with leading performance. We also believe that we are one of the early suppliers of 25/50/100Gb/s Ethernet adapters ~~and switches~~ to the market, and the only end-to-end ~~25/40/50/~~25, 40, 50 and 100Gb/s Ethernet ~~and 56/100 Gb/s Infiniband~~ supplier on the market ~~today.~~

today, which provides us with the opportunity to gain additional share in the Ethernet market as users upgrade from one or 10Gb/s directly to 25/40/50 or 100Gb/s.

As a leader in developing multiple generations of high-speed interconnect solutions, we have established strong relationships with our customers. Our products are incorporated in servers and associated networking solutions produced by server vendors. We supply our products to leading storage and communications infrastructure equipment vendors. Additionally, our products are used as embedded solutions.

In ~~September 2015,~~

EZchip Acquisition

On February 23, 2016, we ~~entered into an Agreement~~completed our acquisition of ~~Merger (the “Agreement”) to acquire~~ EZchip, ~~for approximately $811.0 million. EZchip is~~ a public company formed under the laws of the State of Israel, ~~specializing in network-processing semiconductors. The~~at which time EZchip acquisition is a step in our strategy to become the leading broad-line supplier of intelligent interconnect solutions for the software-defined data centers. The addition of EZchip’s products and expertise in security, deep packet inspection, video, and storage processing enhances our leadership position, and ability to deliver complete end-to-end, intelligent 10, 25, 40, 50, and 100Gb/s interconnect and processing solutions for advanced data center and edge platforms. The combined company will have diverse and robust solutions to enable customers to meet the growing demands of data-intensive applications used in high-performance computing, Web 2.0, cloud, secure data center, enterprise, telecom, database, financial services, and storage environments.

~~Under the Agreement, EZchip will become~~became our wholly owned subsidiary. Under the terms of the Merger Agreement the net cash purchase price of $698.5 million consisted of a $786.0 million cash payment for all outstanding common shares of EZchip at the price of $25.50 per share net of $87.5 million cash received. We also assumed 891,822 EZchip RSUs and converted them to 499,894 equivalent Mellanox RSU awards. The fair value of the converted RSUs was determined based on the per share value of the underlying Mellanox ordinary shares of $46.40 per share as of the acquisition ~~has received~~date. The 499,894 RSUs had a total aggregate value of $23.2 million, of which $1.0 million was recorded as a component of the purchase price for service rendered prior to the acquisition date and $22.2 million will be recognized as share-based compensation expense over the remaining required ~~approvals from our~~service period of up to 2.25 years.

In conjunction with the acquisition, we entered into a $280.0 million variable interest rate Term Debt maturing February 21, 2019.

We accounted for the transaction using the acquisition method, which requires, among other things that the assets acquired and ~~EZchip’s Boards~~liabilities assumed in a business combination be recognized at their respective estimated fair values as of ~~Directors;~~the acquisition date. The amount of recognized identifiable acquired assets and is liabilities assumed are primarily based on provisional fair values and are subject to ~~various closing conditions, regulatory approvals,~~revision as we finalize our analysis. Final determination of values may result in further adjustments to the values of acquired assets and assumed liabilities.

Acquisition-related expenses for the EZchip ~~shareholder approval. We expect~~acquisition for the period ending March 31, 2016 were $6.7 million and consisted primarily of investment banking, consulting and other professional fees.

Amortization of Intangible Assets from Acquisitions

Intangible assets from acquisitions subject to ~~close~~amortization are comprised of trade name, customer relationships, backlog, licensed technology and developed technology. In connection with the EZchip acquisition, we recognized $254.5 million of finite-lived intangible assets subject to amortization over their useful lives of 2 to 9 years. Amortization of intangible assets, including acquired intangibles, was $11.7 million and $2.4 million for the three months ended March 31, 2016 and 2015, respectively. The increased amortization is primarily associated with the EZchip acquisition. For additional information about intangible assets from acquisitions, see Note 6 of the notes to unaudited condensed consolidated financial statements.

Patent Settlement

On March 7, 2016, we entered into a settlement and patent license agreement that resolved all litigation matters between Avago, IPtronics, Inc., IPtronics A/S (now Mellanox Technologies Denmark Aps) and Mellanox. Under the settlement, we agreed with Avago not to sue each other for a period of 5 years. The settlement was deemed not contributory to our operations or products sold. As a result, we recorded a settlement expense in its operating expenses in the amount of $5.1 million during the ~~first quarter of 2016 and to finance the acquisition and related transaction expenses with cash on hand of the combined companies, and with $300 million in fully committed debt financing.~~

three months ended March 31, 2016.

Our Business

Revenues. We derive revenues from sales of our ICs, boards, switch systems, cables, modules, software, accessories and ~~accessories~~other product groups. ~~Our sales have historically been made on the basis of purchase orders rather than long-term agreements.~~ Revenues for the three months ended ~~September 30, 2015~~March 31, 2016 were ~~$171.4~~$196.8 million compared to ~~$120.7~~$146.7 million for the three months ended ~~September 30, 2014,~~March 31, 2015, representing an increase of approximately ~~42.0%. Revenues for the nine months ended September 30, 2015 were $481.2 million compared to $322.5 million for nine months ended September 30, 2014, representing an increase of approximately 49.2%~~34%. Our revenues for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 are not necessarily indicative of our ~~anticipated~~future results. In order to increase our annual revenues, we must continue to achieve design wins over other InfiniBand and Ethernet providers and providers of competing interconnect technologies. We consider a design win to occur when an original equipment manufacturer ("OEM"), or contract manufacturer notifies us that it has selected our products to be incorporated into a product or system under development. Because the life cycles for ~~the year ending December 31, 2015 or thereafter.~~

our customers' products can last for several years if these products have successful commercial introductions, we expect to continue to generate revenues over an extended period of time for each successful design win.

Our products have broad adoption with multiple end customers across HPC, Web 2.0, cloud, EDC, financial services and storage ~~markets; however, these~~markets. These markets are mainly served by leading server, storage and communications infrastructure OEMs. Therefore, we have derived a substantial portion of our revenues from a relatively small number of OEM customers. Sales to our top 10ten customers represented ~~58%~~64% and ~~62%~~60% of our total revenues for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. Sales to customers representing 10% or more of revenues accounted for ~~14%~~20% and ~~33%~~12% of our total revenues for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. The loss of one or more of our principal customers, the reduction or deferral of purchases, or changes in the mix of our products ordered by any one of these customers could cause our revenues to decline materially if we are unable to increase our revenues from other customers. Our customers, including our most significant customers, are not obligated by long-term contracts to purchase our products and may cancel orders with limited potential penalties. If any of our large customers reduces or cancels its purchases from us for any reason, it could have an adverse effect on our revenues and results of operations.

Cost of revenues and gross profit. The cost of revenues consists primarily of the cost of silicon wafers purchased from our foundry supplier, costs associated with the assembly, packaging and production testing of our ICs, outside processing costs associated with the manufacture of our products, royalties due to third parties, warranty costs, excess and obsolete inventory costs, depreciation and amortization, and costs of personnel associated with production management, quality assurance and services. In addition, after we purchase wafers from our foundries, we also face yield risk related to manufacturing these wafers into semiconductor devices. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the product is tested as a finished IC. If our manufacturing yields decrease, our cost per unit increases, which could have a significant adverse impact on our cost of revenues. We do not have long-term pricing agreements with foundry suppliers and contract manufacturers. Accordingly, our costs are subject to price fluctuations based on the overall cyclical demand for semiconductors.

We purchase our inventory pursuant to standard purchase orders. We estimate that lead times for delivery of our finished semiconductors from our foundry supplier and assembly, packaging and production testing subcontractor are approximately three to four months, lead times for delivery from our adapter card manufacturing subcontractor are approximately 8eight to 10ten weeks, and lead times for delivery from our switch systems manufacturing subcontractors are approximately 12twelve weeks. We build inventory based on forecasts of customer orders rather than the actual orders themselves.

We expect our cost of revenues as a percentage of sales to increase in the future as a result of a reduction in the average sale price of our products and a lower percentage of revenue deriving from sales of ICs and boards, which generally yield higher gross margins than ~~our other products.~~sales of switches and cables. This trend will depend on overall customer demand for our products, our product mix, competitive product offerings and related pricing and our ability to reduce manufacturing costs.

Operational ~~Expenses~~

expenses

Research and ~~Development Expenses.~~development expenses. Our research and development expenses consist primarily of salaries, share-based compensation and associated costs for employees engaged in research and development, costs associated with computer aided design software tools, ~~qualification expenses,~~ depreciation, amortization of ~~intangible assets,~~intangibles, allocable facilities related and administrative expenses and tape-out costs. Tape-out costs are expenses related to the manufacture of new ICs, including charges for mask sets, prototype wafers, mask set revisions and testing incurred before releasing new ICs into production. We anticipate research and development expenses will increase in future periods based on an increase in personnel to support our product development activities and the introduction of new products.

Sales and Marketing ~~Expenses~~Expenses. . Sales and marketing expenses consist primarily of salaries, incentive compensation, share-based compensation and associated costs for employees engaged in sales, marketing and customer support, commission payments to third party sales representatives, advertising, trade shows and promotions, travel, amortization of ~~intangible assets,~~intangibles, and allocable facilities related and administrative expenses. We expect these expenses will increase in absolute dollars in future periods based on an increase in sales and marketing personnel and increased marketing activities.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries, share-based compensation and associated costs for employees engaged in finance, legal, human resources and administrative activities, professional service expenses for accounting, corporate legal fees and allocable facilities related expenses. We expect these expenses will increase in absolute dollars in future periods based on an increase in personnel and professional services required to support our business activities.

~~Amortization of Intangible Assets.~~ Amortization of intangible assets relates to intangible assets resulting from our acquisitions of businesses and purchases of patents and other license rights, which will be amortized over their estimated useful lives. Amortization is included in cost of revenues, research and development, sales and marketing or general and administrative expenses based upon the nature of the intangible asset.

Taxes on ~~Income.~~Income

Our operations in Israel have been granted ~~“Approved Enterprise”~~"Approved Enterprise" status by the Investment Center of the Israeli Ministry of Economy and Industry (formerly, the Ministry of Industry, Trade and Labor) and ~~“Beneficiary Enterprise”~~"Beneficiary Enterprise" status by the Israeli Income Tax Authority, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the Beneficiary Enterprise program, income that is attributable to our operations in Yokneam, Israel will be exempt from income tax for a period of 10ten years commencing fiscal year 2011. Income that is attributable to our operations in Tel Aviv, Israel is subject to a reduced income tax rate (generally between 10% and the current corporate tax rate, depending on the percentage of foreign investment in the Company) for five to eight years beginning fiscal year 2013. The ~~Yokneam~~ tax holiday ~~is expected to~~for our Yokneam operations will expire in ~~2020~~2021 and the ~~Tel Aviv~~ tax holiday ~~is expected to~~for our Tel-Aviv operations will expire between the years 2017 and ~~2020.~~2021. The corporate tax rate ~~in Israel~~ was ~~increased to~~reduced from 26.5% in ~~2014.~~

2016 to 25%. Deferred tax assets and liabilities at December 31, 2015 were measured using the 26.5% tax rate. In 2016, we measured deferred tax assets and liabilities using the 25% tax rate. The immediate change in the corporate income tax rates from 26.5% to 25% resulted in a reduction of $1.3 million to our deferred tax assets and a corresponding increase in our income tax expense for the three months ended March 31, 2016.

To prepare our unaudited condensed consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, ~~allowances~~allowance for doubtful accounts, ~~sales returns~~fair value of financial instruments, inventory valuation, valuation and ~~allowances, investment valuation,~~impairment of goodwill, business combinations and acquired intangibles, warranty ~~reserves, inventory reserves,~~provision, share-based compensation, ~~expense, long-term asset valuations, goodwill~~contingent liabilities, and ~~purchased intangible asset valuation, hedge effectiveness, deferred~~ income ~~tax asset valuation, uncertain tax positions, litigation and other loss contingencies~~taxes have the greatest potential impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. ~~Note 2~~ For further information on all of our significant accounting policies, please see note 1, "The Company and Summary of Significant Accounting Policies," of the accompanying notes to ~~the~~our unaudited condensed consolidated financial ~~statements in~~statement.

See our Annual Report on Form 10-K for the year ended December 31, ~~2014,~~2015, filed with the SEC on ~~March 2, 2015, as updated as applicable in Note 1 to the unaudited condensed financial statements describes the significant~~February 26, 2016, for a discussion of additional critical accounting policies and ~~estimates used~~estimates. There have been no changes in our critical accounting policies as compared to what was disclosed in the ~~preparation of~~Form 10-K for the ~~consolidated financial statements.~~

year ended December 31, 2015.

Results of Operations

The following table sets forth our consolidated statements of operations as a percentage of revenues for the periods indicated:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2015

2014

2015

2014

Total revenues

100
%
100
%
100
%
100
%
Cost of revenues

29

33

29

33

Gross profit

71

67

71

67

Operating expenses:

Research and development

38

45

39

47

Sales and marketing

14

16

15

18

General and administrative

7

7

6

8

Total operating expenses

59

68

60

73

Income (loss) from operations

12

(1
)
11

(6
)
Other income (loss), net

—

—

—

—

Income (loss) before taxes

12

(1
)
11

(6
)
(Provision for) benefit from taxes on income

—

1

(1
)
—

Net income (loss)

12
%
—
%
10
%
(6
)%

Three Months Ended
March 31,
2016 2015
Total revenues 100
% 100
%
Cost of revenues 36
28

Gross profit 64
72

Operating expenses:
Research and development 36
40

Sales and marketing 16
15

General and administrative 14
7

Total operating expenses 66
62

(Loss) income from operations (2 ) 10

Interest expense (1 ) —

Other income (loss) 1
(2 )
Other loss, net —
(2 )
(Loss) income before taxes (2 ) 8

Provision for taxes on income (2 ) (1 )
Net (loss) income (4 ) % 7
%

Comparison of the Three Months Ended ~~September 30, 2015~~March 31, 2016 to the Three Months Ended ~~September 30, 2014~~March 31, 2015

The following ~~table represents~~tables represent our total revenues for the three months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ by product ~~category,~~type and interconnect ~~protocol and data rate:~~

Three Months Ended September 30,

% of

% of

Product category:

2015

Revenues

2014

Revenues

($ in thousands)

ICs

$
20,518

12.0
%
$
18,803

15.6
%
Boards

65,752

38.4
%
42,491

35.2
%
Switch and gateway systems

51,825

30.2
%
36,623

30.3
%
Cables, accessories and other

33,282

19.4
%
22,791

18.9
%
Total revenue

$
171,377

100
%
$
120,708

100
%

Three Months Ended September 30,

% of

% of

Interconnect protocol and data rate:

2015

Revenues

2014

Revenues

($ in thousands)

InfiniBand:

EDR

$
14,431

8.4
%
$
—

—

FDR

95,483

55.7
%
73,394

60.8
%
QDR/DDR/SDR

12,447

7.3
%
19,188

15.9
%
Total

122,361

71.4
%
92,582

76.7
%
Ethernet

35,459

20.7
%
19,660

16.3
%
Other

13,557

7.9
%
8,466

7.0
%
Total revenue

$
171,377

100
%
$
120,708

100
%

protocol:

Three Months Ended March 31,
2016
% of
Revenues
2015
% of
Revenues
(In thousands) (In thousands)
ICs $ 28,531
14.5
$ 29,307
20.0
Boards 92,932
47.2
58,506
39.9
Switch systems 43,823
22.3
34,467
23.5
Cables, accessories and other 31,524
16.0
24,395
16.6
Total Revenue $ 196,810
100.0
$ 146,675
100.0

Three Months Ended March 31,
2016 % of
Revenues 2015 % of
Revenues
(In thousands) (In thousands)
InfiniBand:

EDR $ 21,003
10.7
$ —
—
FDR 80,342
40.8
82,866
56.5
QDR/DDR/SDR 11,828
6.0
18,443
12.6
Total 113,173
57.5
101,309
69.1
Ethernet 68,625
34.9
34,680
23.6
Other 15,012
7.6
10,686
7.3
Total revenue $ 196,810
100.0
$ 146,675
100.0

Revenues. Revenues were ~~$171.4~~$196.8 million for the three months ended ~~September 30, 2015~~March 31, 2016 compared to ~~$120.7~~$146.7 million for the three months ended ~~September 30, 2014,~~March 31, 2015, representing an increase of ~~42.0%~~approximately 34%. The year-over-year revenue increase in 2016 from 2015 was primarily due to higher sales of ~~InfiniBand~~40Gb/s Ethernet products into Web2.0 and cloud markets and contribution of the ~~HPC market, as well as higher sales into the storage and EDC markets. In addition, the growth in revenues is attributed~~EZchip acquisition. Sales of Infiniband products also increased primarily due to increased sales ~~of our Ethernet products~~ into ~~Web 2.0~~HPC and ~~cloud~~Web2.0 markets. Revenues from ~~FDR and~~Infiniband EDR ~~InfiniBand~~ products increased as customers continued transitioning from ~~QDR~~FDR and lower data rates to the ~~later~~latest generation of products. ~~Revenues for the three months ended September 30, 2015~~The increase in other product revenues was primarily due to higher cable and component sales. The 2016 revenues are not necessarily indicative of future results.

Gross Profit and Margin.Gross profit was ~~$122.2~~$126.3 million for the three months ended ~~September 30, 2015~~March 31, 2016 compared to ~~$81.3~~$105.6 million for the three months ended ~~September 30, 2014,~~March 31, 2015, representing an increase of ~~50.3%~~approximately 20%. As a percentage of revenues, gross margin ~~increased~~decreased to ~~71.3%~~64.2% in the three months ended ~~September 30, 2015~~March 31, 2016 from ~~67.4%~~approximately 72% in the three months ended ~~September 30, 2014.~~March 31, 2015. The gross margin ~~improvement~~percentage change was primarily due to a $12.3 million increase in acquisition related costs. The gross margin decrease was also a result of ~~improved margins on switches and gateways systems and cables, and~~changes to product mix with a ~~decline in settlement costs.~~lower percentage of revenue attributable to ICs. Gross margin for ~~the three months ended September 30, 2015~~2016 is not necessarily indicative of future results.

Research and Development.

The following table presents details of our research and development expenses for the periods indicated:

Three Months Ended September 30,

2015

% of
Revenues

2014

% of
Revenues

($ in thousands)

Salaries and benefits

$
32,366

18.9
%
$
27,005

22.4
%
Share-based compensation

7,183

4.2
%
6,755

5.6
%
Development and tape-out costs

10,018

5.8
%
8,482

7.0
%
Other

16,294

9.5
%
11,978

9.9
%
Total Research and development

$
65,861

38.4
%
$
54,220

44.9
%



	Three Months Ended March 31,
	2016		% of Revenues		2015		% of Revenues
	(In thousands)				(In thousands)
Salaries and benefits	$	36,978	18.8	%	$	31,707	21.6	%
Share-based compensation	9,152		4.7	%	6,768		4.6	%
Development and tape-out costs	8,866		4.5	%	6,843		4.7	%
Other	16,038		8.1	%	12,800		8.7	%
Total Research and development	$	71,034	36.1	%	$	58,118	39.6	%

Research and development expenses were ~~$65.9~~$71.0 million infor the three months ended ~~September 30, 2015~~March 31, 2016 compared to ~~$54.2~~$58.1 million infor the three months ended ~~September 30, 2014,~~March 31, 2015, representing an increase of ~~21.5%~~$12.9 million, or approximately 22%. The increase in salaries and benefits ~~and share-based compensation~~expenses was primarily attributable to headcount additions from the EZchip acquisition, merit increases and higher accrued bonuses under our annual discretionary bonus ~~award~~ program. The increase in development and tape-out costs was attributable to ~~tape-outs~~increased mask manufacturing costs, material costs and ~~qualification~~equipment expenses as a result of our ~~new products.~~development activities. The increase in other ~~research and development costs was primarily attr~~i~~butable to~~reflects higher ~~other employee related~~professional service expenses, depreciation, and ~~amortization expenses.~~facilities costs. We expect that research and development expenses will increase in absolute dollars in future periods as we continue to devote more resources to develop new products, meet the changing requirements of our customers, ~~develop~~expand into new markets and technologies and hire additional personnel.

For a further discussion of share-based compensation included in research and development expense, see “Share-based Compensation Expense” below.

Sales and Marketing.

The following table presents details of our sales and marketing expenses for the periods indicated:

Three Months Ended September 30,

2015

% of
Revenues

2014

% of
Revenues

($ in thousands)

Salaries and benefits

$
14,713

8.6
%
$
10,520

8.7
%
Share-based compensation

2,621

1.5
%
2,472

2.0
%
Trade shows and promotions

3,989

2.3
%
2,386

2.0
%
Other

3,493

2.1
%
3,485

2.9
%
Total Sales and marketing

$
24,816

14.5
%
$
18,863

15.6
%



	Three Months Ended March 31,
	2016		% of Revenues		2015		% of Revenues
	(In thousands)				(In thousands)
Salaries and benefits	$	17,293	8.8	%	$	13,800	9.4	%
Share-based compensation	3,648		1.9	%	2,394		1.6	%
Trade shows and promotions	5,675		2.9	%	3,081		2.1	%
Other	4,612		2.3	%	3,283		2.3	%
Total Sales and marketing	$	31,228	15.9	%	$	22,558	15.4	%

Sales and marketing expenses were ~~$24.8~~$31.2 million for the three months ended ~~September 30, 2015~~March 31, 2016 compared to ~~$18.9~~$22.6 million for the three months ended ~~September 30, 2014,~~March 31, 2015, representing an increase of ~~31.6%~~$8.7 million, or approximately 38%. The increase in salaries and benefits expenses was primarily related to merit increases, higher accrued bonuses under our annual discretionary bonus program and headcount additions from the EZchip acquisition. The increase in trade show and promotions was due primarily to higher trade show exhibit costs, equipment expenses and travel costs. The increase in other primarily reflects higher amortization costs related to EZchip acquired intangible assets and facilities costs.

For a further discussion of share-based compensation included in sales and marketing expense, see “Share-based Compensation Expense” below.

General and Administrative.

The following table presents details of our general and administrative expenses for the periods indicated:



	Three Months Ended March 31,
	2016		% of Revenues		2015		% of Revenues
	(In thousands)				(In thousands)
Salaries and benefits	$	5,299	2.7	%	$	3,874	2.6	%
Share-based compensation	4,991		2.5	%	2,009		1.4	%
Professional services	15,757		8.0	%	2,426		1.6	%
Other	1,891		1.0	%	1,392		1.0	%
Total General and administrative	$	27,938	14.2	%	$	9,701	6.6	%

General and administrative expenses were $27.9 million for the three months ended March 31, 2016 compared to $9.7 million for the three months ended March 31, 2015, representing an increase of $18.2 million, or approximately 188%. The increase in salaries and benefits was primarily attributable to headcount additions, merit increases and higher accrued bonuses under our annual discretionary bonus award program. The increase in ~~trade shows and promotions~~professional services expenses was primarily ~~attributable to an increase in trade show and advertising fees and higher expenses~~ related to ~~equipment for customer product evaluations.~~

~~For a further discussion~~investment banking, consulting and other professional fees related to the EZchip acquisition of ~~share-based compensation included in sales~~$6.3 million, litigation settlement costs of $5.1 million and ~~marketing expense, see “Share-based Compensation Expense” below.~~

~~General and Administrative.~~

~~The following table presents details of our general and administrative expenses for the periods indicated:~~

Three Months Ended September 30,

% of

% of

2015

Revenues

2014

Revenues

($ in thousands)

Salaries and benefits

$
4,062

2.4
%
$
2,925

2.4
%
Share-based compensation

2,434

1.4
%
2,088

1.7
%
Professional services

2,928

1.7
%
2,881

2.4
%
Other

1,520

0.9
%
1,291

1.1
%
Total General and administrative

$
10,944

6.4
%
$
9,185

7.6
%

General and administrative expenses were $10.9 million for the three months ended September 30, 2015 compared to $9.2 million for the three months ended September 30, 2014, representing an increase of 19.1%. The increase in salaries and benefits was attributable to headcount additions, merit increases and higher accrued bonuses under our annual discretionary bonus award program.legal fees. The increase in other ~~costs~~expenses was primarily ~~due~~related to higher depreciation ~~expense.~~

and facilities costs.

For a further discussion of share-based compensation included in general and administrative expense, see “Share-based Compensation Expense” below.

Share-based Compensation Expense.

The following table ~~summarizes the distribution~~presents details of ~~total~~our share-based compensation expense that is included in ~~the~~each functional line item in our consolidated statements of ~~operations:~~

Three Months Ended
September 30,

2015

2014

(in thousands)

Cost of goods sold

$
592

$
532

Research and development

7,183

6,756

Sales and marketing

2,621

2,473

General and administrative

2,434

2,088

Total share-based compensation expense

$
12,830

$
11,849

income:



	Three Months Ended March 31,
	2016		2015
	(in thousands)
Cost of goods sold	$	475	$	547
Research and development	9,152		6,768
Sales and marketing	3,648		2,394
General and administrative	4,991		2,009
	$	18,266	$	11,718

Share-based compensation expenses were ~~$12.8~~$18.3 million for the three months ended ~~September 30, 2015,~~March 31, 2016, compared to ~~$11.8~~$11.7 million for the three months ended ~~September 30, 2014,~~March 31, 2015, representing an increase of ~~8.3%~~56%. In connection with the acquisition of EZchip in February 2016, we assumed 891,822 EZchip RSUs and converted them to 499,894 of Mellanox RSUs. The ~~increase in~~fair value of the RSUs was $23.2 million of which $1.0 million was recorded as purchase consideration attributable to pre-acquisition service and $22.2 million will be recognized as share-based compensation ~~expense~~over the remaining required service period of up to 2.25 years. During the three-months ended March 31, 2016, we recorded $4.8 million of stock-based compensation expenses related to the acceleration of EZchip RSUs for employees terminated on the closing date.

At March 31, 2016 there was primarily due to RSUs granted to existing employees in the first quarter of fiscal 2015 and RSU grants to new hires during fiscal year 2014 and 2015, partially offset by decreases from fully vested and cancelled options and RSUs.

~~At September 30, 2015, there were $90.5~~$153.2 million of total unrecognized share-based compensation costs related to non-vested share-based compensation arrangements. The ~~costs are~~weighted-average period over which the unearned share-based compensation is expected to be recognized ~~over a weighted average period~~is approximately 2.5 years. If there are any modifications or cancellations of ~~3.0 years.~~

the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional equity awards to employees or assume unvested equity awards in connection with other acquisitions.

Other ~~Income (Loss), Net.~~loss, net. Other ~~income (loss),~~loss net, consists of interest expense and other loss. Interest expense for the three months ended March 31, 2016 and 2015 of $1.0 million and $0, respectively, and was primarily comprised of interest and amortization of debt issuance costs related to the $280.0 million Term Debt entered into on February 22, 2016 in connection with the acquisition of EZchip. Other loss primarily consists of interest ~~earned~~income, impairment loss on ~~cash and cash equivalents and short-term investments, impairment losses on equity investments~~an investment in a private ~~companies,~~company and foreign currency exchange gains and ~~losses. Other income (loss), net~~losses and was ~~$0.4~~$0.9 million for the three months ended ~~September 30,~~March 31, 2016 compared to a loss of $2.5 million for the three months ended March 31, 2015. The change was primarily attributable to a $3.2 million impairment loss on an investment in a privately held company in the three months ended March 31, 2015, partially offset by interest income and ~~2014.~~

realized gains on short term investments.

Provision for Taxes on Income. ~~Provision~~Our provision for taxes on income was ~~$1.1~~$2.4 million for the three months ended ~~September 30, 2015,~~March 31, 2016 as compared to ~~a benefit for taxes on income of $1.2~~$2.2 million for the three months ended ~~September 30, 2014. The effective~~March 31, 2015.

On January 4, 2016 the Israeli Government legislated a reduction in the corporate income tax rate ~~was approximately 5.3%~~from 26.5% to 25%, effective in 2016. Deferred tax assets and ~~202.6%~~liabilities at December 31, 2015 were measured using the 26.5% tax rate. In 2016, we measured deferred tax assets and liabilities using the 25% tax rate. The immediate change in the corporate income tax rates from 26.5% to 25% resulted in a reduction of $1.3 million to our deferred tax assets and a corresponding increase in our income tax expense for the three months ended ~~September 30,~~March 31, 2016.

Our effective tax rate was (49.1%) and 17.6% for three months ended March 31, 2016 and 2015, ~~and 2014,~~ respectively. ~~The~~For the three months ended March 31, 2016, the difference between ~~our~~the (49.1%) effective tax ~~rates~~rate and the 35% federal statutory ~~rate~~ resulted primarily from ~~the tax holiday in Israel and foreign earnings taxed at rates lower than the federal statutory rates, partially offset by~~ the accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax positions, the reduction of our deferred tax assets resulting from the reduction in the Israeli corporate income tax as discussed above, non-tax-deductible expenses such as share-based compensation ~~expense~~ and losses generated from subsidiaries without tax ~~benefits.~~

benefit.

We assess our ability to recover our deferred tax assets on an ongoing basis. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, we consider available positive and negative evidence including its recent cumulative losses, our ability to carry-back losses against prior taxable income and its projected financial results. We also consider, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. A valuation allowance may be recorded in the event it is deemed to be more-likely-than-not that the deferred tax asset cannot be realized. Previously established valuation allowances may also be released in the event it is deemed to be more-likely-than-not that the deferred tax asset can be realized. Any release of valuation allowance will be recorded as a tax benefit which will

positively impact our operating results.

~~Comparison of~~ We believe, based on the ~~Nine Months Ended September 30, 2015 to the Nine Months Ended September 30, 2014~~

~~The following table represents our total revenues for the nine months ended September 30, 2015 and 2014 by product category, interconnect protocol and data rate:~~

Nine Months Ended September 30,

% of

% of

Product category:

2015

Revenues

2014

Revenues

($ in thousands)

ICs

$
78,806

16.4
%
$
46,119

14.3
%
Boards

188,319

39.1
%
103,262

32.0
%
Switch and gateway systems

128,319

26.7
%
103,462

32.1
%
Cables, accessories and other

85,756

17.8
%
69,690

21.6
%
Total revenue

$
481,200

100
%
$
322,533

100
%

Nine Months Ended September 30,

% of

% of

Interconnect protocol and data rate:

2015

Revenues

2014

Revenues

($ in thousands)

InfiniBand:

EDR

$
21,219

4.4
%
$
—

—

FDR

268,088

55.7
%
176,288

54.7
%
QDR/DDR/SDR

48,247

10.0
%
55,879

17.3
%
Total

337,554

70.1
%
232,167

72.0
%
Ethernet

109,124

22.7
%
58,065

18.0
%
Other

34,522

7.2
%
32,301

10.0
%
Total revenue

$
481,200

100
%
$
322,533

100
%

~~Revenues.~~ Revenues were $481.2 million for the nine months ended September 30, 2015 compared to $322.5 million for the nine months ended September 30, 2014, representing an increase of 49.2%. The year-over-year revenue increase was primarily due to higher sales of InfiniBand products into the HPC, storage, and EDC markets. In addition, the growth in revenuesquarterly assessment performed at March 31, 2016, that it is attributed to increased sales of our Ethernet products into Web 2.0 and cloud markets. Revenues from InfiniBand EDR, and FDR products increased as customers continued transitioning from QDR and lower data rates to the later generation products. Revenues for the nine months ended September 30, 2015 are not necessarily indicative of future results.

~~Gross Profit and Margin.~~ ~~Gross profit was $343.8 million for the nine months ended September 30, 2015 compared to $215.0 million for the nine months ended September 30, 2014, representing an increase of 59.9%. As~~possible that a ~~percentage of revenues, gross margin increased to 71.4%~~valuation allowance may be released in the ~~nine months ended September 30, 2015 from 66.7% in the nine months ended September 30, 2014. The gross margin improvement was primarily a result~~future if sustained levels of changes in the product mix, higher margins on switch gateways and cables, and lower amortization and acquisition-related costs. Gross margin for the nine months ended September 30, 2015 is not necessarily indicative of future results.

~~Research and Development.~~

~~The following table presents details of our research and development expenses for the periods indicated:~~

Nine Months Ended September 30,

% of

% of

2015

Revenues

2014

Revenues

($ in thousands)

Salaries and benefits

$
96,216

20.0
%
$
76,229

23.6
%
Share-based compensation

21,504

4.5
%
20,187

6.3
%
Development and tape-out costs

26,805

5.6
%
19,564

6.1
%
Other

42,030

8.7
%
36,083

11.1
%
Total Research and development

$
186,555

38.8
%
$
152,063

47.1
%

Research and development expenses were $186.6 million in the nine months ended September 30, 2015 compared to $152.1 million in the nine months ended September 30, 2014, representing an increase of 22.7%. The increase in salaries and benefits and share-based compensation was attributable to headcount additions, merit increases and higher accrued bonuses under our annual discretionary bonus award program. The increase in development and tape-out costs was attributable to tape-out and qualification costs for our new products. The increase in other research and development costs was primarily attributable to higher depreciation and amortization expenses, and other employee related expenses. We expect that research and development expenses will increase in absolute dollars in future periods as we continue to devote more resources to develop new products, meet the changing requirements of our customers, develop new technologies and hire additional personnel.

~~For a further discussion of share-based compensation included in research and development expense, see “Share-based Compensation Expense” below.~~

~~Sales and Marketing.~~

~~The following table presents details of our sales and marketing expenses for the periods indicated:~~

Nine Months Ended September 30,

% of

% of

2015

Revenues

2014

Revenues

($ in thousands)

Salaries and benefits

$
42,549

8.8
%
$
32,089

9.9
%
Share-based compensation

7,765

1.6
%
7,385

2.3
%
Trade shows and promotions

10,864

2.3
%
7,097

2.2
%
Other

9,562

2.0
%
10,294

3.2
%
Total Sales and marketing

$
70,740

14.7
%
$
56,865

17.6
%

Sales and marketing expenses were $70.7 million for the nine months ended September 30, 2015 compared to $56.9 million for the nine months ended September 30, 2014, representing an increase of 24.4%. The increase in salaries and benefits was attributable to headcount additions, merit increases and higher accrued bonuses under our annual discretionary bonus award program. The increase in trade shows and promotions expenses was primarily attributable to an increase in trade show and advertising fees and higher expenses related to equipment for customer product evaluations. The decrease in other expenses was primarily attributable to lower amortization costs of acquired intangible assets.

~~For a further discussion of share-based compensation included in sales and marketing expense, see “Share-based Compensation Expense” below.~~

~~General and Administrative.~~

~~The following table presents details of our general and administrative expenses for the periods indicated:~~

Nine Months Ended September 30,

% of

% of

2015

Revenues

2014

Revenues

($ in thousands)

Salaries and benefits

$
11,996

2.5
%
$
8,965

2.8
%
Share-based compensation

6,816

1.4
%
6,276

1.9
%
Professional services

8,229

1.7
%
8,237

2.6
%
Other

4,274

0.8
%
3,383

1.0
%
Total General and administrative

$
31,315

6.4
%
$
26,861

8.3
%

General and administrative expenses were $31.3 million for the nine months ended September 30, 2015 compared to $26.9 million for the nine months ended September 30, 2014, representing an increase of 16.6%. The increase in salaries and benefits was attributable to headcount additions, merit increases and higher accrued bonuses under our annual discretionary bonus award program. The increase in other expenses was primarily due to higher depreciation, facility and equipment expense.

~~For a further discussion of share-based compensation included in general and administrative expense, see “Share-based Compensation Expense” below.~~

~~Share-based Compensation Expense.~~

~~The following table summarizes the distribution of total share-based compensation expense in the consolidated statements of operations:~~

Nine Months Ended
September 30,

2015

2014

(in thousands)

Cost of goods sold

$
1,749

$
1,586

Research and development

21,504

20,187

Sales and marketing

7,765

7,385

General and administrative

6,816

6,276

Total share-based compensation expense

$
37,834

$
35,434

Share-based compensation expenses were $37.8 million for the nine months ended September 30, 2015, compared to $35.4 million for the nine months ended September 30, 2014, representing an increase of 6.8%. The increase in share-based compensation expense was primarily due to RSUs granted to existing employees in the first quarter of fiscal 2015 and RSU grants to new hires during fiscal years 2014 and 2015, partially offset by decreases from fully vested and cancelled options and RSUs.

~~Other Income (Loss), Net.~~ Other income (loss), net primarily consists of interest earned on cash and cash equivalents and short-term investments, impairment losses on equity investments in private companies, and foreign currency exchange gains and losses. Other (loss), net was $1.1 million for the nine months ended September 30, 2015 compared to other income, net of $1.0 million for the nine months ended September 30, 2014. The change was primarily attributable to a $3.2 million impairment loss on an investment in a privately held company, partially offset by an increase of $1.0 million in interest income and gains on investments due to higher cash and investment balances.

~~(Provision for)Benefit from Taxes on Income.~~ Provision for taxes on income was $4.4 million for the nine months ended September 30, 2015, compared to a benefit from taxes on income of $0.6 million for the nine months ended September 30, 2014. The effective tax rate was approximately 8.1% and 3.0% for the nine months ended September 30, 2015 and 2014, respectively. The difference between our effective tax rates and the 35% federal statutory rate resulted primarily from the tax holiday in Israel and foreign earnings taxed at rates lower than the federal statutory rates, partially offset by the accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax positions, non-tax-deductible expenses such as share-based compensation expense and losses generated from subsidiaries without tax benefits.

profitability are achieved.

Liquidity and Capital Resources

On September 30, 2015, we entered into a merger agreement with EZchip for a purchase price of approximately $811.0 million. The acquisition is subject to various closing conditions, regulatory approvals, and the approval of EZchip shareholders. We expect to finance the acquisition with cash on hand of the combined companies, and $300 million in fully committed term debt financing. The Credit Facility will consist of a variable interest rate $300 million senior secured loan for the term of three years. The Credit Facility will provide for an additional term loan borrowing of up to $100 million under certain conditions. The Credit Facility is upon closing the EZchip acquisition. We expect to close the transaction in the first quarter of 2016.

Historically, we have financed our operations through a combination of sales of equity securities and cash generated by operations. ~~At September 30, 2015,~~As of March 31, 2016, our principal ~~source~~sources of liquidity consisted of cash and cash equivalents of ~~$140.5~~$117.9 million and short-term investments of ~~$345.1~~$143.9 million. On February 23, 2016 we completed the acquisition of EZchip and acquired its cash of approximately $87.5 million and short term investments of $108.9 million. We ~~expect that our current~~financed the acquisition and related transaction expenses with cash ~~cash equivalents, short-term investments, committed Credit Facility~~on hand and ~~our cash flows operating activities will be sufficient~~with $280.0 million from a variable-interest rate three-year Term Debt. At March 31, 2016, the total amount of future payments related to ~~fund our operations over~~ the ~~next 12 months; after~~Term Debt was estimated at $297.9 million. After taking into consideration expected increases in operating expenses and increases in capital expenditures to support our infrastructure and growth, we expect our current cash and cash equivalents, short-term investments, cash flows from operating and financing activities will be sufficient to fund our operations and both our short-term and long-term liquidity requirements arising from interest, principal and commitment fee payments related to the ~~costs we anticipate~~Term Debt.

We are an Israeli company and as of March 31, 2016 our subsidiaries outside of Israel held approximately $14.2 million in ~~conjunction with the acquisition of EZchip.~~

cash and cash equivalents and short term investments.

Our cash position, short-term investments, ~~restricted~~ cash and working capital at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 were as follows:

September 30, 2015

December 31, 2014

(in thousands)

Cash and cash equivalents

$
140,511

$
51,326

Short-term investments

345,091

334,038

Restricted cash, current

—

3,604

Total

$
485,602

$
388,968

Working capital

$
507,128

$
398,862



	March 31, 2016		December 31, 2015
	(in thousands)
Cash and cash equivalents	$	117,912	$	263,199
Short-term investments	143,926		247,314
Total	$	261,838	$	510,513
Working capital	$	262,744	$	540,108

Our ratio of current assets to current liabilities was ~~5.0:~~2.3:1 at ~~September 30, 2015 compared to 4.4:~~March 31, 2016 and 4.9:1 at December 31, ~~2014.~~

~~Cash flows~~

Nine Months Ended

September 30,
2015

September 30,
2014

(in thousands)

Net cash provided by (used in):

Operating activities

$
115,797

$
35,150

Investing activities

(42,759
)
(57,987
)
Financing activities

16,147

14,525

Net increase (decrease) in cash and cash equivalents

$
89,185

$
(8,312
)

2015.

Operating ~~activities~~

Activities

Net cash provided by our operating activities amounted to ~~$115.8~~$48.6 million in the ~~nine~~three months ended ~~September 30, 2015.~~March 31, 2016. Net cash provided by our operating activities ~~in the nine months ended September 30, 2015~~ was ~~primarily~~ attributable to ~~net income of $49.7 million adjusted by~~ net non-cash items of ~~$69.4~~$40.3 million and changes in assets and liabilities of $15.5 million, partially offset by a net loss of $7.2 million. Non-cash expenses consisted primarily of $20.6 million of depreciation and amortization, $18.3 million of share-based compensation, and $1.3 million of deferred income taxes. The $15.5 million cash inflow from changes in assets and liabilities, excluding the changes to the assets and liabilities as a result of the EZchip acquisition, is attributed to a $10.2 million increase in accrued liabilities and other payables, primarily related to withholding tax liabilities, a decrease in inventory of $4.4 million, an increase in accounts payable of $3.3 million, and a decrease in prepaid expenses and other assets of $2.3 million. These increases were partially offset by a decrease in accounts receivable of $4.7 million, primarily due to the timing of sales.

Net cash provided by our operating activities amounted to $45.8 million in the three months ended March 31, 2015. Net cash provided by our operating activities was primarily attributable to net income of $10.5 million adjusted by net non-cash items of $24.2 million and changes in assets and liabilities of $11.1 million. The non-cash items consisted primarily of ~~$37.8~~$11.7 million of share-based compensation ~~$30.5~~and $9.5 million offor depreciation and ~~amortization, and $3.2 million of loss on impairment of an equity investment in a private company, partially offset by gains on investments of $2.2 million.~~amortization. The ~~$3.3~~$11.1 million cash ~~decrease~~inflow from changes in assets and liabilities resulted primarily from a decrease in accounts receivable of $9.0 million primarily due to the timing of sales, an increase of $6.3 million in accrued and other liabilities, an increase in deferred revenue by $2.7 million and a decrease in prepaid expenses and other assets of $3.9 million, partially offset by an increase in inventories of ~~$24.0~~$8.7 million as a result of our effort to fulfill forecasted sales and ~~in prepaid expenses and other assets of $0.5 million, which were partially offset by an increase~~a decrease in accounts payable of $2.1 million primarily due to the timing of ~~payments, and an increase of $18.8 million in accrued and other liabilities primarily due to increased deferred revenue.~~

payments.

Investing Activities

Net cash ~~provided by our operating~~used in investing activities ~~amounted to $35.2~~was $477.1 million in the ~~nine~~three months ended ~~September 30, 2014. Net~~March 31, 2016. Cash used in investing activities was primarily attributable to $681.2 million net cash ~~provided by operating activities consisted~~used to acquire EZchip and $8.3 million for purchases of ~~a net loss of $19.3 million~~property and ~~changes in assets and liabilities of $9.4 million,~~equipment. These uses were partially offset by net ~~non-cash items~~sales and maturities of ~~$63.8~~short-term investments of $212.7 million. Non-cash expenses consisted primarily of $35.4 million of share-based compensation and $29.0 million for depreciation and amortization. The $9.4 million cash outflow from changes in assets and liabilities resulted from an increase in inventories of $3.7 million, an increase in prepaid expenses and other assets by $10.0 million primarily due to the timing of VAT receivables, an increase in accounts receivable of $2.2 million and a decrease in accrued liabilities and other payables of $1.2 million, partially offset by an increase in accounts payable of $7.8 million.

~~Investing activities~~

Net cash used by investing activities was ~~$42.8~~$42.4 million in the ~~nine~~three months ended ~~September 30,~~March 31, 2015. Cash used by investing activities was primarily attributable to $219.5 million in purchases of short-term investments offset by $210.8 million in proceeds from the sale of short-term investments, the release of restricted cash of $3.6 million, purchases of property and equipment of $37.0 million, and $0.6 million purchases of severance-related insurance policies.

~~Net cash used by investing activities was $58.0 million in the nine months ended September 30, 2014.~~ Cash used by investing activities was primarily attributable to net purchases of short-term investments of ~~$32.4~~$32.7 million and purchases of property and equipment of ~~$21.2 million and an equity investment of $3.7~~$9.5 million.

Financing Activities

Net cash provided by financing activities was $283.2 million in ~~a private company.~~

~~Financing~~the three months ended March 31, 2016. Cash provided by financing activities

was primarily due to $280.0 million proceeds from the Term Debt and $9.0 million from share option exercises and purchases pursuant to our employee share purchase plan. These were offset by $5.5 million debt issuance costs and $0.3 million principal payments on capital lease obligations.

Our financing activities generated ~~$16.1~~$6.9 million in the ~~nine~~three months ended ~~September 30,~~March 31, 2015. Cash provided by financing activities was primarily due to proceeds of ~~$17.0~~$7.2 million from ~~the exercise of~~ share ~~awards,~~option exercises and purchases pursuant to our employee share purchase plan, partially offset by principal payments on capital lease obligations of ~~$0.8~~$0.3 million.

Our financing activities generated $14.5 million in the nine months ended September 30, 2014. Cash provided by financing activities was primarily due to proceeds of $15.3 million from the exercise of share awards, partially offset by principal payments on capital lease obligations of $1.1 million.

~~Off-Balance Sheet Arrangements~~

~~None.~~

Contractual Obligations

The following table summarizes our contractual obligations at ~~September 30, 2015,~~March 31, 2016 and the effect those obligations are expected to have on our liquidity and cash ~~flows~~flow in future periods:

Payments Due by Period

Contractual Obligations:

Total

Less Than
1 Year

1-3 Years

3-5 Years

Beyond 5 Years

(in thousands)

Commitments under capital lease

$
765

$
765

$
—

$
—

$
—

Non-cancelable operating lease

44,359

6,051

22,239

10,401

5,668

Purchase commitments

69,308

53,828

15,480

—

—

Total

$
114,432

$
60,644

$
37,719

$
10,401

$
5,668

~~For purposes of this table, purchase obligations for the purchase of goods or services~~



			Payments Due by Period
Contractual Obligations:	Total		1 Year		1 - 3 Years		3 - 5 Years		Beyond 5 Years
	(in thousands)
Commitments under capital lease	$	223	$	223	$	—	$	—	$	—
Non-cancelable operating lease commitments	59,945		19,793		26,298		13,507		347
Purchase commitments	135,558		123,937		11,602		19		—
Term Debt, including interest⁽¹⁾	297,934		34,513		263,421		—		—
Total	$	493,660	$	178,466	$	301,321	$	13,526	$	347

(1) $28.0 million of the Term Debt is classified as a current liability on our unaudited condensed consolidated balance sheet as of March 31, 2016. For more information about the Term Debt, see note 13 of the notes to the condensed consolidated financial statements.

Purchase commitments. Purchase commitments are defined as agreements that are enforceable and legally binding and that specify all significant terms including: fixed or minimum ~~purchase quantities;~~quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within relatively short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Term Debt. Term Debt commitment represents principal, interest and fees payable for the Term Debt.

The contractual obligation table excludes ~~our~~ unrecognized tax ~~benefit liabilities~~benefits because we cannot make a reliable estimate of the timing of cash payments. ~~At September 30, 2015,~~As of March 31, 2016, our unrecognized tax benefits totaled ~~$23.0~~$36.3 million, which would reduce our income tax expense and effective tax rate, if recognized.

Recent ~~Accounting Standards~~

accounting pronouncements

See ~~Note~~note 1, ~~“The~~"The Company and Summary of Significant Accounting Policies—Recent accounting ~~pronouncements”~~pronouncements" of the ~~Notes~~notes to the ~~Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report,~~unaudited condensed consolidated financial statements, for a full description of recent accounting standards, including the respective dates of adoption and effects on our ~~unaudited condensed~~ consolidated financial position, results of operations and cash flows.

Off-Balance Sheet Arrangements

As of March 31, 2016, we did not have any off-balance sheet arrangements.

Impact of Currency Exchange Rates

We are exposed to currency exchange rate risk, and generally hedge our exposures with derivative contracts. Our revenue is transacted in U.S. dollars; however, a significant amount of our operating expenditures is incurred in or exposed to other currencies, primarily the Israeli shekel, ("NIS). We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in the fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. Our non U.S.-dollar-denominated net liabilities, which are primarily employee benefit and income tax related liabilities, are generally hedged with offsetting currency forward contracts. A portion of our non U.S.-dollar operating expenses denominated in NIS are generally hedged with foreign currency forward contracts or currency option contracts. These programs reduce, but do not eliminate, the impact of currency exchange movements. We do not enter into derivative transactions for speculative

or trading purposes. See note 7, "Derivatives and Hedging Activities," of the notes to the unaudited condensed consolidated financial statements.

ITEM ~~3 —~~ 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest ~~Rate Fluctuation Risk~~

We do not have any long-term borrowings. As more fully disclosed in Note 7-Commitments and Contingencies of the Notes to the unaudited condensed consolidated financial statements, the Company entered into an agreement to merge with EZchip. We expect to fund the merger partially with a $300.0 million variable interest term loan, for which the quantifiable interest rate fluctuation risk ~~is determinable at the close of the loan, expected to occur during the first quarter of 2016.~~

Investments. Our investments consist of cash and cash equivalents, time deposits, money market funds and interest bearing investments in government debt securities, commercial paper and corporate bonds with an average ~~remaining~~ maturity of ~~approximately~~ 12 months. The primary objective of our investment activities is to preserve principal and ensure liquidity while maximizing income without significantly increasing risk. By policy, we limit the amount of our credit exposure through diversification and restricting our investments to highly rated securities. At the time of purchase, we do not invest more than 4% of the total investment portfolio in individual securities, except U.S. Treasury or agency securities. Highly rated long-term securities are defined as having a minimum ~~Moody’s,~~Moody's, Standard & ~~Poor’s~~Poor's or Fitch rating of A2 or A, respectively. Highly rated short-term securities are defined as having a minimum ~~Moody’s,~~Moody's, Standard & ~~Poor’s~~Poor's or Fitch rating of P-1, A-1 or F-1, respectively. We have not experienced any significant losses on our cash equivalents or short-term investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not believe an immediate 1% change in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

Term Debt. At March 31, 2016 we had $280.0 million in principal of variable-interest rate Term Debt outstanding. The impact to our interest expense and pre-tax earnings over the next twelve months, based on hypothetical increases or decreases in LIBOR is as follows:

Hypothetical Change in Interest Rate
Increase (Decrease) of X Basis Points (bps)
150 bps 100 bps 50 bps (25 bps)
(in thousands)
Interest expense on Term Debt $ 4,099
$ 2,733
$ 1,366
$ (683 )

The modeling technique used above measures the change in interest expense arising from selected potential changes in LIBOR. Market changes reflect immediate hypothetical parallel shifts in the yield curve of minus 25 basis points, plus 50 basis points, plus 100 basis points, and plus 150 basis points, which are representative of potential movements in the U.S. Federal Funds rate and the Euro Dollar Rate.

Foreign ~~Currency Exchange Risk~~

currency exchange risk

We derive all of our revenues in U.S. dollars. The U.S. dollar is our functional and reporting currency in all of our foreign locations. However, a significant portion of our headcount related expenses, consisting principally of salaries and related personnel ~~expenses,~~ and ~~our Israeli facility~~facilities expenses, are denominated in new Israeli shekels, or ~~“NIS”.~~NIS. This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the NIS. Furthermore, we anticipate that a material portion of our expenses will continue to be denominated in NIS. To the extent the U.S. dollar weakens against the NIS, we will experience a negative impact on our net income.

To protect against reductions in ~~the~~ value and the volatility of future cash flows caused by changes in foreign currency exchange rates, we have established a balance sheet and anticipated transaction risk management program. Currency derivative ~~contracts~~instruments and natural hedges are generally utilized in this hedging program. We do not enter into derivative ~~contracts~~instruments for trading or speculative purposes. Our hedging program reduces, but does not eliminate the impact of currency exchange rate movements (see Part ~~II,~~I, Item 1A, ~~“Risk Factors”~~"Risk Factors"). If we were to experience a strengthening of USD against NIS of 10% ~~change in currency exchange rates,~~, the impact on assets and liabilities denominated in ~~currencies other than the U.S. dollar,~~NIS, after taking into account hedges and offsetting positions, would result in a loss before taxes of approximately ~~$1.3~~$0.4 million at ~~September 30, 2015.~~March 31, 2016. There would also be an impact on future operating expenses denominated in currencies other than the U.S. dollar. ~~At September 30, 2015, the notional value~~As of ~~the~~March 31, 2016, we had derivative contracts ~~was~~in place of approximately 506.9 million NIS, ~~438.7 million,~~ or approximately ~~$111.8~~$134.2 million based upon the exchange rate ~~at September 30, 2015.~~on that day. The derivative contracts cover a significant portion of future NIS denominated operating expenses expected to occur over the next 12twelve months. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading the risk across a number of major financial institutions. However, under current market conditions, failure of one or more of these financial institutions is possible and could result in incurred losses.

Inflation related risk

We believe that the rate of inflation in both Israel and the United States has not had a material impact on our business to date. Our cost in Israel in U.S. dollar terms will increase if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.

ITEM ~~4 —~~ 4—CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the ~~“Exchange Act”~~"Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the ~~SEC’s~~SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO (principal executive officer) and CFO (principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures ~~at September 30, 2015. Per~~as of March 31, 2016. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were ~~not~~ effective ~~at September 30, 2015 because of the material weaknesses in our internal control over financial reporting described below.~~

~~Previously Identified Material Weaknesses in Internal Control Over Financial Reporting~~

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014 the following control deficiencies that constituted material weaknesses in our internal control over financial reporting at December 31, 2014, which still existed at September 30, 2015.

· Control Environment - We did not maintain an effective control environment as we lacked sufficient oversight of activities related to our internal control over financial reporting. In addition, we did not maintain a sufficient complement of personnel with an appropriate level of knowledge, experience and training in internal control over financial reporting commensurate with our financial reporting requirements. As a result this contributed to the following material weaknesses in risk assessment and monitoring.

· Risk Assessment - We did not appropriately design controls in response to the risk of misstatement. This material weakness contributed to the following control deficiencies, which are considered material weaknesses:

· We did not design, document and maintain effective controls over our period-end financial reporting processes, including controls over the preparation, analysis and review of certain significant account reconciliations required to assess the appropriateness of account balances at period-end; and controls over the preparation and review of the consolidated interim and annual financial statements, including effective controls related to identifying and accumulating all required supporting information to determine the completeness and accuracy of the consolidated financial statements and disclosures.

· We did not design, document and maintain effective controls with respect to the accounting for revenue and related accounts receivable, including maintaining effective controls to prevent or detect errors in the processing of customer transactions. Specifically, we had insufficient controls related to the review of the accuracy of customer order entry and pricing.

· We did not design, document and maintain effective controls with respect to the accounting for inventory and related cost of sales accounts. Specifically, our controls over perpetual inventory records, which include our cycle count and annual physical inventory programs, were not appropriately designed or executed to validate the existence, completeness and accuracy of physical inventory quantities. In addition, we did not appropriately design controls related to the validation of assumptions used in the calculation of the provision for excess and obsolete inventory, as well as the completeness and accuracy of the underlying data used in the calculation.

· We did not design, document and maintain effective controls over access to the Company’s financial applications and data. Specifically, access review controls were not effectively designed to validate that access to certain financial applications and data were adequately restricted, which impacted controls that were dependent on the effective operation of restricted access.

· Monitoring - We did not design and maintain effective monitoring controls related to the design and operating effectiveness of certain controls involving an inherent level of complexity, subjectivity, and judgment related to the following business processes: revenue and accounts receivable, purchases and payables, period-end financial reporting, goodwill, intangible and finite-lived assets, hedging, income taxes, business combinations, and stock-based compensation. Specifically, we did not maintain sufficient documentation or perform a sufficient review of the control activities due to an insufficient complement of personnel with an appropriate level of experience, training, and lines of reporting necessary to monitor control activities to allow for an effective internal control over financial reporting compliance group.

While these material weaknesses did not result in any material misstatement of our historical financial statements, they did result in adjustments to the accounting for business combinations, net revenue, accounts receivable, accrued liabilities, cost of revenues, and operating expenses and revisions to our consolidated financial statements for fiscal years 2013 and 2012, and interim periods in 2014, 2013 and 2012. Additionally, these material weaknesses could result in a misstatement of the account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

~~Status of Remediation Efforts~~

~~Ongoing remediation efforts~~

In response to the identified material weaknesses, our management, with oversight from our audit committee, has dedicated significant resources and efforts to improve our control environment and to remedy the identified material weaknesses. The following actions have been taken:

· Expanded and strengthened our internal audit organization, which reports directly to our audit committee, by hiring an Internal Audit Director as well as increasing the number of staff and external consultants engaged by our internal audit organization;

· Devoted substantial effort in performing a comprehensive risk assessment process to identify, design, implement, and re-evaluate our control activities related to internal control over financial reporting, including monitoring controls related to the design and operating effectiveness of certain control activities;

· ~~Instituted additional training programs for our world-wide finance and accounting personnel; and~~

· ~~Strengthened procedures and set guidelines for documentation of review controls throughout our domestic and international locations for consistency of application.~~

~~Actions taken during the current quarter~~

· During the quarter ended September 30, 2015, we substantially completed the comprehensive risk assessment of the design of existing controls and implemented new controls as needed to remediate the previously identified material weaknesses. However, as we have yet to complete the testing and evaluation of the effectiveness of the controls, management concluded that the material weaknesses described above have not been remediated as of March 31, 2016 to provide the ~~date of this report.~~

We believe that the foregoing actions will support the improvement of our internal control over financial reporting, and through our efforts to identify, design and implement the necessary control activities, will be effective in remediating the material weaknessesreasonable assurance described above. We will continue to devote significant time and attention to these remediation efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address the material weaknesses or determine to modify the remediation plan described above. Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are fully completed, the material weaknesses described above will continue to exist.

Changes in Internal Control Over Financial Reporting

~~Except as described above, there~~

There were no changes in our internal control over financial reporting that occurred during the ~~Company’s fiscal~~ quarter ended ~~September 30, 2015~~March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM ~~1 —~~ 1—LEGAL PROCEEDINGS

See ~~Note 7, “Commitments~~note 8, "Commitments and Contingencies—Legal ~~proceedings”~~proceedings" of the ~~Notes~~notes to the ~~Unaudited Condensed Consolidated Financial Statements,~~unaudited condensed consolidated financial statements, included in Part I, Item 1 of this report, for a full description of legal proceedings and related contingencies and their effects on our ~~condensed~~ consolidated financial position, results of operations and cash flows.

We may, from time to time, become a party to various other legal proceedings arising in the ordinary course of business. We may also be indirectly affected by administrative or court proceedings or actions in which we are not involved, but which have general applicability to the semiconductor industry.

ITEM ~~1A —~~ 1A—RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors, in addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2014,~~2015, the other information set forth in this report, and ~~our~~ other filings with the SEC, before purchasing our ordinary shares. Each of these risk factors could harm our business, financial condition or operating results, as well as decrease the value of an investment in our ordinary shares.

~~There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, except for the following:~~

Risks Related to Our Business

We depend on a small number of customers for a significant portion of our sales, and the loss of any one of these customers will adversely affect our revenues.

A small number of customers account for a significant portion of our revenues. For the three months ended ~~September 30, 2015,~~March 31, 2016, sales to Hewlett-Packard accounted for ~~14%~~20% of our total revenues, while sales to our top 10ten customers accounted for ~~58%~~64% of our revenues. For the three months ended ~~September 30, 2014,~~March 31, 2015, sales to Hewlett-Packard ~~Dell and IBM accounted for 15%, 11% and 11%, respectively,~~12% of our total revenues, while sales to our top 10ten customers accounted for ~~62%~~60% of our revenues. ~~For~~Because the year ended December 31, 2014, sales to Hewlett-Packard, Dell and IBM accounted for 11%, 11% and 10%, respectively, of our total revenues, while sales to our top 10 customers accounted for 62% of our revenues. The majority of servers, storage, communications infrastructure equipment and embedded systems are sold by a relatively small number of ~~vendors. Increasingly, large Web 2.0 and cloud customers directly purchase our products for custom equipment they design. We~~vendors, we expect that we will continue to depend on a small number of customers to account for a significant percentage of our revenues for the foreseeable future. Our customers, including our most significant customers, are not obligated by long-term contracts to purchase our products and may cancel orders with limited potential penalties. If any of our large customers reduces or cancels its purchases from us for any reason, it could have an adverse effect on our revenues and results of operations.

~~We have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating results.~~

Our growth depends upon market growth, our ability to enhance our existing products, and our ability to introduce new products on a timely basis. We intend to continue to address the need to develop new products and enhance existing products through acquisitions of other companies, product lines, technologies, and personnel. In September 2015, we entered into an agreement of merger with EZchip Semiconductor, Ltd. Acquisitions may involve numerous risks, including the following:

· difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired companies, particularly companies with large and widespread operations and/or complex products,

· ~~the diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions,~~

· ~~potential difficulties in completing projects associated with in-process research and development intangibles and,~~

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

~~This anticipated acquisition of EZchip may also cause us to:~~

· ~~use a substantial portion of our cash resources and incur significant amounts of debt under the Credit Facility in order to finance the acquisition of EZchip,~~

· ~~significantly increase our interest expense, leverage and debt service requirements as a result of incurring debt under the Credit Facility to finance the EZchip,~~

· ~~assume liabilities of EZchip,~~

· ~~record certain goodwill and intangible assets that are subject to impairment testing on a regular basis, which could lead to potential periodic impairment charges,~~

· ~~incur amortization expenses related to certain intangible assets,~~

· ~~incur tax expenses related to the effect of acquisitions on our intercompany cost sharing arrangements and legal structure,~~

· ~~incur large and immediate write-offs and restructuring and other related expenses and,~~

· ~~become subject to intellectual property disputes or other litigation.~~

~~Risks Related to Our Indebtedness~~

Leverage incurred in connection with the acquisition of EZchip could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent the interest rate on our variable rate debt increases and prevent us from meeting our obligations under the terms of the Credit Facility.

As a result of the acquisition of EZchip and the related Credit Facility, we expect to become more leveraged than we have been historically. As of September 30, 2015, we did not have any debt for borrowed money on our balance sheet. After giving effect to the acquisition of EZchip, we expect to have borrowed $300.0 million under the Credit Facility. ~~Our substantial indebtedness could have more important consequences, including:~~

· ~~increasing our vulnerability to adverse general economic and industry conditions;~~

· requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy, acquisitions and other general corporate purposes;

· ~~limiting our flexibility in planning for, or reacting to, changes in the economy and the semiconductor industry;~~

· ~~placing us at a competitive disadvantage compared to our competitors with less indebtedness;~~

· ~~exposing us to interest rate risk to the extent of our variable rate indebtedness; and~~

· ~~making it more difficult to borrow additional funds in the future to fund growth, acquisitions, working capital, capital expenditures and other purposes.~~

~~The Credit Facility will become due and payable three years after the closing of the~~ acquisition of EZchip. In addition, if we were to experience a change of control, this would trigger an event of default under the Credit Facility, which would permit the lenders to immediately declare the loans due and payable in whole or in part. In either such event, we may not have sufficient available cash to repay such debt at the time it becomes due, or be able to refinance such debt on acceptable terms or at all. Any of the foregoing could materially and adversely affect our business, financial condition and results of operations.

For more information on the Credit Facility, see Note 7—Commitments and Contingencies in the notes to the unaudited condensed consolidated financial statements, included in Part I, Item 1 of this report.

~~Our Credit Facility is expected to impose certain restrictions on our business.~~

The Credit Facility is expected to contain a number of covenants imposing certain restrictions on our business. These restrictions may affect our ability to operate our business and to take advantage of potential business opportunities as they arise. The restrictions placed on us include limitations on our ability to:

· ~~incur additional indebtedness and issue preferred or redeemable shares;~~

· ~~incur or create liens;~~

· ~~consolidate, merge or transfer all or substantially all of our assets;~~

· ~~make investments, acquisitions, loans or advances or guarantee indebtedness;~~

· ~~engage in sale and lease back transactions;~~

· ~~pay dividends or make other distributions on, redeem or repurchase shares or make other restricted payments; and~~

· ~~engage in transactions with affiliates.~~

The foregoing restrictions could limit our ability to plan for, or react to, changes in market conditions or our capital needs. We do not know whether we will be granted waivers under, or amendments to, the Credit Facility if for any reason we are unable to meet these requirements, or whether we will be able to refinance our indebtedness on terms acceptable to us, or at all.

The breach of any of these covenants or restrictions could result in a default under the Credit Facility. In addition, the Credit Facility will contain cross-default provisions that could result in an acceleration of amounts outstanding under the Credit Facility if certain events of default occur under any of our material debt instruments. If we are unable to repay these amounts, lenders having secured obligations, including the lenders under the Credit Facility, could proceed against the collateral securing that debt. Any of the foregoing would have a material adverse effect on our business, financial condition, and results of operations.

~~Servicing the debt incurred under the Credit Facility will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.~~

Our ability to make scheduled payments of the principal of, to pay interest on, and to refinance our debt, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under the Credit Facility and any future indebtedness we may incur and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our outstanding indebtedness or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, when needed, which could result in a default on our indebtedness.

~~Risks Related to Anticipated Acquisitions~~

~~The failure to complete our acquisition of EZchip may adversely affect our business and our share price.~~

Our and EZchip’s obligations to consummate the EZchip acquisition are subject to the approval of EZchip’s shareholders and the satisfaction or waiver of certain customary conditions, including, among other things, the receipt of certain regulatory approvals. The Company currently anticipates that the EZchip acquisition will be completed during the first quarter of 2016; however there can be no assurance that these conditions to the completion of the EZchip acquisition will be satisfied in a timely manner or at all. If our acquisition of EZchip is not completed, our share price could fall to the extent that our current price reflects an assumption that we will complete the acquisition. Furthermore, if the acquisition is not completed, we may suffer other consequences that could adversely affect our business, results of operations and share price, including the following:

· ~~we would have incurred significant costs in connection with the EZchip acquisition (including in respect of the Credit Facility) that we would be unable to recover;~~

· ~~we may be subject to legal proceedings related to the failure to complete the acquisition;~~

· ~~the failure to consummate the acquisition may result in negative publicity and a negative impression of us in the investment community; and~~

· any disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, vendors and employees, may continue or intensify in the event the acquisition is not consummated.

~~We may fail to realize the benefits expected from the EZchip acquisition, which could adversely affect the value of our ordinary shares.~~

Although we expect significant benefits to result from the EZchip acquisition, there can be no assurance that we will actually realize these or any other anticipated benefits of the EZchip acquisition. The value of our ordinary shares following completion of the EZchip acquisition may be affected by our ability to achieve the benefits expected to result from the EZchip acquisition. Achieving the benefits of the EZchip acquisition will depend, in part, on our ability to integrate the business of EZchip successfully and efficiently with our business. The challenges involved in this integration, which will be complex and time-consuming, include the following:

· demonstrating to our customers and the customers of EZchip that the EZchip acquisition will not adversely affect our ability to address the needs of customers or the loss of attention or business focus;

· ~~coordinating and integrating independent research and development and engineering teams across technologies and product platforms to enhance product development while reducing costs;~~

· ~~consolidating and integrating corporate, information technology, finance and administrative infrastructures;~~

· ~~coordinating sales and marketing efforts to effectively position our capabilities and the direction of product development; and~~

· ~~minimizing the diversion of management attention from important business objectives.~~

If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business of the size and complexity of EZchip, then we may not achieve the anticipated benefits of the EZchip acquisition and our revenue, expenses, operating results and financial condition could be materially adversely affected. For example, goodwill and other intangible assets could be determined to be impaired, which could adversely impact our financial results. The successful integration of the EZchip business is likely to require significant management attention both before and after the completion of the EZchip acquisition, and may divert the attention of management from our business and operational issues.

In addition, we would not realize any of the expected benefits of having completed the EZchip acquisition. The pending EZchip acquisition, if completed, will be our largest acquisition to date, by a significant margin. The benefits we expect to realize from the EZchip acquisition are based on projections and assumptions about the combined businesses of the Company and EZchip, which may not materialize or which may prove to be inaccurate.

~~Risks Related to Operations in Israel and Other Foreign Countries~~

We are susceptible to additional risks from our international operations.

We derived ~~45%~~51% and ~~49%~~53% of our revenues in the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively from sales outside of North America. As a result, we face additional risks from doing business internationally, including:

reduced protection of intellectual property rights in some countries;

difficulties in staffing and managing foreign operations;

longer sales and payment cycles;

greater difficulties in collecting accounts receivable;

adverse economic conditions;

seasonal reductions in business activity;

potentially adverse tax consequences;

laws and business practices favoring local competition;

costs and difficulties of customizing products for foreign countries;

compliance with a wide variety of complex foreign laws and treaties;

compliance with the United ~~States’~~States' Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions;

compliance with export control and regulations;

licenses, tariffs, other trade barriers, transit restrictions and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;

restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments;

foreign currency exchange risks;

fluctuations in freight rates and transportation disruptions;

political and economic instability;

variance and unexpected changes in local laws and regulations;

natural disasters and public health emergencies; and

trade and travel restrictions.

A significant legal risk associated with conducting business internationally is compliance with various and differing anti-corruption and anti-bribery laws and regulations of the countries in which we do business, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in China. In addition, the anti-corruption laws in various countries are constantly evolving and may, in some cases, conflict with each other. Our Code of Ethics and Business Conduct and other policies prohibit us and our employees from offering or giving anything of value to a government official for the purpose of obtaining or retaining business and from engaging in unethical business practices, including kick-backs to or from purely private parties. However, there can be no assurance that all of our employees or agents will refrain from acting in violation of such laws and our related anti-corruption policies and procedures. Any violations of these anti-corruption or trade control laws, or even allegations of such ~~violation~~violations, can lead to an investigation, which could disrupt our operations, involve significant management distraction, and lead to significant costs and expenses, including legal fees. If we, or our employees or agents acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, and other consequences that may have a material adverse effect on our ~~business.~~

business, financial condition and results of operations. In addition, our reputation, sales activities or stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery, or trade control laws and regulations.

Our principal research and development facilities are located in Israel, and our directors, executive officers and other key employees are located primarily in Israel and the United States. In addition, we engage sales representatives in various countries throughout the world to market and sell our products in those countries and surrounding regions. If we encounter any of the above risks in our international operations, we could experience slower than expected revenue growth and our business could be harmed.

The government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs.

Some of our operations in Israel have been granted "Approved Enterprise" and "Beneficiary Enterprise" status by the Investment Center in the Israeli Ministry of Economy and Industry (formerly the Ministry of Industry, Trade and Labor) and the Israeli Income Tax Authority, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. The availability of these tax benefits is subject to certain requirements, including, among other things, making specified investments in fixed assets and equipment, financing a percentage of those investments with our capital contributions, complying with our marketing program which was submitted to the Investment Center, filing of certain reports with the Investment Center, limiting manufacturing outside of Israel and complying with Israeli intellectual property laws. If we do not meet these requirements in the future, these tax benefits may be cancelled and we could be required to refund any tax benefits that we have already received plus interest and penalties thereon. The tax benefits that our current "Approved Enterprise" and "Beneficiary Enterprise" program receives may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs.

If we elect to distribute dividends out of income derived from "Approved Enterprise" operations during the tax exemption period, we will be subject to tax on the gross amount distributed. The tax rate will be the rate which would have been applicable had we not been granted the beneficial status. This rate is generally between 10% and the corporate tax rate in Israel, depending on the percentage of our shares held by foreign shareholders. The dividend recipient is subject to withholding tax at the source at the reduced rate applicable to dividends from Approved Enterprises, which is 15% if the dividend is distributed during the tax exemption period (subject to the applicable double tax treaty) or within 12 years after the period. This 12 year limitation does not apply to foreign investment companies. These dividend tax rules may also apply to our acquisitions if they are made with cash from tax benefited income.

Risks Related to Our Ordinary Shares

~~The ownership of our ordinary shares will continue to be highly concentrated, and your interests may conflict with the interests of our existing shareholders.~~

At September 30, 2015, based on information filed with the SEC or reported to us Oracle Corporation owned approximately 8% of our outstanding ordinary shares, and taken together with our executive officers and directors and their affiliates, beneficially owned an aggregate of approximately 14% of our outstanding ordinary shares. Accordingly, these shareholders, should they act as a group, would have significant influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These shareholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other shareholders. The significant concentration of share ownership may adversely affect the trading price of our ordinary shares due to investors’ perception that conflicts of interest may exist or arise.

The price of our ordinary shares may continue to be volatile, and the value of an investment in our ordinary shares may decline.

During the three months ended ~~September 30 2015~~March 31, 2016, our shares traded as low as $37.54 per share and as high as $55.80 per share. During the twelve month period ended March 31, 2016 our shares traded as low as $32.24 and as high as ~~$49.59 per share. During the 12 months ended September 30, 2015 our shares traded as low as $32.24 per share and as high as $52.77~~$55.80 per share. Factors that could cause volatility in the market price of our ordinary shares include, but are not limited to:

quarterly variations in our results of operations or those of our competitors;

announcements by us, our competitors, our customers or rumors from sources other than our company related to acquisitions, new products, significant contracts, commercial relationships, capital commitments or changes in the competitive landscape;

our ability to develop and market new and enhanced products on a timely basis;

disruption to our operations;

geopolitical instability;

the emergence of new sales channels in which we are unable to compete effectively;

any major change in our board of directors or management;

changes in financial estimates, including our ability to meet our future revenue and operating profit or ~~loss;~~

·loss projections;

changes in governmental regulations or in the status of our regulatory approvals;

general economic conditions and slow or negative growth of related markets;

commencement of, or our involvement in, litigation;

· ~~changes in earnings estimates or recommendations by securities analysts;~~

whether our operating results meet our guidance or the expectations of investors or securities analysts;

continuing international conflicts and acts of terrorism; and

changes in accounting rules.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 — MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 — OTHER INFORMATION

None.

~~None.~~

ITEM 6 — EXHIBITS



2.1		†	Agreement and Plan of Merger, dated June 30, 2014, by and among EZchip Semiconductor Ltd., Eros Acquisition Sub, Inc., Tilera Corporation and Shareholder Representative Services LLC, as the Securityholder Representative.
3.1		(1)	Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 11, 2015).
4.1	*	(2)	Agreement of Merger, dated as of September 30, 2015, among Mellanox Technologies, Ltd., Mondial Europe Sub Ltd. and EZchip Seminconductor Ltd.
4.2	*	(3)	Amendment No. 1 to the Agreement of Merger, dated as of November 17, 2015, among Mellanox Technologies, Ltd., Mondial Europe Sub Ltd. and EZchip Seminconductor Ltd.
4.3	*	(4)	EZchip Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan.
4.4	*	(5)	Amendment to EZchip Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan, dated January 7, 2014.
4.5	*	(6)	EZchip Semiconductor Ltd. 2007 U.S. Equity Incentive Plan.
4.6	*	(7)	Amendment to EZchip Semiconductor Ltd. 2007 U.S. Equity Incentive Plan, dated September 10, 2013.
4.7	*	(8)	Amended and Restated EZchip Semiconductor Ltd. 2009 Equity Incentive Plan.
31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2			Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

~~3.1 (1)~~	~~Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 16, 2011).~~
~~10.1 (2)~~ (1)	~~Agreement of Merger, dated September 30, 2015, by and among Mellanox Technologies, Ltd., Mondial Europe Sub Ltd. and EZchip Semiconductor Ltd.~~
~~31.1~~	~~Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~31.2~~	~~Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~32.1~~	~~Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~32.2~~	~~Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~101.INS~~	~~XBRL Instance Document~~
~~101.SCH~~	~~XBRL Taxonomy Extension Schema Document~~
~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document~~
~~101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase Document~~
~~101.PRE~~	~~XBRL Taxonomy Extension Presentation Linkbase Document~~
~~101.DEF~~	~~XBRL Taxonomy Extension Definition Linkbase Document~~

~~(1)~~

Incorporated by reference to Exhibit A3.1 to the ~~Company’s Definitive Proxy Statement~~Company's Annual Report on ~~Schedule 14A (File~~Form 10-K (SEC File No. 001-33299) filed on ~~April 11, 2011.~~

February 26, 2016.


(2)	I~~ncorporated~~Incorporated by reference to Exhibit 2.1 ofto the Company's Current Report on Form 8-K ~~(File~~(SEC File No. 001-33299) filed on September 30, 2015.


(3)	Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (SEC File No. 001-33299) filed on November 17, 2015.


(4)	Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.


(5)	Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.


(6)	Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.


(7)	Incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.


(8)	Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.

* Indicates management contract or compensatory plan, contract or arrangement.

† Filed herewith.

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

~~Date: October 30, 2015~~

Date:	April 29, 2016	Mellanox Technologies, Ltd.


		/s/ Jacob Shulman
		Jacob Shulman
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

Exhibit Index



2.1		†	Agreement and Plan of Merger, dated June 30, 2014, by and among EZchip Semiconductor Ltd., Eros Acquisition Sub, Inc., Tilera Corporation and Shareholder Representative Services LLC, as the Securityholder Representative.
3.1		(1)	Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 11, 2015).
4.1	*	(2)	Agreement of Merger, dated as of September 30, 2015, among Mellanox Technologies, Ltd., Mondial Europe Sub Ltd. and EZchip Seminconductor Ltd.
4.2	*	(3)	Amendment No. 1 to the Agreement of Merger, dated as of November 17, 2015, among Mellanox Technologies, Ltd., Mondial Europe Sub Ltd. and EZchip Seminconductor Ltd.
4.3	*	(4)	EZchip Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan.
4.4	*	(5)	Amendment to EZchip Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan, dated January 7, 2014.
4.5	*	(6)	EZchip Semiconductor Ltd. 2007 U.S. Equity Incentive Plan.
4.6	*	(7)	Amendment to EZchip Semiconductor Ltd. 2007 U.S. Equity Incentive Plan, dated September 10, 2013.
4.7	*	(8)	Amended and Restated EZchip Semiconductor Ltd. 2009 Equity Incentive Plan.
31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2			Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

~~3.1 (1)~~	~~Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 16, 2011).~~
~~10.1 (2)~~ (1)	~~Agreement of Merger, dated September 30, 2015, by and among Mellanox Technologies, Ltd., Mondial Europe Sub Ltd. and EZchip Semiconductor Ltd.~~
~~31.1~~	~~Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~31.2~~	~~Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~32.1~~	~~Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~32.2~~	~~Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~101.INS~~	~~XBRL Instance Document~~
~~101.SCH~~	~~XBRL Taxonomy Extension Schema Document~~
~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document~~
~~101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase Document~~
~~101.PRE~~	~~XBRL Taxonomy Extension Presentation Linkbase Document~~
~~101.DEF~~	~~XBRL Taxonomy Extension Definition Linkbase Document~~

~~(1)~~

February 26, 2016.


(2)	I~~ncorporated~~Incorporated by reference to Exhibit 2.1 ofto the Company's Current Report on Form 8-K ~~(File~~(SEC File No. 001-33299) filed on September 30, 2015.

(3) Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (SEC File No. 001-33299) filed on November 17, 2015.
(4) Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.
(5) Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.
(6) Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.
(7) Incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.
(8) Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8 (SEC File No.333-209808) filed on February 29, 2016.

* Indicates management contract or compensatory plan, contract or arrangement.

† Filed herewith.

	September 30,			December 31,
	2015			2014
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	140,511		$	51,326
Short-term investments	345,091			334,038
Restricted cash	—			3,604
Accounts receivable, net	64,693			64,922
Inventories	63,111			44,470
Deferred taxes and other current assets	21,107			18,147
Total current assets	634,513			516,507
Property and equipment, net	97,329			78,827
Severance assets	9,543			9,474
Intangible assets, net	34,744			42,067
Goodwill	200,743			200,743
Deferred taxes and other long-term assets	9,697			15,600
Total assets	$	986,569		$	863,218

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	42,216		$	39,811
Accrued liabilities	66,729			61,974
Deferred revenue	17,675			14,758
Capital lease liabilities, current	765			1,102
Total current liabilities	127,385			117,645
Accrued severance	12,454			11,850
Deferred revenue	11,398			8,942
Capital lease liabilities	—			494
Other long-term liabilities	26,825			22,535
Total liabilities	178,062			161,466
Commitments and Contingencies (Note 7)
Shareholders’ equity:
Ordinary shares	198			192
Additional paid-in capital	669,954			615,148
Accumulated other comprehensive loss	(1,773		)	(4,020		)
Retained earnings	140,128			90,432
Total shareholders’ equity	808,507			701,752
Total liabilities and shareholders’ equity	$	986,569		$	863,218

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
	(In thousands, except per share data)
Total revenues	$	171,377		$	120,708		$	481,200		$	322,533
Cost of revenues	49,129			39,377			137,394			107,541
Gross profit	122,248			81,331			343,806			214,992
Operating expenses:
Research and development	65,861			54,220			186,555			152,063
Sales and marketing	24,816			18,863			70,740			56,865
General and administrative	10,944			9,185			31,315			26,861
Total operating expenses	101,621			82,268			288,610			235,789
Income (loss) from operations	20,627			(937		)	55,196			(20,797		)
Other income (loss), net	441			361			(1,116		)	952
Income (loss) before taxes	21,068			(576		)	54,080			(19,845		)
(Provision for) benefit from taxes on income	(1,116		)	1,167			(4,384		)	589
Net income (loss)	$	19,952		$	591		$	49,696		$	(19,256	)
Net income (loss) per share — basic	$	0.43		$	0.01		$	1.08		$	(0.44	)
Net income (loss) per share — diluted	$	0.42		$	0.01		$	1.05		$	(0.44	)
Shares used in per share calculation:
Basic	46,583			44,984			46,158			44,646
Diluted	47,725			46,229			47,542			44,646

	Three Months Ended									Nine Months Ended
	September 30, 2014									September 30, 2014
	As reported			Adjustments			As revised			As reported			Adjustments			As revised
	(in thousands, except per share data)									(in thousands, except per share data)
Statement of operations:
Total revenues	$	120,708		$	—		$	120,708		$	321,987		$	546		$	322,533
Cost of revenues	39,540			(163		)	39,377			107,788			(247		)	107,541
Gross profit	81,168			163			81,331			214,199			793			214,992
Operating expenses:
Research and development	54,220			—			54,220			152,063			—			152,063
Sales and marketing	18,863			—			18,863			56,865			—			56,865
General and administrative	9,185			—			9,185			26,861			—			26,861
Total operating expenses	82,268			—			82,268			235,789			—			235,789
Loss from operations	(1,100		)	163			(937		)	(21,590		)	793			(20,797		)
Other income, net	361			—			361			952			—			952
Loss before taxes on income	(739		)	163			(576		)	(20,638		)	793			(19,845		)
Benefit from taxes on income	1,167			—			1,167			589			—			589
Net income (loss)	$	428		$	163		$	591		$	(20,049	)	$	793		$	(19,256	)
Net income (loss) per share — basic	$	0.01		$	—		$	0.01		$	(0.45	)	$	0.01		$	(0.44	)
Net income (loss) per share — diluted	$	0.01		$	—		$	0.01		$	(0.45	)	$	0.01		$	(0.44	)

	September 30, 2015		December 31, 2014
Hewlett Packard	20	%	17	%
IBM	*		11	%
Ingram Micro	*		10	%

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands except per share data)
Net income (loss)	$	19,952	$	591	$	49,696	$	(19,256	)
Basic and diluted shares:
Weighted average ordinary shares	46,583		44,984		46,158		44,646
Dilutive effect of employee stock option	1,142		1,245		1,384		—
Shares used to compute diluted net income	47,725		46,229		47,542		44,646
Net income (loss) per share — basic	$	0.43	$	0.01	$	1.08	$	(0.44	)
Net income (loss) per share — diluted	$	0.42	$	0.01	$	1.05	$	(0.44	)

	Level 1		Level 2		Total
	(in thousands)
Money market funds	$	11,979	$	—	$	11,979
Certificates of deposit	—		105,354		105,354
U.S. Government and agency securities	—		33,453		33,453
Commercial paper	—		45,024		45,024
Corporate bonds	—		119,143		119,143
Municipal bonds	—		28,058		28,058
Foreign government bonds	—		14,059		14,059
Total financial assets	$	11,979	$	345,091	$	357,070
Derivative contracts	—		1,641		1,641
Total financial liabilities	$	—	$	1,641	$	1,641

	September 30, 2015
	Amortized			Unrealized		Unrealized			Estimated
	Cost			Gains		Losses			Fair Value
	(in thousands)
Cash	$	128,532		$	—	$	—		$	128,532
Money market funds	11,979			—		—			11,979
Certificates of deposit	105,348			9		(3		)	105,354
U.S. Government and agency securities	33,421			34		(2		)	33,453
Commercial paper	45,013			13		(2		)	45,024
Corporate bonds	119,304			37		(198		)	119,143
Municipal bonds	28,060			18		(20		)	28,058
Foreign government bonds	14,077			3		(21		)	14,059
Total	$	485,734		$	114	$	(246	)	$	485,602
Less amounts classified as cash and cash equivalents	(140,511		)	—		—			(140,511		)
	$	345,223		$	114	$	(246	)	$	345,091

	December 31, 2014
	Amortized Cost			Unrealized Gains		Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash	$	46,900		$	—	$	—		$	46,900
Money market funds	4,426			—		—			4,426
Certificates of deposit	80,304			1		(30		)	80,275
U.S. Government and agency securities	99,236			9		(131		)	99,114
Commercial paper	23,017			3		(1		)	23,019
Corporate bonds	112,033			16		(313		)	111,736
Municipal bonds	13,151			—		(47		)	13,104
Foreign government bonds	6,809			—		(19		)	6,790
Total	$	385,876		$	29	$	(541	)	$	385,364
Less amounts classified as cash and cash equivalents	(51,326		)	—		—			(51,326		)
	$	334,550		$	29	$	(541	)	$	334,038

	Gross					Net
	Carrying		Accumulated			Carrying
	Value		Amortization			Value
	(in thousands)
Licensed technology	$	2,554	$	(1,436	)	$	1,118
Developed technology	69,828		(38,167		)	31,661
Customer relationships	13,376		(11,411		)	1,965
Total intangible assets	$	85,758	$	(51,014	)	$	34,744

Remaining three months of 2015	$	2,583
2016	9,991
2017	9,928
2018	6,942
2019	3,407
2020 and thereafter	1,893
	$	34,744



	(in thousands)
2016 (remaining nine months)	$	43,611
2017	49,782
2018	46,784
2019	41,653
2020 and thereafter	93,191
Total	$	275,021

	Buy Contracts
	September 30, 2015		December 31, 2014
	(in thousands)
Israeli shekel	$	111,828	$	88,532

December 31, 2014	$	(3,646	)
Amount of loss recognized in OCI (effective portion)	(1,578		)
Amount of gain reclassified from OCI to income (effective portion)	3,583
September 30, 2015	$	(1,641	)



		Other current assets		Other accrued liabilities
		March 31, 2016		December 31, 2015
		(in thousands)
Derivatives designed as hedging instruments
	Currency forward contracts	$	2,249	$	1,157
Derivatives not designed as hedging instruments
	Currency forward contracts	296		—
Total derivatives		$	2,545	$	1,157

Year Ended December 31,	Capital Leases			Operating Leases
	(in thousands)
Remaining three months of 2015	$	280		$	6,051
2016	502			12,409
2017	—			9,830
2018	—			6,120
2019	—			4,281
2020 and beyond	—			5,668
Total minimum lease payments	$	782		$	44,359
Less: Amount representing interest	(17		)
Present value of capital lease obligations	$	765

	Options Outstanding
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2014	2,467,523		$	29.55
Options exercised	(269,900	)	15.41
Options cancelled	(43,719	)	76.20
Outstanding at September 30, 2015	2,153,904		$	30.37

	Restricted Share Units Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value
Non vested restricted share units at December 31, 2014	1,911,166		$	41.61
Restricted share units granted	1,286,655		45.90
Restricted share units vested	(671,994	)	40.35
Restricted share units canceled	(125,488	)	43.48
Non vested restricted share units at September 30, 2015	2,400,339		$	44.16

	Employee Share Options		Employee Share Purchase Plan
	Nine Months Ended September 30,		Nine Months Ended September 30,
	2015 *	2014	2015	2014
Dividend yield, %	—	—	—	—
Expected volatility, %	—	56.1	39.2	48.1
Risk free interest rate, %	—	1.98	0.10	0.07
Expected life, years	—	5.77	0.50	0.50
Estimated forfeiture rate, %	—	6.73	—	—

	Unrealized Gains
	(Losses) on			Unrealized
	Available-for-			Gains (Losses)
	Sale Securities			on Derivatives			Total
	(in thousands)
Balance at December 31, 2014	$	(374	)	$	(3,646	)	$	(4,020	)
Other comprehensive income/loss before reclassifications	225			(1,578		)	(1,353		)
Amounts reclassified from accumulated other comprehensive income/loss	17			3,583			3,600
Net current-period other comprehensive income, net of taxes	242			2,005			2,247
Balance at September 30, 2015	$	(132	)	$	(1,641	)	$	(1,773	)

Balance at December 31, 2013	$	(6	)	$	1,396		$	1,390
Other comprehensive income before reclassifications	(182		)	(2,712		)	(2,894		)
Amounts reclassified from accumulated other comprehensive income/loss	(10		)	(699		)	(709		)
Net current-period other comprehensive income, net of taxes	(192		)	(3,411		)	(3,603		)
Balance at September 30, 2014	$	(198	)	$	(2,015	)	$	(2,213	)

	Amount Reclassified from
	Other Comprehensive Income
	(Loss)
Details about	Nine Months Ended
Accumulated Other Comprehensive Income (Loss)	September 30,					Affected Line Item in the
Components	2015			2014		Statement of Operations
	(in thousands)
Unrealized gains (losses) on Derivatives	$	(3,583	)	$	699	Cost of revenues and Operating expenses:
	(244		)	38		Cost of revenues
	(2,707		)	535		Research and development
	(292		)	62		Sales and marketing
	(340		)	64		General and administrative
	(3,583		)	699
Unrealized gain (losses) on Available-for-Sale Securities	(17		)	10		Other income, net
Total reclassifications for the period	$	(3,600	)	$	709	Total



Details about Accumulated Other Comprehensive Income / Loss Components	Amount Reclassified from Other Comprehensive Income / Loss					Affected Line Item in the Statement of Operations
	Three Months Ended March 31,
	2016			2015
	(in thousands)
Gains/losses on Derivatives	$	138		(2,273	)	Cost of revenues and Operating expenses
	12			(153	)	Cost of revenues
	138			(1,690	)	Research and development
	21			(175	)	Sales and marketing
	(33		)	(255	)	General and administrative
Gains/losses on Available-for-Sale Securities	(560		)	3		Other income, net
Total reclassifications for the period	$	(422	)	(2,270	)	Total

	Three Months Ended September 30,
			% of				% of
Product category:	2015		Revenues		2014		Revenues
	($ in thousands)
ICs	$	20,518	12.0	%	$	18,803	15.6	%
Boards	65,752		38.4	%	42,491		35.2	%
Switch and gateway systems	51,825		30.2	%	36,623		30.3	%
Cables, accessories and other	33,282		19.4	%	22,791		18.9	%
Total revenue	$	171,377	100	%	$	120,708	100	%

	Nine Months Ended
	September 30, 2015			September 30, 2014
	(in thousands)
Net cash provided by (used in):
Operating activities	$	115,797		$	35,150
Investing activities	(42,759		)	(57,987		)
Financing activities	16,147			14,525
Net increase (decrease) in cash and cash equivalents	$	89,185		$	(8,312	)

			Payments Due by Period
Contractual Obligations:	Total		Less Than 1 Year		1-3 Years		3-5 Years		Beyond 5 Years
	(in thousands)
Commitments under capital lease	$	765	$	765	$	—	$	—	$	—
Non-cancelable operating lease	44,359		6,051		22,239		10,401		5,668
Purchase commitments	69,308		53,828		15,480		—		—
Total	$	114,432	$	60,644	$	37,719	$	10,401	$	5,668



	Hypothetical Change in Interest Rate
	Increase (Decrease) of X Basis Points (bps)
	150 bps		100 bps		50 bps		(25 bps)
	(in thousands)
Interest expense on Term Debt	$	4,099	$	2,733	$	1,366	$	(683	)

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o
(Do not check if a
smaller reporting company)

Smaller reporting company o

~~(Do not check if a smaller reporting company)~~