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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended March 29, 2014
Commission file number 000-49602

SYNAPTICS INCORPORATED
(Exact name of registrant as specified in its charter)

 
 	 	 	
Delaware	 	77-0118518	
(State or other jurisdiction
of incorporation or organization)	 	(I.R.S. Employer
Identification No.)	
1251 McKay Drive
San Jose, California 95131
(Address of principal executive offices) (Zip code)
(408) 904-1100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	 	x	  	Accelerated filer	 	¨	
 	 	 	 	
Non-accelerated filer	 	¨  (Do not check if a smaller reporting company)	  	Smaller reporting company	 	¨	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
Number of shares of Common Stock outstanding at April 25, 2014: 36,021,594

 

Table of Contents
SYNAPTICS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2014
TABLE OF CONTENTS

 	 	 	  	 	  	Page	 	
Part I.	 	Financial Information	  	 	 	 	
 	 	 	 	
 	 	Item 1.	  	Condensed Consolidated Financial Statements (Unaudited):	  	 	 	 	
 	 	 	 	
 	 	 	  	Condensed Consolidated Balance Sheets—March 31, 2014 and June 30, 2013	  	 	3	  	
 	 	 	 	
 	 	 	  	Condensed Consolidated Statements of Income—Three and Nine Months Ended March 31, 2014 and 2013	  	 	4	  	
 	 	 	 	
 	 	 	  	Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended March 31, 2014 and 2013	  	 	5	  	
 	 	 	 	
 	 	 	  	Condensed Consolidated Statements of Cash Flows—Nine Months Ended March 31, 2014 and 2013	  	 	6	  	
 	 	 	 	
 	 	 	  	Notes to Condensed Consolidated Financial Statements	  	 	7	  	
 	 	 	 	
 	 	Item 2.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	 	22	  	
 	 	 	 	
 	 	Item 3.	  	Quantitative and Qualitative Disclosures About Market Risk	  	 	29	  	
 	 	 	 	
 	 	Item 4.	  	Controls and Procedures	  	 	29	  	
 	 	 	
Part II.	 	Other Information	  	 	 	 	
 	 	 	 	
 	 	Item 2.	  	Unregistered Sales of Equity Securities and Use of Proceeds	  	 	30	  	
 	 	 	 	
 	 	Item 6.	  	Exhibits	  	 	31	  	
 	 	 	
Signatures	  	 	  	 	32	  	

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PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

 	  	March 31,
2014	 	 	June 30,
2013	 	
ASSETS	  	 	 	 	 	 	 	 	
Current Assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	391,481	  	 	$	355,303	  	
Accounts receivable, net of allowances of $887 and $883 at March 31, 2014 and June 30, 2013, respectively	  	 	149,687	  	 	 	148,454	  	
Inventories	  	 	70,188	  	 	 	49,948	  	
Prepaid expenses and other current assets	  	 	23,012	  	 	 	6,715	  	
 	  	 	 	 	 	 	 	 	
Total current assets	  	 	634,368	  	 	 	560,420	  	
Property and equipment at cost, net of accumulated depreciation of $45,542 and $35,285 at March 31, 2014 and June 30, 2013, respectively	  	 	76,993	  	 	 	58,035	  	
Goodwill	  	 	61,030	  	 	 	20,695	  	
Acquired intangibles	  	 	84,751	  	 	 	13,110	  	
Non-current investments	  	 	18,566	  	 	 	16,969	  	
Other assets	  	 	19,098	  	 	 	22,037	  	
 	  	 	 	 	 	 	 	 	
 	  	$	894,806	  	 	$	691,266	  	
 	  	 	 	 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current Liabilities:	  	 	 	 	 	 	 	 	
Accounts payable	  	$	76,692	  	 	$	83,710	  	
Accrued compensation	  	 	22,819	  	 	 	23,728	  	
Income taxes payable	  	 	4,978	  	 	 	10,751	  	
Other accrued liabilities	  	 	86,406	  	 	 	31,437	  	
 	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	190,895	  	 	 	149,626	  	
Notes payable	  	 	—  	  	 	 	2,305	  	
Other liabilities	  	 	75,314	  	 	 	17,480	  	
Stockholders’ Equity:	  	 	 	 	 	 	 	 	
Common stock:	  	 	 	 	 	 	 	 	
$0.001 par value; 120,000,000 shares authorized, 55,033,057 and 50,673,758 shares issued, and 35,985,346 and 33,289,826 shares outstanding, at March 31, 2014 and June 30, 2013, respectively	  	 	55	  	 	 	51	  	
Additional paid-in capital	  	 	703,107	  	 	 	539,170	  	
Treasury stock: 19,047,711 and 17,383,932 common treasury shares at March 31, 2014 and June 30, 2013, respectively, at cost	  	 	(530,422	) 	 	 	(460,160	) 	
Accumulated other comprehensive income	  	 	7,648	  	 	 	6,802	  	
Retained earnings	  	 	448,209	  	 	 	435,992	  	
 	  	 	 	 	 	 	 	 	
Total stockholders’ equity	  	 	628,597	  	 	 	521,855	  	
 	  	 	 	 	 	 	 	 	
 	  	$	894,806	  	 	$	691,266	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to condensed consolidated financial statements (unaudited).
 
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

 	  	Three Months Ended
March 31,	 	 	Nine Months Ended
March 31,	 	
 	  	2014	 	 	2013	 	 	2014	 	  	2013	 	
Net revenue	  	$	204,271	  	 	$	163,324	  	 	$	632,641	  	  	$	433,405	  	
Cost of revenue	  	 	111,841	  	 	 	82,241	  	 	 	336,387	  	  	 	222,722	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Gross margin	  	 	92,430	  	 	 	81,083	  	 	 	296,254	  	  	 	210,683	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Operating expenses:	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Research and development	  	 	49,412	  	 	 	36,740	  	 	 	135,785	  	  	 	103,799	  	
Selling, general, and administrative	  	 	25,856	  	 	 	20,183	  	 	 	69,825	  	  	 	58,099	  	
Acquired intangibles amortization	  	 	262	  	 	 	262	  	 	 	785	  	  	 	763	  	
Change in contingent consideration	  	 	53,043	  	 	 	237	  	 	 	56,731	  	  	 	1,100	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total operating expenses	  	 	128,573	  	 	 	57,422	  	 	 	263,126	  	  	 	163,761	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Operating income/(loss)	  	 	(36,143	) 	 	 	23,661	  	 	 	33,128	  	  	 	46,922	  	
Interest income, net	  	 	516	  	 	 	193	  	 	 	1,413	  	  	 	627	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Income/(loss) before provision/(benefit) for income taxes	  	 	(35,627	) 	 	 	23,854	  	 	 	34,541	  	  	 	47,549	  	
Provision/(benefit) for income taxes	  	 	4,429	  	 	 	(12,592	) 	 	 	22,324	  	  	 	(6,064	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Net income/(loss)	  	$	(40,056	) 	 	$	36,446	  	 	$	12,217	  	  	$	53,613	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Net income/(loss) per share:	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Basic	  	$	(1.12	) 	 	$	1.13	  	 	$	0.36	  	  	$	1.65	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Diluted	  	$	(1.12	) 	 	$	1.07	  	 	$	0.33	  	  	$	1.58	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Shares used in computing net income/(loss) per share:	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Basic	  	 	35,685	  	 	 	32,234	  	 	 	34,212	  	  	 	32,552	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Diluted	  	 	35,685	  	 	 	34,135	  	 	 	36,532	  	  	 	33,843	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
See accompanying notes to condensed consolidated financial statements (unaudited).
 
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 	  	Three Months Ended
March 31,	 	  	Nine Months Ended
March 31,	 	
 	  	2014	 	 	2013	 	  	2014	 	 	2013	 	
Net income/(loss)	  	$	(40,056	) 	 	$	36,446	  	  	$	12,217	  	 	$	53,613	  	
Other comprehensive income:	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Change in unrealized net gain on investments before reclassifications	  	 	306	  	 	 	842	  	  	 	1,597	  	 	 	2,680	  	
Reclassification from accumulated other comprehensive income to other income for accretion of non-current investments	  	 	(278	) 	 	 	—  	  	  	 	(751	) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Net current-period other comprehensive income	  	 	28	  	 	 	842	  	  	 	846	  	 	 	2,680	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Comprehensive income/(loss)	  	$	(40,028	) 	 	$	37,288	  	  	$	13,063	  	 	$	56,293	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
See accompanying notes to condensed consolidated financial statements (unaudited).
 
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 	  	Nine Months Ended
March 31,	 	
 	  	2014	 	 	2013	 	
Cash flows from operating activities	  	 	 	 	 	 	 	 	
Net income	  	$	12,217	  	 	$	53,613	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	
Share-based and deferred compensation costs	  	 	23,561	  	 	 	24,706	  	
Depreciation and amortization	  	 	10,353	  	 	 	7,205	  	
Acquired intangibles amortization	  	 	4,759	  	 	 	763	  	
Accretion and remeasurement of contingent consideration liability	  	 	56,731	  	 	 	1,100	  	
Deferred taxes	  	 	8,483	  	 	 	(1,675	) 	
Impairment of property and equipment	  	 	—  	  	 	 	300	  	
Non-cash interest income	  	 	(751	) 	 	 	—  	  	
Changes in operating assets and liabilities:	  	 	 	 	 	 	 	 	
Accounts receivable, net	  	 	2,607	  	 	 	(2,560	) 	
Inventories	  	 	(18,086	) 	 	 	(10,835	) 	
Prepaid expenses and other current assets	  	 	(673	) 	 	 	501	  	
Other assets	  	 	(8,727	) 	 	 	(2,964	) 	
Accounts payable	  	 	(5,823	) 	 	 	4,848	  	
Accrued compensation	  	 	(2,461	) 	 	 	3,679	  	
Income taxes	  	 	(4,259	) 	 	 	(16,502	) 	
Other accrued liabilities	  	 	13,172	  	 	 	7,436	  	
 	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	91,103	  	 	 	69,615	  	
 	  	 	 	 	 	 	 	 	
Cash flows from investing activities	  	 	 	 	 	 	 	 	
Proceeds from sales of non-current investments	  	 	—  	  	 	 	2,200	  	
Acquisition of business, net of cash acquired	  	 	(19,620	) 	 	 	(5,000	) 	
Purchases of property and equipment	  	 	(32,321	) 	 	 	(30,005	) 	
 	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(51,941	) 	 	 	(32,805	) 	
 	  	 	 	 	 	 	 	 	
Cash flows from financing activities	  	 	 	 	 	 	 	 	
Payment of contingent consideration	  	 	—  	  	 	 	(4,600	) 	
Purchases of treasury stock	  	 	(70,262	) 	 	 	(31,280	) 	
Proceeds from issuance of shares	  	 	62,997	  	 	 	11,614	  	
Excess tax benefit from share-based compensation	  	 	12,946	  	 	 	716	  	
Payroll taxes for deferred stock units	  	 	(6,406	) 	 	 	(2,752	) 	
Payment of notes payable	  	 	(2,259	) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(2,984	) 	 	 	(26,302	) 	
 	  	 	 	 	 	 	 	 	
Net increase in cash and cash equivalents	  	 	36,178	  	 	 	10,508	  	
Cash and cash equivalents at beginning of period	  	 	355,303	  	 	 	305,005	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	  	$	391,481	  	 	$	315,513	  	
 	  	 	 	 	 	 	 	 	
Supplemental disclosures of cash flow information	  	 	 	 	 	 	 	 	
Cash paid for income taxes	  	$	15,311	  	 	$	16,552	  	
Non-cash investing activities:	  	 	 	 	 	 	 	 	
Common stock issued pursuant to acquisition	  	$	70,280	  	 	$	—  	  	
Contingent consideration pursuant to acquisition	  	$	37,499	  	 	$	—  	  	
See accompanying notes to condensed consolidated financial statements (unaudited).
 
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and U.S. generally accepted accounting principles, or U.S. GAAP. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations. In our opinion, the financial statements include all adjustments, which are of a normal and recurring nature, necessary for the fair presentation of the results of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
The consolidated financial statements include our financial statements and those of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.
Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. Our fiscal 2014 and 2013 years are 52-week periods ending on June 28, 2014 and June 29, 2013, respectively. The quarterly fiscal periods presented in this report were 13-week periods for the three months ended March 29, 2014 and March 30, 2013. For ease of presentation, the accompanying consolidated financial statements have been shown as ending on calendar quarter end dates for all annual, interim, and quarterly financial statement captions, unless otherwise indicated.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, cost of revenue, inventories, loss on purchase commitments, product warranty, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, goodwill, intangible assets, investments, contingent consideration liability, and loss contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Recently Issued Accounting Pronouncements
There are no new accounting pronouncements that are expected to have a material impact on our condensed consolidated financial statements.
2. Revenue Recognition
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred and title has transferred, the price is fixed or determinable, and collection is reasonably assured, which is generally upon shipment of the product. We accrue for estimated sales returns, incentives, and other allowances at the time we recognize revenue. Our products contain embedded firmware and software that allow for further differentiation and customer integration, which together with our ASIC chip, deliver the essential functionality of our products and, as such, software revenue recognition guidance is not applicable.
 
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3. Net Income/(Loss) Per Share
The computation of basic and diluted net income/(loss) per share was as follows (in thousands, except per share data):

 	  	Three Months Ended	 	  	Nine Months Ended	 	
 	  	March 31,	 	  	March 31,	 	
 	  	2014	 	 	2013	 	  	2014	 	  	2013	 	
Numerator:	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Net income/(loss)	  	$	(40,056	) 	 	$	36,446	  	  	$	12,217	  	  	$	53,613	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Denominator:	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Shares, basic	  	 	35,685	  	 	 	32,234	  	  	 	34,212	  	  	 	32,552	  	
Effect of dilutive share-based awards	  	 	—  	  	 	 	1,901	  	  	 	2,320	  	  	 	1,291	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Shares, diluted	  	 	35,685	  	 	 	34,135	  	  	 	36,532	  	  	 	33,843	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Net income/(loss) per share:	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Basic	  	$	(1.12	) 	 	$	1.13	  	  	$	0.36	  	  	$	1.65	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Diluted	  	$	(1.12	) 	 	$	1.07	  	  	$	0.33	  	  	$	1.58	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Our basic net income/(loss) per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding. Our diluted net income/(loss) per share amounts for each period presented include the weighted average effect of potentially dilutive shares. We use the “treasury stock” method to determine the dilutive effect of our stock options, deferred stock units, or DSUs, market stock units, or MSUs, and convertible notes.
Dilutive net income/(loss) per share amounts do not include the weighted average effect of 2,481,307 share-based compensation awards and convertible notes outstanding, and shares issuable for settlement of contingent consideration determined to be payable during the three months ended March 31, 2014, 1,055,896 share-based awards that were outstanding during the three months ended March 31, 2013, and 356,878 and 3,025,632 share-based awards that were outstanding during the nine months ended March 31, 2014 and 2013, respectively. These share-based awards were not included in the computation of diluted net income/(loss) per share because their effect would have been antidilutive.
4. Fair Value
Financial assets and liabilities, measured at fair value on a recurring basis by level within the fair value hierarchy, consisted of the following (in thousands):

 	  	March 31,	 	  	June 30,	 	
 	  	2014	 	  	2013	 	
 	  	Level 1	 	  	Level 3	 	  	Level 1	 	  	Level 3	 	
Assets:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Money market	  	$	380,977	  	  	$	—  	  	  	$	350,521	  	  	$	—  	  	
Auction rate securities	  	 	—  	  	  	 	18,566	  	  	 	—  	  	  	 	16,969	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total available-for-sale securities	  	$	380,977	  	  	$	18,566	  	  	$	350,521	  	  	$	16,969	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Liabilities:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Contingent consideration liability recorded for business combination	  	$	—  	  	  	$	102,444	  	  	$	—  	  	  	$	8,247	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
In our condensed consolidated balance sheets as of March 31, 2014 and June 30, 2013, money market balances were included in cash and cash equivalents and auction rate securities, or ARS investments, were included in non-current investments. The contingent consideration liability recorded for business combinations was included in other liabilities of which $60.8 million and $8.1 million was included in the non-current portion of other liabilities as of March 31, 2014 and June 30, 2013, respectively, and $41.6 million and $196,000 was included in other current liabilities as of March 31, 2014 and June 30, 2013, respectively.
 
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Changes in fair value of our Level 3 financial assets as of March 31, 2014 were as follows (in thousands):

Balance as of June 30, 2013	  	$	16,969	  	
Net unrealized gain	  	 	1,597	  	
 	  	 	 	 	
Balance as of March 31, 2014	  	$	18,566	  	
 	  	 	 	 	
Changes in fair value of our Level 3 contingent consideration liability as of March 31, 2014 were as follows (in thousands):

Balance as of June 30, 2013	  	$	8,247	  	
Contingent consideration liability incurred	  	 	37,499	  	
Accretion and remeasurement	  	 	56,731	  	
Issuance of common stock in settlement of liability	  	 	(33	) 	
 	  	 	 	 	
Balance as of March 31, 2014	  	$	102,444	  	
 	  	 	 	 	
In connection with the acquisition of Validity Sensors, Inc., or Validity (see Note 15), we entered into a contingent consideration arrangement and may owe up to $162.5 million of additional consideration to the former Validity stockholders and option holders based on sales of products utilizing Validity technology through March 2016.
In connection with the acquisition of Pacinian we entered into a contingent consideration arrangement, and subsequently paid $5.0 million of additional consideration to the former Pacinian stockholders upon customer acceptance of a ThinTouch product. As of March 31, 2014, we may owe up to $10.0 million of additional consideration to the former Pacinian stockholders based on sales of products utilizing ThinTouch technology through June 2016.
There were no transfers in or out of our Level 1 or 3 assets or liabilities during the three and nine months ended March 31, 2014 and 2013.
The fair values of our accounts receivable and accounts payable approximate their carrying values because of the short-term nature of those instruments. Intangible assets, property and equipment, and goodwill are measured at fair value on a non-recurring basis if impairment is indicated.
5. Auction Rate Securities
Our ARS investments have failed to settle in auctions and are not liquid. In the event we need to access these funds prior to their maturity, we will not be able to do so without a loss of principal, unless redeemed by the issuers or a future auction on these investments is successful. During the three and nine months ended March 31, 2014, none of our ARS investments were redeemed.
As there are currently no active markets for our various failed ARS investments, we have estimated the fair value as of March 31, 2014 using a trinomial discounted cash flow analysis. The analysis considered, among others, the following factors:
 
 	•	 	the collateral underlying the security investments;	
 
 	•	 	the creditworthiness of the counterparty;	
 
 	•	 	the timing of expected future cash flows;	
 
 	•	 	the probability of a successful auction in a future period;	
 
 	•	 	the underlying structure of each investment;	
 
 	•	 	the present value of future principal and interest payments discounted at rates considered to reflect current market conditions;	
 
 	•	 	a consideration of the probabilities of default, passing a future auction, or redemption at par for each period; and	
 
 	•	 	estimates of the recovery rates in the event of default for each investment.	
 
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When possible, our ARS investments were compared to other observable market data or securities with similar characteristics. Our estimate of the fair value of our ARS investments could change materially from period to period based on future market conditions.
Our ARS investments include $13.4 million fair value maturing from calendar years 2015 to 2017, $3.2 million fair value maturing from calendar years 2043 to 2045, and $2.0 million fair value with no maturity date. Of our ARS investments, $5.5 million par value are investment grade, and the remaining $18.5 million par value are below investment grade.
The various types of ARS investments we held as of March 31, 2014, including the original cost basis, other-than-temporary impairment included in retained earnings, new cost basis, unrealized gain/(loss), and fair value, consisted of the following (in thousands):

 	  	 	 	  	Other-than-	 	 	 	 	  	 	 	 	 	 	
 	  	 	 	  	temporary	 	 	 	 	  	 	 	 	 	 	
 	  	Original Cost	 	  	Impairment in	 	 	New Cost	 	  	Unrealized	 	 	Fair	 	
 	  	Basis	 	  	Retained Earnings	 	 	Basis	 	  	Gain/(Loss)	 	 	Value	 	
Student loans	  	$	3,500	  	  	$	(179	) 	 	$	3,321	  	  	$	(144	) 	 	$	3,177	  	
Credit linked notes	  	 	13,500	  	  	 	(7,820	)(1) 	 	 	5,680	  	  	 	5,768	  	 	 	11,448	  	
Preferred stock	  	 	5,000	  	  	 	(5,000	) 	 	 	—  	  	  	 	2,000	  	 	 	2,000	  	
Municipals	  	 	2,000	  	  	 	(83	) 	 	 	1,917	  	  	 	24	  	 	 	1,941	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Total ARS	  	$	24,000	  	  	$	(13,082	) 	 	$	10,918	  	  	$	7,648	  	 	$	18,566	  	

(1)	Other-than-temporary impairment in retained earnings is partially offset by cumulative accretion of $945,000 on non-current investments. Accretion is reclassified from accumulated other comprehensive income and recorded in the condensed consolidated statements of income as non-cash interest income.	
The various types of ARS investments we held as of June 30, 2013, including the original cost basis, other-than-temporary impairment included in retained earnings, new cost basis, unrealized gain/(loss), and fair value, consisted of the following (in thousands):

 	  	 	 	  	Other-than-	 	 	 	 	  	 	 	 	 	 	
 	  	 	 	  	temporary	 	 	 	 	  	 	 	 	 	 	
 	  	Original Cost	 	  	Impairment in	 	 	New Cost	 	  	Unrealized	 	 	Fair	 	
 	  	Basis	 	  	Retained Earnings	 	 	Basis	 	  	Gain/(Loss)	 	 	Value	 	
Student loans	  	$	3,500	  	  	$	(179	) 	 	$	3,321	  	  	$	(168	) 	 	$	3,153	  	
Credit linked notes	  	 	13,500	  	  	 	(8,571	)(1) 	 	 	4,929	  	  	 	4,980	  	 	 	9,909	  	
Preferred stock	  	 	5,000	  	  	 	(5,000	) 	 	 	—  	  	  	 	2,000	  	 	 	2,000	  	
Municipals	  	 	2,000	  	  	 	(83	) 	 	 	1,917	  	  	 	(10	) 	 	 	1,907	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Total ARS	  	$	24,000	  	  	$	(13,833	) 	 	$	10,167	  	  	$	6,802	  	 	$	16,969	  	

(1)	Other-than-temporary impairment in retained earnings is partially offset by cumulative accretion of $194,000 on non-current investments. Accretion is reclassified from accumulated other comprehensive income and recorded in the condensed consolidated statements of income as non-cash interest income.	
The ARS investments in each of the above tables with unrealized losses have been in a continuous unrealized loss position for more than 12 months.
We have accounted for all of our ARS investments as non-current as we are not able to reasonably determine when the ARS markets will recover or be restructured. Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not intend to sell the investments, and it is not more likely than not that we will be required to sell the investments before the recovery of the amortized cost basis.
 
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6. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated net realizable value) and consisted of the following (in thousands):

 	  	March 31,	 	  	June 30,	 	
 	  	2014	 	  	2013	 	
Raw materials	  	$	54,273	  	  	$	38,181	  	
Finished goods	  	 	15,915	  	  	 	11,767	  	
 	  	 	 	 	  	 	 	 	
 	  	$	70,188	  	  	$	49,948	  	
 	  	 	 	 	  	 	 	 	
7. Property and Equipment
During the third quarter of fiscal 2014, we purchased a 5.35 acre site, with two single story buildings totaling approximately 80,000 square feet, located adjacent to our San Jose headquarters for approximately $10.1 million in cash. We allocated $5.4 million of the cost to land and the remaining $4.7 million to buildings. We plan to retrofit one of the two buildings, or approximately 51,000 square feet, to support expansion of our San Jose-based employee population. The second building is leased to a tenant through March 2016, with an option for the tenant to renew the lease for an additional five years.
8. Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):

 	  	March 31,	 	  	June 30,	 	
 	  	2014	 	  	2013	 	
Customer obligations	  	$	28,625	  	  	$	16,291	  	
Contingent consideration	  	 	41,620	  	  	 	196	  	
Inventory obligations	  	 	3,854	  	  	 	6,333	  	
Warranty	  	 	1,459	  	  	 	1,696	  	
Other	  	 	10,848	  	  	 	6,921	  	
 	  	 	 	 	  	 	 	 	
 	  	$	86,406	  	  	$	31,437	  	
 	  	 	 	 	  	 	 	 	
9. Product Warranties, Indemnifications, and Contingencies
Product Warranties
We generally warrant our products for a period of 12 months from the date of sale and estimate probable product warranty costs at the time we recognize revenue. Factors that affect our warranty liability include historical and anticipated rates of warranty claims, materials usage, rework, and delivery costs. However, we assess the adequacy of our warranty obligations each reporting period and adjust the accrued warranty liability on the basis of our estimates.
Indemnifications
In connection with certain agreements, we are obligated to indemnify the counter-party against third-party claims alleging infringement of certain intellectual property rights by us. We have also entered into indemnification agreements with our officers and directors. Maximum potential future payments cannot be estimated because these agreements do not have a maximum stated liability. However, historical costs related to these indemnification provisions have not been significant. We have not recorded any liability in our consolidated financial statements for such indemnification obligations.
 
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Contingencies
We have in the past and may in the future receive notices from third parties that claim our products infringe their intellectual property rights. We cannot be certain that our technologies and products do not or will not infringe issued patents or other proprietary rights of third parties.
Any infringement claims, with or without merit, could result in significant litigation costs and diversion of management and financial resources, including the payment of damages, which could have a material adverse effect on our business, financial condition, and results of operations.
10. Notes Payable Conversion
During the third quarter of fiscal 2014, we announced that our 0.75% convertible senior subordinated notes due 2024, or Notes, were convertible during the quarter as a result of our common stock price exceeding the conversion trigger for 20 of the last 30 consecutive trading days ending on the last trading day of the calendar quarter ended December 31, 2013. As we previously made a principal conversion settlement election to settle the principal in cash, the principal amount of Notes tendered for conversion will be settled in cash following the cash settlement averaging period as defined in the Indenture and we elected to settle the excess conversion value in shares. During the third quarter, we also issued a Notice of Redemption setting April 2, 2014 as the redemption date upon which we would redeem 100% of the principal amount, plus accrued and unpaid interest, of any remaining outstanding Notes. Noteholders had the right to convert any of their Notes that we had called for redemption at any time prior to 5:00 p.m., Eastern Standard Time, on March 31, 2014. As of March 31, 2014, the entire $2.3 million principal amount of outstanding notes had been properly tendered for conversion and all but $46,000 principal amount of the Notes were settled in the March quarter. In April and May 2014, following the cash settlement averaging periods, we will settle the remaining $46,000 principal amount of the Notes.
11. Share-Based Compensation
Share-based compensation and the related tax benefit recognized in our condensed consolidated statements of income were as follows (in thousands):

 	  	Three Months Ended	 	  	Nine Months Ended	 	
 	  	March 31,	 	  	March 31,	 	
 	  	2014	 	  	2013	 	  	2014	 	  	2013	 	
Cost of revenue	  	$	328	  	  	$	249	  	  	$	844	  	  	$	690	  	
Research and development	  	 	4,951	  	  	 	3,993	  	  	 	13,119	  	  	 	11,783	  	
Selling, general, and administrative	  	 	3,496	  	  	 	3,991	  	  	 	9,476	  	  	 	12,233	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	8,775	  	  	$	8,233	  	  	$	23,439	  	  	$	24,706	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Income tax benefit on share-based compensation	  	$	2,593	  	  	$	2,279	  	  	$	7,399	  	  	$	6,676	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Historically, we have issued new shares in connection with our share-based compensation plans, however, treasury shares were also available for issuance as of March 31, 2014, including shares repurchased under our common stock repurchase program.
 
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Stock Options
Stock option activity, including stock options granted, exercised, and forfeited, and weighted average exercise prices for options outstanding and exercisable, and the aggregate intrinsic value were as follows:

 	  	Stock	 	 	Weighted	 	  	Aggregate	 	
 	  	Option	 	 	Average	 	  	Intrinsic	 	
 	  	Awards	 	 	Exercise	 	  	Value	 	
 	  	Outstanding	 	 	Price	 	  	(in thousands)	 	
Balance at June 30, 2013	  	 	6,030,287	  	 	$	26.15	  	  	 	 	 	
Granted	  	 	395,022	  	 	 	48.20	  	  	 	 	 	
Exercised	  	 	(2,277,830	) 	 	 	25.88	  	  	 	 	 	
Forfeited	  	 	(126,418	) 	 	 	29.70	  	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	
Balance at March 31, 2014	  	 	4,021,061	  	 	 	28.36	  	  	$	120,197	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
Exercisable at March 31, 2014	  	 	2,893,995	  	 	$	25.58	  	  	$	94,416	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
The aggregate intrinsic value was determined using the closing price of our common stock on March 28, 2014 of $58.20 and excludes the impact of stock options that were not in-the-money.
Deferred Stock Units
DSU activity, including DSUs granted, delivered, and forfeited, and the balance and aggregate intrinsic value of DSUs was as follows:

 	  	 	 	 	Aggregate	 	
 	  	 	 	 	Intrinsic	 	
 	  	DSU Awards	 	 	Value	 	
 	  	Outstanding	 	 	(in thousands)	 	
Balance at June 30, 2013	  	 	1,005,435	  	 	 	 	 	
Granted	  	 	535,860	  	 	 	 	 	
Delivered	  	 	(381,783	) 	 	 	 	 	
Forfeited	  	 	(71,142	) 	 	 	 	 	
 	  	 	 	 	 	 	 	 	
Balance at March 31, 2014	  	 	1,088,370	  	 	$	63,343	  	
 	  	 	 	 	 	 	 	 	
The aggregate intrinsic value was determined using the closing price of our common stock on March 28, 2014 of $58.20.
Of the shares delivered, 118,025 shares valued at $5.7 million were withheld to meet statutory minimum tax withholding requirements.
Market Stock Units
Our Amended and Restated 2010 Incentive Compensation Plan provides for the grant of MSU awards, which are a type of DSU award, to our employees, consultants, and directors. An MSU is a promise to deliver shares of our common stock at a future date based on the achievement of market-based performance requirements in accordance with the terms of the MSU grant agreement. We began granting MSUs in November 2012.
We have granted MSUs to our executive officers, which were designed to vest in three tranches with the target quantity for each tranche equal to one-third of the total MSU grant. The first tranche vests based on a one-year performance period; the second tranche vests based on a two-year performance period; and the third tranche vests based on a three-year performance period. Performance is measured based on the achievement of a specified level of total stockholder return, or TSR, relative to the TSR of the Philadelphia Semiconductor Index, or SOX Index. The potential payout ranges from 0% to 200% of the grant target quantity and is adjusted on a two-to-one ratio based on our TSR performance relative to the SOX Index TSR performance using the following formula:
(100% + ([Synaptics TSR - SOX Index TSR] x 2))
 
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Delivery of shares earned, if any, will take place on the dates provided in the applicable MSU grant agreement, assuming the grantee is still an employee, consultant, or director of our company at the end of the applicable performance period. On the delivery date, we withhold shares to cover statutory minimum tax withholding by delivering a net quantity of shares. Until delivery of shares, the grantee has no rights as a stockholder with respect to any shares underlying the MSU award.
During the nine months ended March 31, 2014, MSU activity, including MSUs granted, delivered, and forfeited, and the balance and aggregate intrinsic value of MSUs as of March 31, 2014 was as follows:

 	  	 	 	 	Aggregate	 	
 	  	 	 	 	Intrinsic	 	
 	  	MSU Awards	 	 	Value	 	
 	  	Outstanding	 	 	(in thousands)	 	
Balance at June 30, 2013	  	 	67,400	  	 	 	 	 	
Granted	  	 	80,730	  	 	 	 	 	
Performance adjustment	  	 	10,782	  	 	 	 	 	
Delivered	  	 	(33,249	) 	 	 	 	 	
Forfeited	  	 	(5,333	) 	 	 	 	 	
 	  	 	 	 	 	 	 	 	
Balance at March 31, 2014	  	 	120,330	  	 	$	7,003	  	
 	  	 	 	 	 	 	 	 	
As a result of the Synaptics TSR exceeding the SOX Index TSR by 24 percentage points, we delivered 148% of the targeted shares underlying the November 2012 MSU grants, or 10,782 additional shares. Of the shares delivered, 15,148 shares valued at $670,000 were withheld to meet statutory minimum tax withholding requirements.
We valued the MSUs using the Monte Carlo simulation model and amortize the compensation expense over the three-year performance and service period on a straight-line basis. The grant date fair value for MSUs granted during the nine months ended March 31, 2014 was $60.62 per MSU. The unrecognized share-based compensation cost of our outstanding MSUs was approximately $5.1 million as of March 31, 2014, which will be recognized over a weighted average period of approximately 1.4 years. The aggregate intrinsic value was determined using the closing price of our common stock on March 28, 2014 of $58.20.
 
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12. Income Taxes
We account for income taxes under the asset and liability method. We consider the operating earnings of our foreign subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has been made for the federal, state, or foreign taxes that may result from future remittances of undistributed earnings of our foreign subsidiaries.
The provision/(benefit) for income taxes of $4.4 million and ($12.6) million for the three months ended March 31, 2014 and 2013, respectively, represented estimated federal, foreign, and state income taxes. The provision/(benefit) for income taxes recorded in interim periods is recorded by applying the estimated annual effective tax rate to year-to-date income/(loss) before income taxes, excluding the effects of significant unusual or infrequently occurring discrete items and the change in contingent consideration liability related to the Validity acquisition which is not yet reliably estimable. The tax effects of discrete items and the change in the Validity contingent consideration liability are recorded in the same period that the related item is reported and resulted in the difference between the actual effective tax rate for the three months ended March 31, 2014 and March 31, 2013, and the estimated annual effective tax rates for those periods of 29.3% and 25.2%, respectively. The Company’s annual effective tax rate diverged from the combined U.S. federal and state statutory rate primarily because of foreign income taxed at lower tax rates and the federal research credit, partially offset by foreign withholding taxes, nondeductible amortization, contingent consideration, and net unrecognized tax benefits associated with qualified stock options. Discrete items recognized in the three months ended March 31, 2014 included additional research and development credits net of an increase in unrecognized tax benefits related to uncertain tax positions related to prior fiscal years and tax benefits realized from stock-based compensation. Discrete items recognized in the three months ended March 31, 2013 included additional research and development credits resulting from the retroactive restatement of the federal research and development credit, a decrease in unrecognized tax benefits related to uncertain tax positions, which included the remeasurement of a prior year tax position, and tax benefits realized from stock-based compensation.
The provision/(benefit) for income taxes of $22.3 million and ($6.1) million for the nine months ended March 31, 2014 and 2013, respectively, represented estimated federal, foreign, and state income taxes. The provision/(benefit) for income taxes recorded in interim periods is recorded by applying the estimated annual effective tax rate to year-to-date income/(loss) before income taxes, excluding the effects of significant unusual or infrequently occurring discrete items and the change in contingent consideration liability related to the Validity acquisition which is not yet reliably estimable. The tax effects of discrete items and the change in the Validity contingent consideration liability are recorded in the same period that the related item is reported and resulted in the difference between the actual effective tax rate for the nine months ended March 31, 2014 and March 31, 2013, and the estimated annual effective tax rates for those periods of 29.3% and 25.2%, respectively. The Company’s annual effective tax rate diverged from the combined U.S. federal and state statutory rate primarily because of foreign income taxed at lower tax rates and the federal research credit, partially offset by foreign withholding taxes, nondeductible amortization, contingent consideration, and net unrecognized tax benefits associated with qualified stock options. Discrete items recognized in the nine months ended March 31, 2014 included additional research and development credits net of an increase in unrecognized tax benefits related to uncertain tax positions related to prior fiscal years and tax benefits realized from stock-based compensation. Discrete items recognized in the nine months ended March 31, 2013 included additional research and development credits resulting from the retroactive restatement of the federal research and development credit and a decrease in unrecognized tax benefits related to uncertain tax positions, which included the remeasurement of a prior year tax position and the recognition of a prior year tax position due to an expired statute, and tax benefits realized from stock-based compensation.
Unrecognized Tax Benefits
The total liability for gross unrecognized tax benefits increased $2.2 million during the nine months ended March 31, 2014 to $10.4 million from $8.2 million at June 30, 2013 and was included in other liabilities on our condensed consolidated balance sheets. If recognized, this total amount would affect the effective tax rate on income from continuing operations. The balance of interest and penalties accrued related to unrecognized tax benefits as of March 31, 2014 was $1.0 million and increased by $101,000 from June 30, 2013. We classify interest and penalties as components of income tax expense.
 
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In May 2011, we were notified by the Internal Revenue Service, or the Service, that our fiscal 2003 through 2006 and fiscal 2008 through 2010 would be subject to examination. The early periods were being audited in connection with a mandatory review of tax refunds in excess of $2.0 million which resulted when we carried back our fiscal 2008 net operating loss. In March 2013, we received the Revenue Agent’s Report resolving our examination with the Service and paid an assessment that had no material impact on our condensed consolidated financial statements. Our case is pending review by the Joint Committee on Taxation, which we anticipate will conclude in our fiscal 2015. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.
On January 2, 2013, President Barack Obama signed into law The American Taxpayer Relief Act of 2013, or the Act. The Act extended the Federal research credit for two years retroactively from January 1, 2012 through December 31, 2013. As such, we will only recognize six months of tax benefit from the research tax credit in our current fiscal year.
Our major tax jurisdictions are the United States, California, and Hong Kong SAR, and fiscal 2003 onward remain subject to examination by one or more of these jurisdictions.
 
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13. Segment, Customers, and Geographic Information
We operate in one segment: the development, marketing, and sale of interactive user interface solutions for electronic devices and products. We generate our revenue from two broad product categories: the mobile product market and the personal computing, or PC, market. The mobile product market accounted for 74% and 64% of net revenue for the three months ended March 31, 2014 and 2013, respectively, and 71% and 58% of net revenue for the nine months ended March 31, 2014 and 2013, respectively.
Net revenue within geographic areas based on our customers’ locations for the periods presented was as follows (in thousands):

 	  	Three Months Ended	 	  	Nine Months Ended	 	
 	  	March 31,	 	  	March 31,	 	
 	  	2014	 	  	2013	 	  	2014	 	  	2013	 	
China	  	$	90,038	  	  	$	96,897	  	  	$	307,974	  	  	$	277,192	  	
South Korea	  	 	46,632	  	  	 	18,900	  	  	 	164,458	  	  	 	31,762	  	
Taiwan	  	 	25,711	  	  	 	21,611	  	  	 	92,080	  	  	 	58,192	  	
Japan	  	 	11,346	  	  	 	17,135	  	  	 	33,812	  	  	 	44,822	  	
United States	  	 	29,002	  	  	 	8,511	  	  	 	33,161	  	  	 	19,662	  	
Other	  	 	1,542	  	  	 	270	  	  	 	1,156	  	  	 	1,775	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	204,271	  	  	$	163,324	  	  	$	632,641	  	  	$	433,405	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net revenue from external customers for each group of similar products was as follows (in thousands):

 	  	Three Months Ended	 	  	Nine Months Ended	 	
 	  	March 31,	 	  	March 31,	 	
 	  	2014	 	  	2013	 	  	2014	 	  	2013	 	
Mobile product applications	  	$	150,746	  	  	$	104,673	  	  	$	447,014	  	  	$	250,878	  	
PC product applications	  	 	53,525	  	  	 	58,651	  	  	 	185,627	  	  	 	182,527	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	204,271	  	  	$	163,324	  	  	$	632,641	  	  	$	433,405	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net revenue from major customers as a percentage of total net revenue for the periods presented was as follows:

 	  	Three Months Ended	 	 	Nine Months Ended	 	
 	  	March 31,	 	 	March 31,	 	
 	  	2014	 	 	2013	 	 	2014	 	 	2013	 	
Customer A	  	 	32	% 	 	 	12	% 	 	 	24	% 	 	 	*	  	
 
*	Less than 10%	
We sell our products to original equipment manufacturers, or OEMs, and to contract manufacturers that provide manufacturing services to OEMs. We extend credit based on an evaluation of a customer’s financial condition, and we generally do not require collateral. Major customer accounts receivable as a percentage of total accounts receivable at the dates presented were as follows:

 	  	March 31,	 	 	June 30,	 	
 	  	2014	 	 	2013	 	
Customer A	  	 	35	% 	 	 	27	% 	
Customer B	  	 	13	% 	 	 	*	  	
 
*	Less than 10%	
 
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14. Comprehensive Income/(Loss)
Our comprehensive income/(loss) generally consists of net income/(loss) plus the effect of unrealized gains and losses on our investments, primarily due to temporary changes in market value of certain of our ARS investments. In addition, we recognize the noncredit portion of other-than-temporary impairment on debt securities in other comprehensive income. We recognize foreign currency remeasurement adjustments and transaction gains and losses in our condensed consolidated statements of income as the U.S. dollar is the functional currency of our foreign entities.
15. Acquisition of Validity
On November 7, 2013, or the Acquisition Date, we acquired 100% of the outstanding common and preferred shares and voting interest of Validity. This acquisition has been accounted for as a business combination. The results of Validity’s operations have been included in our consolidated financial statements since the Acquisition Date. Validity was a privately held company, which was a leading provider of capacitive-based biometric fingerprint authentication solutions for notebook applications. Validity had begun to target its biometric fingerprint authentication solutions for smartphone and tablet applications and had one revenue-generating design win with one customer as of the Acquisition Date. We believe this acquisition brings together substantial synergies through the combination of the Validity technologies and workforce and our financial stability, scale, infrastructure, customer relationships, and technology delivery performance record. With this acquisition, we expect to gain access to the fast-growing biometrics market, significantly expanding our market opportunity and underscoring our commitment to making smart devices easier to use.
The Acquisition Date fair value of the consideration transferred totaled $127.8 million, which consisted of the following (in thousands):

Cash	  	$	19,985	  	
Shares issued	  	 	70,280	  	
Contingent consideration	  	 	37,499	  	
 	  	 	 	 	
 	  	$	127,764	  	
 	  	 	 	 	
In connection with the acquisition, we issued 1,577,559 shares of our common stock to the former Validity stockholders valued at $70.3 million based on the Acquisition Date closing price of our common stock of $44.55. The contingent consideration arrangement requires us to make earn-out consideration payments of up to $162.5 million, based primarily on sales, calculated quarterly, ending on March 31, 2016, of certain products embodying Validity fingerprint sensor technology. The earn-out consideration will be payable in cash, except for the initial $16.3 million of contingent consideration, which will be satisfied by delivery of 338,427 shares of our common stock, based on the transaction reference price of $48.278. Under certain conditions, we may be required to deliver additional shares to ensure that at least 40% of the value of consideration transferred to the former Validity stockholders is paid in shares of our common stock.
The estimated fair value of the contingent consideration arrangement as of the Acquisition Date was $37.5 million. We estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement. The key assumptions in applying the probability-weighted discounted cash flow model was a 23% discount rate under three unequally weighted cash flow scenarios reviewed by senior management and our board to assess the transaction. The contingent consideration is remeasured to fair value each reporting period and adjustments are recorded through earnings. As of March 31, 2014, the estimated fair value of the contingent consideration was $96.5 million. The increase in the estimated fair value of the contingent consideration during the third quarter of fiscal 2014 was primarily due to the increase in the forecasted revenue for the product embodying Validity fingerprint sensor technology.
 
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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the Acquisition Date (in thousands):

Cash	  	$	365	  	
Accounts receivable	  	 	3,840	  	
Inventory	  	 	2,154	  	
Prepaid expenses and other	  	 	984	  	
Property and equipment	  	 	326	  	
Deferred tax assets	  	 	12,242	  	
Acquired intangible assets	  	 	76,400	  	
Other assets	  	 	1,283	  	
 	  	 	 	 	
Total identifiable assets acquired	  	 	97,594	  	
Accounts payable	  	 	2,141	  	
Accrued liabilities	  	 	1,497	  	
Non-current deferred tax liabilities	  	 	5,327	  	
Non-current taxes payable	  	 	700	  	
Other non-current accrued liabilities	  	 	500	  	
 	  	 	 	 	
Net identifiable assets acquired	  	 	87,429	  	
Goodwill	  	 	40,335	  	
 	  	 	 	 	
Net assets acquired	  	$	127,764	  	
 	  	 	 	 	
Of the $76.4 million of acquired intangible assets, $57.0 million was assigned to in-process research and development and will be amortized over an estimated useful life to be determined at the date the underlying projects are determined to be substantively complete, $18.6 million was assigned to developed technology and is amortizing over an estimated useful life of 2-3 years, and $750,000 was assigned to backlog and was amortized during the quarter ended December 31, 2013. In-process research and development refers to the next generation fingerprint authentication technology designed for the mobile product and PC markets. Developed technology refers to the established fingerprint authentication technology initially designed for and sold into the PC market and adapted for the mobile product market. We anticipate that all in-process research and development projects will be substantially completed within the next three to six months. The value of goodwill reflects the anticipated synergies of the combined operations and workforce of Validity as of the Acquisition Date.
As of March 31, 2014, our purchase price allocation was preliminary and has not been finalized. Additional information, which existed as of the Acquisition Date but is yet unknown to us, may become known to us during the remainder of the measurement period, which will not exceed 12 months from the Acquisition Date. Changes to amounts recorded as assets or liabilities will be recorded as retrospective adjustments to the provisional amounts recognized as of the Acquisition Date and may result in a corresponding adjustment to goodwill.
In connection with the acquisition, we recognized $1.2 million of indemnification assets, consisting of $700,000 for income tax and $500,000 for service tax. These amounts represent estimated tax settlements plus interest and penalties. Under the merger agreement, we are indemnified for any additional tax liability incurred (as well as other reasonable expenses) before the acquisition.
The Validity fingerprint authentication products are an extension of our existing interactive user interface solution products and are marketed to our existing customer base. We report revenue from these products on a combined basis with our other products based on device type. We continue to operate in one segment and therefore the goodwill applies to a company-wide reporting unit. None of the goodwill is expected to be deductible for income tax purposes.
We recognized approximately $2.0 million of legal and consulting costs that were expensed in fiscal 2014. These costs are included in our consolidated statements of income as selling, general, and administrative expenses.
Prior to the acquisition, we did not have an existing relationship with Validity.
The condensed consolidated financial statements include $35.7 million of revenue from Validity fingerprint authentication products from the Acquisition Date through March 31, 2014.
 
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The following unaudited pro forma financial information presents the combined results of operations for us and Validity as if the acquisition had occurred on July 1, 2012. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of the actual operating results that would have been recorded had the acquisition actually taken place on July 1, 2012, and should not be taken as indicative of future consolidated operating results. Additionally, the unaudited pro forma financial results do not include any anticipated synergies or other expected benefits from the acquisition.

 	  	Three Months Ended	 	  	Nine Months Ended	 	
 	  	March 31,	 	  	March 31,	 	
 	  	2013	 	  	2014	 	  	2013	 	
 	  	(in thousands, except per share data)	 	
Revenue	  	$	167,375	  	  	$	640,524	  	  	$	444,299	  	
Net income	  	 	29,894	  	  	 	7,200	  	  	 	34,327	  	
Net income per share—diluted	  	 	0.84	  	  	 	0.19	  	  	 	0.97	  	
Pro forma adjustments used to arrive at pro forma net income for the three and nine months ended March 31, 2014 and March 31, 2013, were as follows (in thousands):

 	  	Three Months Ended	 	 	Nine Months Ended	 	
 	  	March 31,	 	 	March 31,	 	
 	  	2013	 	 	2014	 	 	2013	 	
Buyer transaction costs	  	$	—  	  	 	$	2,000	  	 	$	—  	  	
Seller transaction costs	  	 	—  	  	 	 	517	  	 	 	—  	  	
Inventory adjustment	  	 	—  	  	 	 	575	  	 	 	—  	  	
Share-based compensation	  	 	87	  	 	 	280	  	 	 	262	  	
Intangible amortization	  	 	(2,060	) 	 	 	(2,685	) 	 	 	(6,931	) 	
Deferred compensation	  	 	(19	) 	 	 	66	  	 	 	(56	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(1,992	) 	 	$	753	  	 	$	(6,725	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
16. Acquired Intangibles
The following table summarizes the life, the gross carrying value of our acquired intangible assets, and the related accumulated amortization as of March 31, 2014 and June 30, 2013 (in thousands):

 	  	 	  	March 31,	 	 	June 30,	 	
 	  	Life	  	2014	 	 	2013	 	
In-process research and development	  	To Be Determined	  	$	57,000	  	 	$	8,900	  	
Fingerprint developed technology	  	2-3 years	  	 	18,650	  	 	 	—  	  	
Thintouch developed technology	  	7 years	  	 	8,900	  	 	 	—  	  	
Customer relationships	  	5 years	  	 	3,800	  	 	 	3,800	  	
Licensed technology and other	  	5 years	  	 	1,335	  	 	 	1,335	  	
Backlog	  	Less than 1 year	  	 	750	  	 	 	—  	  	
Patents	  	5 years	  	 	100	  	 	 	100	  	
 	  	 	  	 	 	 	 	 	 	 	
 	  	 	  	 	90,535	  	 	 	14,135	  	
Accumulated amortization	  	 	  	 	(5,784	) 	 	 	(1,025	) 	
 	  	 	  	 	 	 	 	 	 	 	
Acquired intangibles, net	  	 	  	$	84,751	  	 	$	13,110	  	
 	  	 	  	 	 	 	 	 	 	 	
The total amortization expense for the acquired intangible assets was $2.6 million and $262,000 for the three months ended March 31, 2014 and 2013, respectively, and $4.8 million and $763,000 for the nine months ended March 31, 2014 and 2013, respectively. This amortization expense was included in our condensed consolidated statements of income in cost of revenue and acquired intangibles amortization.
 
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The following table presents expected annual aggregate amortization expense as of March 31, 2014 (in thousands):

Remainder of 2014	  	$	2,640	  	
2015	  	 	10,560	  	
2016	  	 	7,016	  	
2017	  	 	3,221	  	
2018	  	 	1,293	  	
Thereafter	  	 	3,021	  	
To be determined	  	 	57,000	  	
 	  	 	 	 	
Future amortization	  	$	84,751	  	

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Factors That May Affect Results
You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and notes in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
In addition to the historical information contained in this report, this report may contain forward-looking statements, including those related to our operating model and strategies; our market penetration and market share in the mobile product applications and PC product applications markets; competitive factors in the mobile product applications and PC product applications markets; revenue from the mobile product applications and PC product applications markets; industry estimates of growth rates of these markets; average selling prices; product design mix; manufacturing costs; gross margins; new product solution introductions; customer relationships; research and development expenses; selling, general, and administrative expenses and schedules; liquidity and anticipated cash requirements; our ability to provide local sales, operational, and engineering support to customers; our assessment of the combination of added value we bring to our OEM customers’ products in meeting their custom design requirements and the impact of our ongoing cost-improvement programs; our expectations regarding the timing of the conclusion of an ongoing appeal of a tax audit; our estimates of the value of contingent consideration arrangements; our expectations regarding the timing of the substantial conclusion of all the in-process research and development projects; and our expectations regarding tax benefits for the federal research credit. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially.
We caution that these statements are qualified by various factors that may affect future results, including the following: economic conditions; changes in the market for our products and the success of our customers’ products; our success in moving products from the design phase into the manufacturing phase; changes in the competitive environment; infringement claims; warranty obligations related to product failures; the failure of key technologies to deliver commercially acceptable performance; our dependence on certain key markets; penetration into new markets; the absence of both long-term purchase and supply commitments; and our lengthy development and product acceptance cycles. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, including particularly Item 1A “Risk Factors” therein.
Overview
We are a leading worldwide developer and supplier of custom-designed human interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We believe our results to date reflect the combination of our customer focus, the strength of our intellectual property, and our engineering know-how, which allow us to develop or engineer products that meet the demanding design specifications of OEMs.
Many of our customers have manufacturing operations in China, and many of our OEM customers have established design centers in that region. With our expanded global presence, including offices in China, Finland, Hong Kong, India, Japan, Korea, Switzerland, Taiwan, and the United States, we are well positioned to provide local sales, operational, and engineering support services to our existing customers as well as potential new customers, on a global basis.
Our manufacturing operations are based on a variable cost model in which we outsource all of our production requirements and generally drop ship our products directly to our customers from our contract manufacturers’ facilities, reducing the need for significant capital expenditures and allowing us to minimize our investment in inventories. This approach requires us to work closely with our contract manufacturers and semiconductor foundries to ensure adequate production capacity to meet our forecasted volume requirements. We provide our contract manufacturers with six-month rolling forecasts and issue purchase orders based on our anticipated requirements for the next 90 days. However, we do not have any long-term supply contracts with any of our contract manufacturers. We use three third-party semiconductor wafer manufacturers to supply us with silicon wafers integrating our proprietary design specifications. The completed silicon wafers are forwarded to third-party package and test processors for further processing into die and packaged ASICs, as applicable, which are then utilized in our custom interface products or processed as our ASIC-based solutions. In certain cases, we rely on a single source or a limited number of suppliers to provide other key components of our products. Our cost of revenue includes all costs associated with the production of our products, including materials, logistics, amortization of intangibles related to acquired developed technology, manufacturing, assembly, and test costs paid to third-party manufacturers, and related overhead costs associated with our indirect manufacturing operations personnel. Additionally, we charge losses on inventory purchase obligations and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value (including warranty costs) to cost of revenue.
 
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Our gross margin generally reflects the combination of the added value we bring to our OEM customers’ products in meeting their custom design requirements and the impact of our ongoing cost-improvement programs. These cost-improvement programs include reducing materials and component costs and implementing design and process improvements.
Our research and development expenses include costs for supplies and materials related to product development as well as the engineering costs incurred to design ASICs and human interface solutions for OEM customers prior to and after their commitment to incorporate those solutions into their products. These expenses have generally increased, reflecting our continuing commitment to the technological and design innovation required to maintain our position in our existing markets and to adapt our existing technologies or develop new technologies for new markets.
Selling, general, and administrative expenses include expenses related to sales, marketing, and administrative personnel; internal sales and outside sales representatives’ commissions; market and usability research; outside legal, accounting, and consulting costs; and other marketing and sales activities. These expenses have generally increased, primarily reflecting incremental staffing and related support costs associated with our business acquisitions, increased business levels, growth in our existing markets, and penetration into new markets.
Change in contingent consideration is a cost associated with the acquisition of a business in which an earn-out arrangement was entered into between us and a selling party. We entered into earn-out arrangements in connection with our acquisitions of both Pacinian and Validity. The earn-out arrangements were designed to deliver more purchase price consideration to the selling parties, provided the acquired business delivers on the negotiated earn-out terms. Under these earn-out arrangements, upon satisfaction of certain financial metrics and other conditions, additional cash will be delivered to the former Pacinian stockholders and additional cash and shares of our common stock will be delivered to the former Validity stockholders. Accordingly, we anticipate that changes in the fair value of the contingent consideration could result in volatility in our operating results due to changes in our stock price, our estimates of the timing and the number of qualifying units expected to be sold during the earn-out period, the degree of success of current and future projects incorporating both the developed technology and in-process technology of Pacinian and/or Validity, and changes in the discount rates used to determine the fair value of the contingent consideration liabilities over time.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates during the nine months ended March 31, 2014 compared with our critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
 
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Results of Operations
Certain of the data used in our condensed consolidated statements of income for the periods indicated, together with comparative absolute and percentage changes in these amounts, were as follows (in thousands, except percentages):

 	 	Three Months Ended March 31,	 	 	Nine Months Ended March 31,	 	
 	 	2014 (1)	 	 	2013	 	 	$ Change	 	 	% Change	 	 	2014 (1)	 	 	2013	 	 	$ Change	 	 	% Change	 	
Mobile product applications	 	$	150,746	  	 	$	104,673	  	 	$	46,073	  	 	 	44.0	% 	 	$	447,014	  	 	$	250,878	  	 	$	196,136	  	 	 	78.2	% 	
PC product applications	 	 	53,525	  	 	 	58,651	  	 	 	(5,126	) 	 	 	(8.7	%) 	 	 	185,627	  	 	 	182,527	  	 	 	3,100	  	 	 	1.7	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	 	204,271	  	 	 	163,324	  	 	 	40,947	  	 	 	25.1	% 	 	 	632,641	  	 	 	433,405	  	 	 	199,236	  	 	 	46.0	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross margin	 	 	92,430	  	 	 	81,083	  	 	 	11,347	  	 	 	14.0	% 	 	 	296,254	  	 	 	210,683	  	 	 	85,571	  	 	 	40.6	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	49,412	  	 	 	36,740	  	 	 	12,672	  	 	 	34.5	% 	 	 	135,785	  	 	 	103,799	  	 	 	31,986	  	 	 	30.8	% 	
Selling, general, and administrative	 	 	25,856	  	 	 	20,183	  	 	 	5,673	  	 	 	28.1	% 	 	 	69,825	  	 	 	58,099	  	 	 	11,726	  	 	 	20.2	% 	
Acquired intangibles amortization	 	 	262	  	 	 	262	  	 	 	—  	  	 	 	0.0	% 	 	 	785	  	 	 	763	  	 	 	22	  	 	 	2.9	% 	
Change in contingent consideration	 	 	53,043	  	 	 	237	  	 	 	52,806	  	 	 	22281.0	% 	 	 	56,731	  	 	 	1,100	  	 	 	55,631	  	 	 	5057.4	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income/(loss)	 	 	(36,143	) 	 	 	23,661	  	 	 	(59,804	) 	 	 	(252.8	%) 	 	 	33,128	  	 	 	46,922	  	 	 	(13,794	) 	 	 	(29.4	%) 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income, net	 	 	516	  	 	 	193	  	 	 	323	  	 	 	167.4	% 	 	 	1,413	  	 	 	627	  	 	 	786	  	 	 	125.4	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income/(loss) before provision for income taxes	 	 	(35,627	) 	 	 	23,854	  	 	 	(59,481	) 	 	 	(249.4	%) 	 	 	34,541	  	 	 	47,549	  	 	 	(13,008	) 	 	 	(27.4	%) 	
Provision/(benefit) for income taxes	 	 	4,429	  	 	 	(12,592	) 	 	 	17,021	  	 	 	(135.2	%) 	 	 	22,324	  	 	 	(6,064	) 	 	 	28,388	  	 	 	(468.1	%) 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income/(loss)	 	$	(40,056	) 	 	$	36,446	  	 	$	(76,502	) 	 	 	(209.9	%) 	 	$	12,217	  	 	$	53,613	  	 	$	(41,396	) 	 	 	(77.2	%) 	

(1)	Includes the results of operations from Validity, which was acquired on November 7, 2013 (see Note 15 to the condensed consolidated financial statements)	
Certain of the data used in our condensed consolidated statements of income data as a percentage of net revenue for the periods indicated were as follows:

 	 	Three Months Ended	 	 	Point	 	 	NIne Months Ended	 	 	Point	 	
 	 	March 31,	 	 	Increase/	 	 	March 31,	 	 	Increase/	 	
 	 	2014	 	 	2013	 	 	(Decrease)	 	 	2014	 	 	2013	 	 	(Decrease)	 	
Mobile product applications	 	 	73.8	% 	 	 	64.1	% 	 	 	9.7	% 	 	 	70.7	% 	 	 	57.9	% 	 	 	12.8	% 	
PC product applications	 	 	26.2	% 	 	 	35.9	% 	 	 	(9.7	%) 	 	 	29.3	% 	 	 	42.1	% 	 	 	(12.8	%) 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	 	100.0	% 	 	 	100.0	% 	 	 	 	 	 	 	100.0	% 	 	 	100.0	% 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross margin	 	 	45.2	% 	 	 	49.6	% 	 	 	(4.4	%) 	 	 	46.8	% 	 	 	48.6	% 	 	 	(1.8	%) 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	24.2	% 	 	 	22.5	% 	 	 	1.7	% 	 	 	21.5	% 	 	 	23.9	% 	 	 	(2.4	%) 	
Selling, general, and administrative	 	 	12.7	% 	 	 	12.4	% 	 	 	0.3	% 	 	 	11.0	% 	 	 	13.4	% 	 	 	(2.4	%) 	
Acquired intangibles amortization	 	 	0.1	% 	 	 	0.2	% 	 	 	(0.1	%) 	 	 	0.1	% 	 	 	0.2	% 	 	 	(0.1	%) 	
Change in contingent consideration	 	 	26.0	% 	 	 	0.1	% 	 	 	25.9	% 	 	 	9.0	% 	 	 	0.3	% 	 	 	8.7	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income/(loss)	 	 	(17.7	%) 	 	 	14.5	% 	 	 	(32.2	%) 	 	 	5.2	% 	 	 	10.8	% 	 	 	(5.6	%) 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income/(loss) before provision for income taxes	 	 	(17.4	%) 	 	 	14.6	% 	 	 	(32.0	%) 	 	 	5.5	% 	 	 	11.0	% 	 	 	(5.5	%) 	
Provision for income taxes	 	 	2.2	% 	 	 	(7.7	%) 	 	 	9.9	% 	 	 	3.5	% 	 	 	(1.4	%) 	 	 	4.9	% 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income/(loss)	 	 	(19.6	%) 	 	 	22.3	% 	 	 	(41.9	%) 	 	 	1.9	% 	 	 	12.4	% 	 	 	(10.5	%) 	

(1)	Includes the results of operations from Validity, which was acquired on November 7, 2013 (see Note 15 to the condensed consolidated financial statements)	
 
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Net Revenue.
Net revenue was $204.3 million for the quarter ended March 31, 2014 compared with $163.3 million for the quarter ended March 31, 2013, an increase of $40.9 million, or 25.1%, which includes $31.4 million of biometric fingerprint authentication product revenue. Of our third quarter fiscal 2014 net revenue, $150.8 million, or 73.8%, was from mobile product applications and $53.5 million, or 26.2%, was from PC product applications. The increase in net revenue for the quarter ended March 31, 2014 was attributable to an increase in net revenue from mobile product, partially offset by a decline in PC product applications. Net revenue from mobile product applications increased primarily as a result of higher unit sales in the quarter, reflecting market growth and the addition of mobile based biometric fingerprint authentication solutions. Net revenue from PC product applications decreased primarily as a result of lower unit sales in the quarter, reflecting weakness in the overall PC market, and timing of our sales in the supply chain.
Net revenue was $632.6 million for the nine months ended March 31, 2014 compared with $433.4 million for the nine months ended March 31, 2013, an increase of $199.2 million, or 46.0%, which includes $35.7 million of biometric fingerprint authentication product revenue. Of our first nine months of fiscal 2014 net revenue, $447.0 million, or 70.7%, was from mobile product applications and $185.6 million, or 29.3%, was from PC product applications. The increase in net revenue for the nine months ended March 31, 2014 was attributable to an increase in net revenue from mobile product applications and PC product applications. Net revenue from mobile product applications increased primarily as a result of higher unit sales in the nine month period, primarily reflecting market growth. Net revenue from PC product applications increased primarily as a result of expanding our content in PC products with the addition of biometric fingerprint authentication products.
Based on industry estimates of unit shipments, the mobile smartphone market is anticipated to increase approximately 20%, the tablet market is anticipated to increase 22%, and the notebook market is anticipated to decrease approximately 4% in calendar year 2014 compared with calendar year 2013.
Gross Margin.
Gross margin as a percentage of net revenue was 45.2%, or $92.4 million, for the quarter ended March 31, 2014 compared with 49.6%, or $81.1 million, for the quarter ended March 31, 2013. The 440 basis point decline in gross margin was primarily due to amortization of acquired intangibles incurred in the current quarter, as well as a higher mix of module products, which generally carry a lower margin than chip products due to additional components/materials than just the chip.
Gross margin as a percentage of net revenue was 46.8%, or $296.3 million, for the nine months ended March 31, 2014 compared with 48.6%, or $210.7 million, for the nine months ended March 31, 2013. The 180 basis point decline in gross margin was primarily due to amortization of acquired intangibles incurred in the current year as well as a higher mix of module products, which generally carry a lower margin than chip products due to additional components/materials than just the chip.
We continuously introduce new product solutions, many of which have life cycles of less than a year. Further, as we sell our capacitive sensing technology in designs that are generally unique or specific to an OEM customer’s application, gross margin varies on a product-by-product basis, making our cumulative gross margin a blend of our product specific designs. As a virtual manufacturer, our gross margin percentage is generally not impacted materially by our shipment volume. We charge losses on inventory purchase obligations and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value (including warranty costs) to cost of revenue.
Operating Expenses.
Research and Development Expenses. Research and development expenses increased $12.7 million to $49.4 million for the quarter ended March 31, 2014 compared with the quarter ended March 31, 2013. The increase in research and development expenses primarily reflected a $8.7 million increase in personnel-related costs, which included our annual merit increase, additional headcount associated with an expanded product portfolio and a recent acquisition, a $1.9 million increase in infrastructure-related costs, and a $1.0 million increase in share-based compensation costs.
Research and development expenses increased $32.0 million to $135.8 million for the nine months ended March 31, 2014 compared with the nine months ended March 31, 2013. The increase in research and development expenses primarily reflected a $19.9 million increase in personnel-related costs, which included our annual merit increase, an increase in our incentive compensation accrual, additional headcount associated with an expanded product portfolio and a recent acquisition, a $9.2 million increase in infrastructure-related costs, and a $1.4 million increase in travel and related expenses.
 
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Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $5.7 million to $25.9 million for the quarter ended March 31, 2014 compared with the quarter ended March 31, 2013. The increase in selling, general, and administrative expenses primarily reflected a $3.2 million increase in employee-related costs, which included our annual merit increase, additional headcount related to a recent acquisition, and a $1.4 million increase in professional fees, primarily associated with acquisition-related costs.
Selling, general, and administrative expenses increased $11.7 million to $69.8 million for the nine months ended March 31, 2014 compared with the nine months ended March 31, 2013. The increase in selling, general, and administrative expenses primarily reflected a $8.6 million increase in employee-related costs, which included our annual merit increase and additional headcount including new employees related to a recent acquisition, a $3.2 million increase in professional fees, primarily associated with acquisition-related costs, and a $1.7 million in travel and related expenses, partially offset by a $2.8 million decrease in share-based compensation.
Change in Contingent Consideration. Our contingent consideration increased $52.8 million for the quarter ended March 31, 2014 compared with the quarter ended March 31, 2013. The increase was primarily attributable to the increase in the estimated fair value of the contingent consideration, which resulted from a substantial increase in expected unit sales of products embodying Validity fingerprint sensor technology over the remaining earn-out period. The material increase in change in contingent consideration resulted in a net loss for the quarter ended March 31, 2014.
Our contingent consideration increased $55.6 million for the nine months ended March 31, 2014 compared with the nine months ended March 31, 2013. The increase was primarily attributable to the increase in the estimated fair value of the contingent consideration, which resulted from a substantial increase in expected unit sales of products embodying Validity fingerprint sensor technology over the remaining earn-out period.
Provision for Income Taxes.
We account for income taxes under the asset and liability method. We consider the operating earnings of our foreign subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has been made for the federal, state, or foreign taxes that may result from future remittances of undistributed earnings of our foreign subsidiaries.
The provision/(benefit) for income taxes of $4.4 million and ($12.6) million for the three months ended March 31, 2014 and 2013, respectively, represented estimated federal, foreign, and state income taxes. The provision/(benefit) for income taxes recorded in interim periods is recorded by applying the estimated annual effective tax rate to year-to-date income/(loss) before income taxes, excluding the effects of significant unusual or infrequently occurring discrete items and the change in contingent consideration liability related to the Validity acquisition which is not yet reliably estimable. The tax effects of discrete items and the change in the Validity contingent consideration liability are recorded in the same period that the related item is reported and resulted in the difference between the actual effective tax rate for the three months ended March 31, 2014 and March 31, 2013, and the estimated annual effective tax rates for those periods of 29.3% and 25.2%, respectively. The Company’s annual effective tax rate diverged from the combined U.S. federal and state statutory rate primarily because of foreign income taxed at lower tax rates and the federal research credit, partially offset by foreign withholding taxes, nondeductible amortization, contingent consideration, and net unrecognized tax benefits associated with qualified stock options. Discrete items recognized in the three months ended March 31, 2014 included additional research and development credits net of an increase in unrecognized tax benefits related to uncertain tax positions related to prior fiscal years, and tax benefits realized from stock-based compensation. Discrete items recognized in the three months ended March 31, 2013 included additional research and development credits resulting from the retroactive restatement of the federal research and development credit, a decrease in unrecognized tax benefits related to uncertain tax positions, which included the remeasurement of a prior year tax position, and tax benefits realized from stock-based compensation.
 
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The provision/(benefit) for income taxes of $22.3 million and ($6.1) million for the nine months ended March 31, 2014 and 2013, respectively, represented estimated federal, foreign, and state income taxes. The provision/(benefit) for income taxes recorded in interim periods is recorded by applying the estimated annual effective tax rate to year-to-date income/(loss) before income taxes, excluding the effects of significant unusual or infrequently occurring discrete items and the change in contingent consideration liability related to the Validity acquisition which is not yet reliably estimable. The tax effects of discrete items and the change in the Validity contingent consideration liability are recorded in the same period that the related item is reported and resulted in the difference between the actual effective tax rate for the nine months ended March 31, 2014 and March 31, 2013, and the estimated annual effective tax rates for those periods of 29.3% and 25.2%, respectively. The Company’s annual effective tax rate diverged from the combined U.S. federal and state statutory rate primarily because of foreign income taxed at lower tax rates and the federal research credit, partially offset by foreign withholding taxes, nondeductible amortization, contingent consideration, and net unrecognized tax benefits associated with qualified stock options. Discrete items recognized in the nine months ended March 31, 2014 included additional research and development credits net of an increase in unrecognized tax benefits related to uncertain tax positions related to prior fiscal years and tax benefits realized from stock-based compensation. Discrete items recognized in the nine months ended March 31, 2013 included additional research and development credits resulting from the retroactive restatement of the federal research and development credit, a decrease in unrecognized tax benefits related to uncertain tax positions, which included the remeasurement of a prior year tax position and the recognition of a prior year tax position due to an expired statute, and tax benefits realized from stock-based compensation.
In May 2011, we were notified by the Internal Revenue Service, or the Service, that our fiscal 2003 through 2006 and fiscal 2008 through 2010 would be subject to examination. The early periods were being audited in connection with a mandatory review of tax refunds in excess of $2.0 million which resulted when we carried back our fiscal 2008 net operating loss. In March 2013, we received the Revenue Agent’s Report resolving our examination with the Service and paid an assessment that had no material impact to our condensed consolidated financial statements. Our case is pending review by the Joint Committee on Taxation, which we anticipate will conclude in our fiscal 2015. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.
On January 2, 2013, President Barack Obama signed into law The American Taxpayer Relief Act of 2013, or the Act. The Act extended the Federal research credit for two years retroactively from January 1, 2012 through December 31, 2013. As such, we will only recognize six months of tax benefit from the research credit in our current fiscal year.
Liquidity and Capital Resources
Our cash and cash equivalents were $391.5 million as of March 31, 2014 compared with $355.3 million as of June 30, 2013, an increase of $36.2 million. The increase primarily reflected the combination of $91.1 million provided from operating cash flows and $63.0 million of proceeds from the issuance of shares, partially offset by $70.3 million used to repurchase 1,663,779 shares of our common stock, $32.3 million used for the purchase of property and equipment, and $19.6 million used for the acquisition of a business. We consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes that may result from a future repatriation of those earnings. As of March 31, 2014, $348.5 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay U.S. federal, foreign, and state taxes to repatriate these funds.
Cash Flows from Operating Activities. Operating activities during the nine months ended March 31, 2014 generated net cash of $91.1 million compared with $69.6 million of net cash generated during the nine months ended March 31, 2013. For the nine months ended March 31, 2014, net cash provided by operating activities was primarily attributable to net income of $12.2 million plus adjustments for non-cash charges of $103.1 million, and a $24.3 million net change in operating assets and liabilities. The net change in operating assets and liabilities was primarily attributable to an $18.1 million increase in inventory, a $4.3 million decrease in income taxes, an $8.7 million increase in other assets, a $5.8 million decrease in accounts payable, partially offset by a $13.2 million increase in other accrued liabilities. From June 30, 2013 to March 31, 2014, our days sales outstanding increased from 58 days to 66 days and our inventory turns declined from 9 to 6.
Cash Flows from Investing Activities. Investing activities during the nine months ended March 31, 2014 used net cash of $32.3 million for purchases of property and equipment and $19.6 million for the acquisition of a business compared with $30.0 million net cash used for purchases of property and equipment and $5.0 million for the acquisition of a business during the nine months ended March 31, 2013.
Cash Flows from Financing Activities. Net cash used in financing activities for the nine months ended March 31, 2014 was $3.0 million compared with $26.3 million for the nine months ended March 31, 2013. Net cash used in financing activities for the nine months ended March 31, 2014 primarily included $70.3 million used to repurchase 1,663,779 shares of our common stock, partially offset by proceeds from issuance of shares of our common stock under our employee equity programs of $63.0 million.
 
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Common Stock Repurchase Program. Our board has cumulatively authorized $620.0 million for our stock repurchase program, expiring in October 2015. The program authorizes us to purchase our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors. The number of shares purchased and the timing of purchases is based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. Common stock purchased under this program is held as treasury stock. From April 2005 through March 31, 2014, we purchased 19,047,711 shares of our common stock in the open market for an aggregate cost of $530.4 million. Treasury shares purchased prior to August 28, 2008 were not subject to the stock split on that date. As of March 31, 2014, we had $89.6 million remaining under our common stock repurchase program.
Bank Credit Facility. We maintain a $75.0 million working capital line of credit with Wells Fargo Bank. The Wells Fargo Bank revolving line of credit, which expires on September 1, 2014, provides for an interest rate equal to the prime lending rate or 150 basis points above LIBOR, depending on whether we choose a variable or fixed rate, respectively. We had not borrowed any amounts under this line of credit as of March 31, 2014.
$100 Million Shelf Registration. We have registered an aggregate of $100.0 million of common stock and preferred stock for issuance in connection with acquisitions, which shares will generally be freely tradeable after their issuance under Rule 145 of the Securities Act unless held by an affiliate of the acquired company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144.
Liquidity and Capital Resources. We believe our existing cash and cash equivalents and anticipated cash flows from operating activities will be sufficient to meet our working capital and other cash requirements for at least the next 12 months, including our contingent consideration obligation associated with the acquisition of Validity. Our future capital requirements will depend on many factors, including our revenue, the timing and extent of spending to support product development efforts, costs related to protecting our intellectual property, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, the costs of maintaining sufficient space or renovating recently acquired building space for our expanding workforce, the continuing market acceptance of our product solutions, our common stock repurchase program, and the amount and timing of our investments in, or acquisitions of, other technologies or companies. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of business opportunities or to respond to competitive pressures could be limited or severely constrained.
Our non-current investments consist of ARS investments, which have failed to settle in auctions. These investments are not liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principal, unless redeemed by the issuers or a future auction on these investments is successful.
Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not anticipate that the lack of liquidity on these investments will affect our ability to operate our business as usual. Further, we do not anticipate the need to repatriate any undistributed earnings of our foreign subsidiaries to meet our working capital and other cash requirements.
Contractual Obligations and Commercial Commitments
Our material contractual obligations and commercial commitments as of March 31, 2014 were as follows (in millions):

 	 	Remaining
in Fiscal
Year 2014	 	 	Fiscal
Year
2015	 	 	Fiscal
Year
2016	 	 	Fiscal
Year
2017	 	 	Fiscal
Year
2018	 	 	Thereafter	 	 	Total	 	
Leases	 	$	1	  	 	$	4	  	 	$	2	  	 	$	2	  	 	$	1	  	 	$	2	  	 	$	12	  	
Purchase obligations and other commitments (1)	 	 	3	  	 	 	54	  	 	 	51	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	108	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	4	  	 	$	58	  	 	$	53	  	 	$	2	  	 	$	1	  	 	$	2	  	 	$	120	  	

(1)	Purchase obligations and other commitments include payments due for contingent consideration, a long-term services agreement and inventory purchase obligations with contract manufacturers.	
In connection with the acquisition of Validity in November 2013, we entered into a contingent consideration arrangement. As of March 31, 2014, we may owe up to $162.5 million of additional consideration to the former Validity stockholders and option holders based on unit sales of products utilizing Validity technology through March 2016. The estimated fair value of the contingent consideration liability as of March 31, 2014 was $96.5 million.
 
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In connection with the acquisition of Pacinian in June 2012, we entered into a contingent consideration arrangement and subsequently paid $5.0 million of additional consideration to the former Pacinian stockholders upon customer acceptance of a ThinTouch product. As of March 31, 2014, we may owe up to $10.0 million of additional consideration to the former Pacinian stockholders based on unit sales of products utilizing ThinTouch technology through June 2016. The estimated fair value of the contingent consideration liability as of March 31, 2014 was $5.9 million.
The amounts in the table above exclude unrecognized tax benefits of $10.4 million. As of March 31, 2014, we were unable to make a reasonably reliable estimate of when cash settlement with a taxing authority may occur in connection with our gross unrecognized tax benefit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk has not changed materially from the interest rate and foreign currency exchange risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are designed and are effective to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and are effective and sufficient to ensure that we record, process, summarize, and report information required to be disclosed by us in our periodic reports filed under the Securities Exchange Act of 1934, as amended, within the time periods specified by the SEC’s rules and forms.
During the fiscal quarter covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II—OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Our cumulative authorization for our common stock repurchase program is $620.0 million. The remaining amount authorized for the repurchase of our common stock through October 2015 is $89.6 million. There were no repurchases under our common stock repurchase program during the three-month period ended March 31, 2014.
 
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ITEM 6. EXHIBITS

  31.1	  	Certification of Chief Executive Officer	
 	 	
  31.2	  	Certification of Chief Financial Officer	
 	 	
  32.1	  	Section 1350 Certification of Chief Executive Officer	
 	 	
  32.2	  	Section 1350 Certification of Chief Financial Officer	
 	 	
101.INS	  	XBRL Instance Document	
 	 	
101.SCH	  	XBRL Taxonomy Extension Schema Document	
 	 	
101.CAL	  	XBRL Taxonomy Extension Calculation Linkbase Document	
 	 	
101.DEF	  	XBRL Taxonomy Extension Definition Linkbase Document	
 	 	
101.LAB	  	XBRL Taxonomy Extension Label Linkbase Document	
 	 	
101.PRE	  	XBRL Taxonomy Extension Presentation Linkbase Document	
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	 	 	SYNAPTICS INCORPORATED	
 	 	 	 	
Date: May 2, 2014	 	 	 	By:	 	/s/ Richard A. Bergman	
 	 	 	 	Name:	 	Richard A. Bergman	
 	 	 	 	Title:	 	President and Chief Executive Officer	

 	 	 	 	
Date: May 2, 2014	 	 	 	By:	 	/s/ Kathleen A. Bayless	
 	 	 	 	Name:	 	Kathleen A. Bayless	
 	 	 	 	Title:	 	Senior Vice President, Chief Financial Officer and Treasurer	
 
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INDEX TO EXHIBITS

Exhibit
Number	  	Exhibit	
 	 	
  31.1	  	Certification of Chief Executive Officer	
 	 	
  31.2	  	Certification of Chief Financial Officer	
 	 	
  32.1	  	Section 1350 Certification of Chief Executive Officer	
 	 	
  32.2	  	Section 1350 Certification of Chief Financial Officer	
 	 	
101.INS	  	XBRL Instance Document	
 	 	
101.SCH	  	XBRL Taxonomy Extension Schema Document	
 	 	
101.CAL	  	XBRL Taxonomy Extension Calculation Linkbase Document	
 	 	
101.DEF	  	XBRL Taxonomy Extension Definition Linkbase Document	
 	 	
101.LAB	  	XBRL Taxonomy Extension Label Linkbase Document	
 	 	
101.PRE	  	XBRL Taxonomy Extension Presentation Linkbase Document	
 
33

Exhibit 31.1
Certification of Chief Executive Officer
I, Richard A. Bergman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Synaptics Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 2, 2014

/s/ Richard A. Bergman	
Richard A. Bergman	
Chief Executive Officer	

Exhibit 31.2
Certification of Chief Financial Officer
I, Kathleen A. Bayless, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Synaptics Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 2, 2014

/s/ Kathleen A. Bayless	
Kathleen A. Bayless	
Chief Financial Officer	

Exhibit 32.1
Section 1350 Certification of Chief Executive Officer
In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the “Company”) for the quarterly period ended March 29, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard A. Bergman, Chief Executive Officer of the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and	
 
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

/s/ Richard A. Bergman	
Richard A. Bergman	
Chief Executive Officer	
May 2, 2014	

Exhibit 32.2
Section 1350 Certification of Chief Financial Officer
In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the “Company”) for the quarterly period ended March 29, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kathleen A. Bayless, Chief Financial Officer of the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and	
 
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

/s/ Kathleen A. Bayless	
Kathleen A. Bayless	
Chief Financial Officer	
May 2, 2014