Acquisitions

In 2016, we completed the acquisition of Kepware (on January 12, 2016) and Vuforia (on November 3, 2015), in 2015, we completed the acquisition of ColdLight (on May 7, 2015), and in 2014, we completed the acquisitions of Axeda (on August 11, 2014), Atego (on June 30, 2014) and ThingWorx (on December 30, 2013). The results of operations of these acquired businesses have been included in our consolidated financial statements beginning on their respective acquisition dates. Our results of operations prior to these acquisitions, if presented on a pro forma basis, would not differ materially from our reported results.

These acquisitions have been accounted for as business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the respective acquisition date. The fair values of intangible assets for Kepware, ColdLight and the 2014 acquisitions were based on valuations using an income approach, with estimates and assumptions provided by management of the acquired companies and PTC. The fair values of intangible assets for Vuforia were based on valuations using a cost approach which requires the use of significant estimates and assumptions, including estimating costs to reproduce an asset. The process for estimating the fair values of identifiable intangible assets as well as the Kepware, ColdLight and ThingWorx contingent consideration liabilities requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.

In accounting for these business combinations, we recorded net deferred tax liabilities of $21.6 million in 2014, primarily related to the tax effect of the acquired intangible assets other than goodwill that are not deductible for income tax purposes, partially offset by net operating loss carryforwards. As described in Note G, these net deferred tax liabilities reduced our net deferred tax asset balance and resulted in a tax benefit to decrease our valuation allowance in the U.S. and the U.K.

Acquisition-related costs were $3.5 million, $8.9 million and $12.7 million in 2016, 2015 and 2014, respectively. Acquisition-related costs include direct costs of completing an acquisition (e.g., investment banker fees and professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees, severance, and retention bonuses). In addition, subsequent adjustments to our initial estimated amounts of Kepware, ColdLight and ThingWorx contingent consideration, primarily net present value changes, are included within acquisition-related charges. These costs have been classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.

2016 Acquisitions

Kepware

On January 12, 2016, we acquired all of the ownership interest in Kepware, Inc., for $99.4 million in cash (net of cash acquired of $0.6 million) and, $16.9 million representing the fair value of contingent consideration payable upon achievement of targets described below. We borrowed $100.0 million under our existing credit facility in January of 2016 to fund the acquisition.

The acquisition of Kepware's KEPServerEX^® communication platform enhances our portfolio of Internet of Things (IoT) technology, and accelerates our entry into the factory setting and industrial IoT. At the time of the acquisition, Kepware had historical annualized revenues which were immaterial to our financial results. Kepware added approximately $16 million to our 2016 revenue and approximately $15 million in costs and expenses.

The former shareholders of Kepware are eligible to receive additional consideration of up to $18.0 million, which is contingent on the achievement of certain Financial Performance, Product Integration and Business Integration targets (as defined in the Stock Purchase Agreement) within 24 months from April 1, 2016. If such targets are achieved within the defined 12 month, 18 month and 24 month earn-out periods, the consideration corresponding to each target will be earned and payable in cash. Up to $9.6 million of the total contingent consideration is eligible to become payable in 2017, and the remainder, if subsequently earned, will become payable in 2018. In connection with accounting for the business combination, we recorded a liability of $16.9 million representing the fair value of the contingent consideration. The liability was valued using a discounted cash flow method and a probability weighted estimate of achievement of the targets. The estimated undiscounted range of outcomes for the contingent consideration was $16.9 million to $18.0 million at the acquisition date. As of September 30, 2016, our estimate of the liability was increased to $17.1 million. We will continue to assess the probability that the unearned milestones will be met and at what level each reporting period. The subsequent changes in the estimated fair value of the liability are reflected in earnings until the liability is fully settled.

The purchase price allocation resulted in $77.1 million of goodwill, which will be deductible for income tax purposes. Intangible assets of $34.5 million includes purchased software of $28.7 million, customer relationships of $5.2 million and trademarks of $0.6 million, which are being amortized over useful lives of 10 years, 10 years and 6 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized.

The resulting amount of goodwill reflects our expectations of the following benefits: 1) Kepware’s protocol translators and connectivity platform strengthen the ThingWorx technology platform and accelerate our entry into the factory setting and Industrial IoT (IIoT); 2) cross-selling opportunities for our integrated technology platforms in the critical infrastructure markets to drive revenue growth; and 3) Kepware’s 20 years of manufacturing experience strengthens our manufacturing talent and domain expertise and provides support for our manufacturing strategy initiatives.

Vuforia

On November 3, 2015, pursuant to an Asset Purchase Agreement, we acquired the Vuforia business from Qualcomm Connected Experiences, Inc., a subsidiary of Qualcomm Incorporated, for $64.8 million in cash (net of cash acquired of $4.5 million). We borrowed $50.0 million under our credit facility to finance this acquisition.

The acquisition of Vuforia's augmented reality (AR) technology platform enhances our technology portfolio and accelerates our strategy as a leading provider of technologies and solutions that blend the digital and physical worlds. At the time of the acquisition, Vuforia had approximately 80 employees and historical annualized revenues which were immaterial to our financial results.

The purchase price allocation resulted in $23.3 million of goodwill, $41.2 million of technology and $0.3 million of net tangible assets. The acquired technology is being amortized over a useful life of 6 years. The resulting amount of goodwill reflects the value of the synergies created by integrating Vuforia’s augmented technology platform into PTC’s IoT solutions.

The total purchase price for our 2016 acquisitions was allocated to assets and liabilities acquired as follows:



Purchase price allocation:	Kepware			Vuforia
	(in thousands)
Goodwill	$	77,081		$	23,316
Identifiable intangible assets	34,500			41,200
Cash	590			4,466
Other assets and liabilities, net	4,729			261
Total allocation of purchase price consideration	116,900			69,243
Less: cash acquired	(590		)	(4,466		)
Total purchase price allocation, net of cash acquired	116,310			64,777
Less: contingent consideration	(16,900		)	—
Net cash used for acquisitions of businesses	$	99,410		$	64,777

2015 Acquisition

ColdLight

On May 7, 2015, we acquired all of the ownership interest of ColdLight Solutions, LLC, a company that offered solutions for data machine learning and predictive analytics, for approximately $98.6 million in cash (net of cash acquired of $1.3 million).

The total purchase price for ColdLight was allocated to assets and liabilities acquired as follows:



Purchase price allocation:	(in thousands)
Goodwill	$	85,288
Identifiable intangible assets	17,620
Cash	1,313
Other assets and liabilities, net	(516		)
Total allocation of purchase price consideration	103,705
Less: cash acquired	(1,313		)
Total purchase price allocation, net of cash acquired	102,392
Less: contingent consideration	(3,800		)
Net cash used to acquire ColdLight	$	98,592

The purchase price allocation resulted in $85.3 million of goodwill, which will be deductible for income tax purposes. Intangible assets of $17.6 million includes purchased software of $13.6 million, customer relationships of $3.5 million and trademarks of $0.5 million, which are being amortized over useful lives of 10 years, 9 years and 7 years, respectively, based upon the pattern in which economic benefits related to such assets are expected to be realized.

The resulting amount of goodwill reflects our expectations of the following benefits: (1) ColdLight provides a differentiated machine learning platform for critical data analytics in our solution portfolio; (2) ColdLight’s Neuron^® product suite can automate the analytics process, reducing the dependency on manual processes; (3) ColdLight is addressing challenging aspects of data analytics aligned with the PTC / ThingWorx analytics vision; (4) ColdLight has a presence in industries outside of PTC's traditional markets which create a foundation for us to pursue opportunities in non-traditional vertical markets.

The former shareholders of ColdLight are eligible to receive additional consideration (the earn-out) of up to $5.0 million, which is contingent upon achievement of certain technology milestones within two years of the acquisition. If an earn-out milestone is achieved, a portion of the contingent consideration becomes earned and payable in cash after each six-month period. In connection with accounting for the business combination, we recorded a liability of $3.8 million, representing the fair value of the contingent consideration. The liability was valued using a discounted cash flow method and a probability weighted estimate of achievement of the technology milestones. The estimated undiscounted range of outcomes for the contingent consideration was $3.8 million to $5.0 million at the acquisition date. As of September 30, 2016, our estimate of the liability was $2.5 million, net of $2.5 million in payments made in 2016. $1.9 million of the total payments represents the fair value of the liability recorded at acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. The remaining $0.6 million of the total payments represents changes in the estimated liability recorded at acquisition date and is included in operating activities in the Consolidated Statements of Cash Flow.

2014 Acquisitions

Axeda and Atego

In the fourth quarter of 2014, we acquired all of the outstanding shares of capital stock of Axeda (a privately-held U.S.-based company) and Atego Group Limited (a privately-held company with operations in the U.K., the U.S. and France) for a total of $212.0 million, net of $13.1 million of cash acquired. The acquisitions resulted in goodwill of $157.7 million, intangible assets of $86.9 million and deferred tax liabilities related to the intangible assets of $12.6 million.

ThingWorx

In the second quarter of 2014, we acquired ThingWorx, Inc. for $111.5 million (net of cash acquired of $0.1 million). The former shareholders of ThingWorx were eligible to receive additional consideration (the earn-out) of up to $18.0 million if certain profitability and bookings targets were achieved within two years of the acquisition from December 30, 2013 to January 1, 2016. In connection with accounting for the business combination, we recorded a liability representing the fair value of the contingent consideration. The liability was valued using a discounted cash flow method and a probability weighted estimate of achievement the financial targets.

The ThingWorx contingent earn-out first year payment criteria were attained in fiscal 2015. As such, $9.0 million of the total contingent consideration was paid in July 2015. Of this payment, $4.3 million represents the fair value of the first installment payment recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. The remaining $4.7 million of this payment represents changes in the estimated liability recorded since the acquisition date and was included in operating activities in the Consolidated Statements of Cash Flows. The contingent earn-out second year payment criteria were attained in fiscal 2016. We paid the remaining $9.0 million of the total contingent consideration in April 2016. Of this payment, $8.7 million represents the fair value of the second installment payment liability recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. The remaining $0.3 million of this payment represents changes in the estimated liability recorded since the acquisition date and is included in operating activities in the Consolidated Statements of Cash Flows.