Business Acquisitions

We did not complete any business acquisitions during 2018. We acquired FFPS and Generation Digital during 2017, which have been included in our Fiery operating segment, and two business process automation businesses, CRC and Escada, which have been included in our Productivity Software operating segment. Post-acquisition revenue was $27.1 million in the year ended December 31, 2017 related to these four acquisitions. We acquired Optitex and Rialco during 2016, which have been included in our Productivity Software and Industrial Inkjet operating segments, respectively. Post-acquisition revenue was $19.8 million in the year ended December 31, 2016 related to these two acquisitions. Acquisition-related transaction costs were $1.2, $2.1, and $2.2 million during the years ended December 31, 2018, 2017, and 2016, respectively.

These acquisitions were accounted for as purchase business combinations. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair value on their respective acquisition dates. Excess purchase consideration was recorded as goodwill. Factors contributing to a purchase price that results in goodwill include, but are not limited to, the retention of research and development personnel with skills to develop future technology, manufacturing capacity in the Industrial Inkjet operating segment, support personnel to provide maintenance services related to the products, a trained sales force capable of selling current and future products, the positive reputation of each of these businesses in the market, the opportunity to integrate acquired technology into our products, the opportunity to sell Fiery DFEs to FFPS customers, and the opportunity to expand our presence in the DFE market through the synergy of FFPS technology with existing Fiery products, and the opportunity to sell our Productivity Software Suite to customers of the acquired businesses. Rialco’s technical and commercial capabilities benefit the Industrial Inkjet operating segment in the sourcing, specification, and purification of high quality dyes and expand our research, development, and innovation base to develop ink for the signage, ceramic, and packaging markets.

2017 Acquisitions

Fiery Segment

We acquired certain assets comprising the FFPS business from Xerox on January 31, 2017 for cash consideration of $23.9 million consisting of $5.9 million paid at closing, $9.0 million paid in July 2017, and $9.0 million paid in July 2018. These subsequent payments were discounted at our incremental borrowing rate of 4.98%, resulting in a purchase price of $23.1 million. The FFPS business manufactures and markets the FFPS DFE, which is a DFE that previously competed with our Fiery DFEs and is included in our Fiery segment.

We acquired privately held Generation Digital on August 14, 2017 for cash consideration of $3.2 million, net of cash acquired, plus an additional potential future cash earnout, which is contingent on achieving certain revenue and operating profit performance targets during a 6-month period followed sequentially by a 12-month period. Generation Digital provides software to textile and fashion designers for the creation and design of prints and patterns, color matching, and color palette creation and management. Generation Digital has been integrated into the Fiery segment.

We made a contingent consideration payment for the initial 6-month period but the fair value of the remaining earnout related to the Generation Digital acquisition is currently estimated to be zero as of December 31, 2018, by applying the income approach. Key assumptions include probability-adjusted revenue and operating profit levels. Probability-adjusted revenue and operating profit are significant inputs that are not observable in the market, which ASC 820-10-35 refers to as a Level 3 inputs. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in general and administrative expenses.

Productivity Software Segment

During 2017 we acquired privately-held CRC and Escada, which have been included in our Productivity Software operating segment, for cash consideration of approximately $19.5 million, net of cash acquired, plus an additional potential future cash earnout related to Escada, which is contingent on Escada achieving certain revenue and operating profit performance targets over two consecutive 12-month periods.

CRC, acquired from Reynolds on May 8, 2017, offers business process automation software for commercial, label, and packaging printers.

Escada, acquired on October 1, 2017, offers the corrugated packaging market corrugator control systems, which provide comprehensive control and traceability for the entire corrugated packaging process.

The fair value of the earnout related to the Escada acquisition is currently estimated to be $4.2 million as of December 31, 2018 by applying the income approach in accordance with ASC 805-30-25-5, Business Combinations. Key assumptions include a risk-free discount rate of 2.97% and probability-adjusted revenue and operating profit levels. This contingent liability is reflected in our Consolidated Balance Sheet as of December 31, 2018, as a current and noncurrent liability of $2.4 and $1.9 million.

2016 Acquisitions

Industrial Inkjet Segment

Rialco was acquired on March 1, 2016 for cash consideration of $8.4 million, net of cash acquired, plus an additional potential future cash earnout, which is contingent on achieving certain revenue and gross profit performance targets over three consecutive 12-month periods. Rialco is a leading European supplier of dye powders and color products for the textile, digital print, and other decorating industries. Rialco’s pure disperse dyes are particularly important in the manufacture of high-quality dye sublimation inkjet ink for textile applications, which is a key growth area in the global migration from analog to digital print. Rialco has been included in the Industrial Inkjet segment.

The fair value of the earnout related to the remaining Rialco acquisition is estimated to be $1.9 million as of December 31, 2018 by applying the income approach, adjusted for the impact of post-acquisition foreign currency translation changes. Key assumptions include a risk-free discount rate of 0.8% and probability-adjusted revenue and gross profit levels. This contingent liability is reflected on the Consolidated Balance Sheet as of December 31, 2018, as a current liability of $1.9 million.

Productivity Software Segment

Optitex was acquired on June 16, 2016 for cash consideration of $11.6 million, net of cash acquired, plus an additional potential future cash earnout, which is contingent on achieving certain revenue and operating profit performance targets over three consecutive 12-month periods. Optitex has developed and markets integrated 2D and 3D CAD software that is shortening the design cycle, reducing our customers’ costs, and accelerating the adoption of fast fashion. Optitex has been integrated into the Productivity Software segment.

The fair value of the earnout related to the Optitex acquisition is estimated to be zero as of December 31, 2018, by applying the income approach, adjusted for the impact of post-acquisition foreign currency translation changes. Key assumptions include a risk-free discount rate of 3.39% and probability-adjusted revenue and operating profit levels. During the year ended December 31, 2018, we reduced the contingent consideration liability for Optitex by a total of $20.9 million with a credit to general and administrative expenses.

Valuation Methodologies

Intangible assets acquired in 2017, and 2016 consist of customer relationships, the Master Purchasing Agreement (the “Purchasing Agreement”) with Xerox, “take-or-pay” contractual penalty with Xerox, trade names, existing technology, backlog, and IPR&D. The intangible asset valuation methodologies for each acquisition assumes discount rates between 14% and 30%.

Customer Relationships and Backlog were valued using the excess earnings method, which is an income approach. The value of customer relationships lies in the generation of a consistent and predictable revenue source and the avoidance of costs associated with developing the relationships. Customer relationships were valued by estimating the revenue and operating income attributable to existing customer relationships and probability-weighting each forecast year to reflect the uncertainty of maintaining existing relationships based on historical attrition rates. Backlog represents unfulfilled customer purchase orders at the acquisition date that will provide a relatively secure revenue stream, subject only to potential customer cancellation.

Trade Names were valued using the relief from royalty method, which is an income approach, with royalty rates based on various factors including an analysis of market data, comparable trade name agreements, and historical advertising dollars spent supporting the trade name.

Existing Technology was generally valued using the relief from royalty method based on royalty rates for similar technologies. The value of existing technology is derived from consistent and predictable revenue, including the opportunity to cross-sell to existing customers and the avoidance of the costs associated with developing the technology. Revenue related to existing technology was adjusted in each forecast year to reflect the evolution of the technology and the cost of sustaining research and development required to maintain the technology.

Rialco existing technology was valued using the cost approach. The value of existing technology was estimated based on the historical time and cost to develop the technology, the estimated man-years required to recreate the technology, historical employee compensation and benefits, and a reasonable mark-up based on profit for companies with similar operations.

Purchasing Agreement was valued using the excess earnings method, which is an income approach. The Purchasing Agreement entered into with Xerox states that we will be Xerox’s preferred supplier of DFEs provided that we meet quality, cost, delivery, and services requirements. The value of the Purchasing Agreement lies in the generation of a consistent and predictable revenue source without incurring the costs normally required to acquire the Purchasing Agreement. The Purchasing Agreement was valued by estimating the revenue and operating profit attributable to the Purchasing Agreement and probability-weighting each forecast year to reflect the uncertainty of maintaining the existing relationship with Xerox beyond the initial five-year term of the agreement.

Take-or-pay Contract was valued using the Monte Carlo method, which is an income approach. If Xerox’s purchases of Fiery and FFPS DFEs during each of four consecutive 12-month periods is less than the minimum level defined for each purchase period, then Xerox shall make a one-time payment in an amount equal to a percentage of such shortfall compared to the minimum level, subject to the maximum payment amount agreed between the parties for each purchase period. Key assumptions include a risk-free discount rate of 4.98%, asset volatility of 27%, and probability-adjusted DFE revenue. If Xerox’s purchases of Fiery and FFPS DFEs exceed the minimum purchase levels defined for each purchase period, then we will pay a percentage of such excess to Xerox.

The allocation of the purchase price to the assets acquired and liabilities assumed (in thousands) with respect to each of these acquisitions at their respective acquisition dates is summarized as follows:



	2017 Acquisitions												2016 Acquisitions
	Fiery								Productivity Software				Industrial Inkjet			Productivity Software
	FFPS				Generation Digital				CRC and Escada				Rialco			Optitex
	Weighted average useful life	Purchase Price Allocation			Weighted average useful life	Purchase Price Allocation			Weighted average useful life	Purchase Price Allocation			Weighted average useful life	Purchase Price Allocation		Weighted average useful life	Purchase Price Allocation
Purchasing agreement	10 years	$	9,330		—	$	—		—	$	—		—	$	—	—	$	—
Take-or-pay contract	4 years	9,000			—	—			—	—			—	—		—	—
Customer relationships	—	—			8 years	3,030			7-9 years	5,240			6 years	2,512		3-4 years	8,890
Existing technology	2 years	2,570			5 years	890			4-6 years	5,870			5 years	846		5 years	7,760
Trade names	5 years	1,020			5 years	290			4-5 years	850			5 years	763		4 years	2,020
IPR&D	< one year	70			—	—			—	—			—	—		—	—
Backlog	—	—			—	—			one year	191			< one year	56		< one year	370
Goodwill	—	6,590			—	3,012			—	11,632				1,426			28,147
Total intangible assets		28,580				7,222				23,783				5,603			47,187
Net tangible assets (liabilities)		(5,537		)		(298		)		(3,738		)		5,177			(11,924		)
Total purchase price		$	23,043			$	6,924			$	20,045			$	10,780		$	35,263

The initial preliminary purchase price allocations were adjusted by $0.7and $0.8 million during the years ended December 31, 2017, and 2016, respectively, primarily related to certain current assets and deferred tax liabilities. Proforma results of operations have not been presented because they are not material to our Consolidated Statements of Operations.

Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired. Goodwill that was generated by our acquisitions of Rialco, CRC and Escada is not deductible for tax purposes. Goodwill that was generated by our acquisitions of FFPS and Generation Digital is deductible for tax purposes. Goodwill that was generated by our acquisition of Optitex is deductible for U.S. tax purposes, but is not deductible for tax purposes in Israel.

Escada and Rialco generate revenue and incur operating expenses primarily in British pounds sterling. Upon consideration of the salient economic indicators, we consider British pounds sterling to be the functional currency for Escada and Rialco. Optitex generates revenue and incurs operating expenses primarily in Israeli shekels. Upon consideration of the salient economic indicators, we consider the Israeli shekel to be the functional currency for Optitex.