Acquisitions

In 2014, we completed the acquisitions of Axeda (on August 11, 2014), Atego (on June 30, 2014) and ThingWorx (on December 30, 2013). In 2015, we completed the acquisition of ColdLight (on May 7, 2015). The results of operations of these acquired businesses have been included in our consolidated financial statements beginning on their respective acquisition dates.

Acquisition-related costs were $2.8 million and $8.7 million for the third quarter and first nine months of 2015, respectively, and $1.3 million and $6.4 million for the third quarter and first nine months of 2014, respectively. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees, 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 amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs have been classified in general and administrative expenses in the accompanying Consolidated Statements of Operations.

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). Up to $5 million of contingent consideration may become payable to the former owners of ColdLight if certain technology milestones are achieved within two years of the acquisition (the earn-out). If an earn-out milestone is achieved, a portion of the contingent consideration becomes earned and payable in cash after each six-month period. Up to $3.0 million of the contingent consideration can be earned in the first year and up to $2.0 million can be earned in the second year. We borrowed $100.0 million under our existing credit facility to fund the acquisition.

The acquisition of the ColdLight automated predictive analytics platform will expand our technology portfolio in the Internet of Things (IoT) market. At the time of the acquisition, ColdLight had approximately 60 employees and annualized revenues of $8.0 million. The results of operations of ColdLight have been included in our consolidated financial statements beginning on the acquisition date. Revenue and earnings of ColdLight since the acquisition date were not material.

The acquisition of ColdLight has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of ColdLight and PTC. The process for estimating the fair values of identifiable intangible assets and the contingent consideration liability 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 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 is $3.8 million to $5.0 million. We will assess the probability that the milestones will be met and at what level each reporting period. Any subsequent changes in the estimated fair value of the liability will be reflected in earnings until the liability is fully settled.

Based upon a preliminary valuation, the total purchase price allocation was 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 preliminary purchase price allocation resulted in $85.3 million of goodwill, which will be deductible for income tax purposes. All of the acquired goodwill was allocated to our software products segment. 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 weighted average 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.

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 are eligible to receive additional consideration of up to $18.0 million if certain profitability and bookings targets are achieved within two years of the acquisition (the earn-out). The earn-out is payable in cash in two installments, half of which was earned and paid in July 2015 and the remainder of which, if earned, will become payable in 2016 after the second year measurement period. 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 of the financial targets. We assess the probability that the targets will be met each reporting period. At July 4, 2015, we estimate that the full amount of the contingent consideration of $18.0 million will be earned. Any subsequent changes in the estimated fair value of the liability are reflected in earnings until the liability is fully settled (an increase of $2.8 million in the contingent consideration liability in the first nine months of 2015, see Note 8).