10-Q 1 a3rdqtr2013form10-q.htm 10-Q 3rd Qtr 2013 Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 FORM 10-Q
 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 1-13461
 
 
 
Group 1 Automotive, Inc.
 
 
 
(Exact name of registrant as specified in its charter) 
 
Delaware
 
76-0506313
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
 
 
800 Gessner, Suite 500
Houston, Texas 77024
(Address of principal executive offices) (Zip code)
 
 
 
 
(713) 647-5700
(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  þ    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  þ    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
þ
 
¨
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  þ
As of October 29, 2013, the registrant had 24,371,498 shares of common stock, par value $0.01, outstanding.




TABLE OF CONTENTS
 

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
 
 
September 30, 2013
 
December 31,
2012
 
 
(Unaudited)
 
 
 
(In thousands, except per share amounts)
ASSETS
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
26,278

 
$
4,650

Contracts-in-transit and vehicle receivables, net
 
160,554

 
204,396

Accounts and notes receivable, net
 
123,376

 
111,228

Inventories, net
 
1,351,719

 
1,194,288

Deferred income taxes
 
22,273

 
19,750

Prepaid expenses and other current assets
 
23,775

 
31,869

Total current assets
 
1,707,975

 
1,566,181

PROPERTY AND EQUIPMENT, net
 
716,514

 
667,768

GOODWILL
 
689,871

 
582,384

INTANGIBLE FRANCHISE RIGHTS
 
279,806

 
196,058

OTHER ASSETS
 
15,742

 
10,624

Total assets
 
$
3,409,908

 
$
3,023,015

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
 
 
 
 
Floorplan notes payable - credit facility and other
 
$
960,871

 
$
968,959

Offset account related to floorplan notes payable - credit facility
 
(47,709
)
 
(112,261
)
Floorplan notes payable - manufacturer affiliates
 
308,869

 
211,965

Current maturities of long-term debt and short-term financing
 
27,010

 
31,358

Accounts payable
 
201,699

 
167,439

Accrued expenses
 
133,777

 
128,118

Total current liabilities
 
1,584,517

 
1,395,578

LONG-TERM DEBT, net of current maturities
 
560,427

 
555,016

DEFERRED INCOME TAXES
 
136,664

 
94,130

LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES
 
29,184

 
43,089

OTHER LIABILITIES
 
46,200

 
42,413

COMMITMENTS AND CONTINGENCIES (NOTE 11)
 

 

TEMPORARY EQUITY - Redeemable equity portion of the 3.00% Convertible Senior Notes
 
29,974

 
32,505

STOCKHOLDERS’ EQUITY:
 
 
 
 
Preferred stock, $0.01 par value, 1,000 shares authorized; none issued or outstanding
 

 

Common stock, $0.01 par value, 50,000 shares authorized; 25,888 and 25,836 issued, respectively
 
259

 
258

Additional paid-in capital
 
369,198

 
332,836

Retained earnings
 
758,498

 
677,864

Accumulated other comprehensive loss
 
(46,345
)
 
(33,057
)
Treasury stock, at cost; 1,514 and 3,110 shares, respectively
 
(58,668
)
 
(117,617
)
Total stockholders’ equity
 
1,022,942

 
860,284

Total liabilities and stockholders’ equity
 
$
3,409,908

 
$
3,023,015


The accompanying notes are an integral part of these consolidated financial statements.
3


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(Unaudited, in thousands, except per share amounts)
REVENUES:
 
 
 
 
 
 
 
 
New vehicle retail sales
 
$
1,386,667

 
$
1,141,286

 
$
3,873,121

 
$
3,134,591

Used vehicle retail sales
 
529,828

 
462,395

 
1,536,031

 
1,333,603

Used vehicle wholesale sales
 
85,800

 
78,424

 
243,667

 
218,415

Parts and service sales
 
255,316

 
224,990

 
753,776

 
658,404

Finance, insurance and other, net
 
82,536

 
69,477

 
232,494

 
192,130

Total revenues
 
2,340,147

 
1,976,572

 
6,639,089

 
5,537,143

COST OF SALES:
 
 
 
 
 
 
 
 
New vehicle retail sales
 
1,313,372

 
1,074,736

 
3,656,825

 
2,951,379

Used vehicle retail sales
 
488,346

 
424,663

 
1,410,768

 
1,220,628

Used vehicle wholesale sales
 
87,334

 
79,067

 
242,267

 
216,031

Parts and service sales
 
121,633

 
106,875

 
358,004

 
312,106

Total cost of sales
 
2,010,685

 
1,685,341

 
5,667,864

 
4,700,144

GROSS PROFIT
 
329,462

 
291,231

 
971,225

 
836,999

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
246,863

 
216,082

 
731,455

 
629,521

DEPRECIATION AND AMORTIZATION EXPENSE
 
9,093

 
8,096

 
26,390

 
23,074

ASSET IMPAIRMENTS
 
565

 

 
1,174

 
288

INCOME FROM OPERATIONS
 
72,941

 
67,053

 
212,206

 
184,116

OTHER EXPENSE:
 
 
 
 
 
 
 
 
Floorplan interest expense
 
(10,690
)
 
(7,942
)
 
(30,927
)
 
(23,424
)
Other interest expense, net
 
(9,971
)
 
(9,619
)
 
(28,783
)
 
(27,849
)
Other expense, net
 

 

 
(789
)
 

INCOME BEFORE INCOME TAXES
 
52,280

 
49,492

 
151,707

 
132,843

PROVISION FOR INCOME TAXES
 
(19,515
)
 
(18,157
)
 
(59,436
)
 
(49,766
)
NET INCOME
 
$
32,765

 
$
31,335

 
$
92,271

 
$
83,077

BASIC EARNINGS PER SHARE
 
$
1.34

 
$
1.38

 
$
3.83

 
$
3.64

Weighted average common shares outstanding
 
23,373

 
21,521

 
22,994

 
21,600

DILUTED EARNINGS PER SHARE
 
$
1.19

 
$
1.32

 
$
3.52

 
$
3.50

Weighted average common shares outstanding
 
26,342

 
22,458

 
25,153

 
22,501

CASH DIVIDENDS PER COMMON SHARE
 
$
0.17

 
$
0.15

 
$
0.48

 
$
0.44



The accompanying notes are an integral part of these consolidated financial statements.
4


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(Unaudited, in thousands)
NET INCOME
 
$
32,765

 
$
31,335

 
$
92,271

 
$
83,077

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
3,237

 
1,856

 
(23,487
)
 
1,850

Unrealized loss on marketable securities, net of tax benefit of $0, $10, $0 and $5, respectively
 

 
(16
)
 

 
(8
)
Net unrealized gain (loss) on interest rate swaps:
 
 
 
 
 
 
 
 
Unrealized gain (loss) arising during the period, net of tax benefit (provision) of $1,615, $2,786, ($2,999) and $7,352, respectively
 
(2,691
)
 
(4,644
)
 
4,999

 
(12,254
)
Reclassification adjustment for loss included in interest expense, net of tax provision of $1,075, $1,006, $3,120 and $3,216, respectively
 
1,791

 
1,676

 
5,200

 
5,360

Net unrealized gain (loss) on interest rate swaps, net of tax
 
(900
)
 
(2,968
)
 
10,199

 
(6,894
)
OTHER COMPREHENSIVE INCOME (LOSS) NET OF TAXES
 
2,337

 
(1,128
)
 
(13,288
)
 
(5,052
)
COMPREHENSIVE INCOME
 
$
35,102

 
$
30,207

 
$
78,983

 
$
78,025



The accompanying notes are an integral part of these consolidated financial statements.
5


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 
 
 
Common Stock
 
Additional
Paid-in
 
Retained
 
Accumulated
Other
Comprehensive
 
Treasury
 
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Stock
 
Total
 
 
(Unaudited, in thousands)
BALANCE, December 31, 2012
 
25,836

 
$
258

 
$
332,836

 
$
677,864

 
$
(33,057
)
 
$
(117,617
)
 
$
860,284

Net income
 

 

 

 
92,271

 

 

 
92,271

Other comprehensive loss, net
 

 

 

 

 
(13,288
)
 

 
(13,288
)
Treasury stock used in acquisition
 

 

 
27,689

 

 

 
52,709

 
80,398

3.00% Convertible Notes reclassification from temporary equity
 

 

 
2,531

 

 

 

 
2,531

Net issuance of treasury shares to employee stock compensation plans
 
52

 
1

 
(5,705
)
 

 

 
6,240

 
536

Stock-based compensation
 

 

 
10,434

 

 

 

 
10,434

Tax effect from stock-based compensation plans
 

 

 
1,413

 

 

 

 
1,413

Cash dividends, net of estimated forfeitures relative to participating securities
 

 

 

 
(11,637
)
 

 

 
(11,637
)
BALANCE, September 30, 2013
 
25,888

 
$
259

 
$
369,198

 
$
758,498

 
$
(46,345
)
 
$
(58,668
)
 
$
1,022,942



The accompanying notes are an integral part of these consolidated financial statements.
6


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
(Unaudited, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
92,271

 
$
83,077

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
26,390

 
23,074

Deferred income taxes
 
16,601

 
10,755

Asset impairments
 
1,174

 
288

Stock-based compensation
 
10,473

 
8,943

Amortization of debt discount and issue costs
 
10,453

 
9,659

Gain on real estate transactions
 

 
(2,131
)
Gain on disposition of assets
 
(11,093
)
 

Tax effect from stock-based compensation
 
(1,413
)
 
(1,015
)
Other
 
2,301

 
1,609

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Accounts payable and accrued expenses
 
(9,500
)
 
19,294

Accounts and notes receivable
 
2,815

 
6,680

Inventories
 
(107,994
)
 
(193,145
)
Contracts-in-transit and vehicle receivables
 
45,284

 
25,135

Prepaid expenses and other assets
 
1,046

 
6,575

Floorplan notes payable - manufacturer affiliates
 
49,814

 
(5,979
)
Deferred revenues
 
344

 
(110
)
Net cash provided by (used in) operating activities
 
128,966

 
(7,291
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Cash paid in acquisitions, net of cash received
 
(106,672
)
 
(116,528
)
Proceeds from disposition of franchises, property and equipment
 
101,821

 
257

Purchases of property and equipment, including real estate
 
(63,890
)
 
(67,877
)
Other
 
2,155

 
2,814

Net cash used in investing activities
 
(66,586
)
 
(181,334
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings on credit facility - Floorplan Line and other
 
4,707,989

 
4,186,871

Repayments on credit facility - Floorplan Line and other
 
(4,652,495
)
 
(4,014,024
)
Borrowings on mortgage facility
 

 
18,080

Principal payments on mortgage facility
 
(7,919
)
 
(1,648
)
Borrowings of other long-term debt
 
828

 
36

Principal payments of long-term debt related to real estate loans
 
(32,792
)
 
(7,297
)
Borrowings of short-term and long-term debt related to real estate
 
21,105

 
54,320

Principal payments of other long-term debt
 
(65,446
)
 
(3,938
)
Repurchases of common stock, amounts based on settlement date
 

 
(11,317
)
Issuance of common stock to benefit plans
 
538

 
1,753

Tax effect from stock-based compensation
 
1,413

 
1,015

Dividends paid
 
(11,676
)
 
(10,029
)
Net cash (used in) provided by financing activities
 
(38,455
)
 
213,822

EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
(2,297
)
 
(1,270
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
21,628

 
23,927

CASH AND CASH EQUIVALENTS, beginning of period
 
4,650

 
14,895

CASH AND CASH EQUIVALENTS, end of period
 
$
26,278

 
$
38,822

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Purchases of property and equipment, including real estate, accrued in accounts payable and accrued expenses
 
$
501

 
$
3,738


The accompanying notes are an integral part of these consolidated financial statements.
7

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. INTERIM FINANCIAL INFORMATION
Business and Organization
Group 1 Automotive, Inc., a Delaware corporation, through its regions, is a leading operator in the automotive retailing industry with operations in 15 states in the United States of America (“U.S.”), 13 towns in the United Kingdom (“U.K.”) and two states in Brazil. Group 1 Automotive, Inc. and its subsidiaries are collectively referred to as the “Company” in these Notes to Consolidated Financial Statements. The Company, through its regions, sells new and used cars and light trucks; arranges related vehicle financing; sells service and insurance contracts; provides automotive maintenance and repair services; and sells vehicle parts.
As of September 30, 2013, the Company’s U.S. retail network consisted of the following two regions (with the number of dealerships they comprised): (a) the East (44 dealerships in Alabama, Florida, Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York and South Carolina), and (b) the West (65 dealerships in California, Kansas, Louisiana, Oklahoma, and Texas). Each U.S. region is managed by a regional vice president who reports directly to the Company’s Chief Executive Officer and is responsible for the overall performance of their regions. The financial matters of each U.S. region are managed by a regional chief financial officer who reports directly to the Company’s Chief Financial Officer. The Company’s two international regions consist of 14 dealerships in the U.K. and 18 dealerships in Brazil, which are also managed locally with direct reporting responsibilities to the Company’s corporate management team.
The Company's operating results are generally subject to changes in the economic environment as well as seasonal variations. Generally there are higher volumes of vehicles sales and service in the second and third calendar quarters of each year in the U.S., in the first and third quarters in the U.K. and during the third and fourth quarters in Brazil. This seasonality is generally attributable to consumer buying trends and the timing of manufacturer new vehicle model introductions. In addition, in some regions of the U.S., vehicle purchases decline during the winter months due to inclement weather. As a result, revenues and operating income are typically lower in the first and fourth quarters and higher in the second and third quarters. Other factors unrelated to seasonality, such as changes in economic condition, manufacturer incentive programs, or shifts in governmental taxes or regulations may exaggerate seasonal or cause counter-seasonal fluctuations in our revenues and operating income.
Basis of Presentation
The accompanying unaudited condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying unaudited condensed Consolidated Financial Statements. Due to seasonality and other factors, the results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”).
All business acquisitions completed during the periods presented have been accounted for using the purchase method of accounting, and their results of operations are included from the effective dates of the closings of the acquisitions. The allocations of purchase price to the assets acquired and liabilities assumed are assigned and recorded based on estimates of fair value. All intercompany balances and transactions have been eliminated in consolidation.
Business Segment Information
The Company, through its regions, conducts business in the automotive retailing industry. All of the segments sell new and used cars and light trucks, arrange related vehicle financing, service and insurance contracts, provide automotive maintenance and repair services and sell vehicle parts. Effective with the acquisition of UAB Motors Participações S.A. (“UAB Motors”) on February 28, 2013, the Company is aligned into four geographic regions: the East and West Regions in the U.S., the U.K. Region, and the Brazil Region. Also, in conjunction with the acquisition of UAB Motors and consistent with how the Company's chief operating decision maker evaluates performance and allocates resources, the Company reaffirmed that each region represents an operating segment. As part of this determination, the Company concluded, as it has historically, that the East and West Regions of the U.S. are economically similar in that they deliver the same products and services to a common customer group, their customers are generally individuals, they follow the same procedures and methods in managing their operations, and they operate in similar regulatory environments; therefore, the Company aggregates these two regions into one reportable segment. As such, the Company's three reportable segments are the U.S., which includes the activities of the Company's corporate office, the U.K. and Brazil.

8

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Variable Interest Entity
In 2013, the Company entered into arrangements to provide a fixed-interest-rate working capital loan and various administrative services to a related-party entity that owns and operates retail automotive dealerships for a variable fee, both of which constitute variable interests in the entity. The Company's exposure to loss as a result of its involvement in the entity includes the balance outstanding under the loan arrangement. The Company holds no equity ownership interest in the entity, and has determined that the entity meets the criteria of a variable interest entity (“VIE”). The terms of the loan and services agreements provide the Company with the right to control the activities of the VIE that most significantly impact the VIE's economic performance, the obligation to absorb potentially significant losses of the VIE and the right to receive potentially significant benefits from the VIE. Accordingly, the Company qualified as the VIE's primary beneficiary and consolidated 100% of the assets and liabilities of the VIE as of September 30, 2013, as well as 100% of the results of operations of the VIE beginning on the effective date of the variable interests arrangements to September 30, 2013. The floorplan notes payable liability of the VIE is securitized by the new and used vehicle inventory of the VIE, as well as the associated receivable balances from the sale of such inventory to the extent necessary. The preliminary carrying amounts and classification of assets and liabilities (for which creditors do not have recourse to the general credit of the Company) are included within amounts from the Company's purchase price allocations. As discussed in Note 2, "Acquisitions and Dispositions," the allocations are based on estimates and assumptions that are subject to change within the purchase price allocation period. The assets and liabilities included in the Company's consolidated statements of financial position for the consolidated VIE are as follows (in thousands):
 
 
September 30, 2013
 
Current Assets
 
$
26,918

 
Non-current Assets
 
75,786

 
Total Assets
 
$
102,704

 
Current Liabilities
 
$
24,352

 
Non-current Liabilities
 
26,764

 
Total Liabilities
 
$
51,116

 
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The Company's adoption of ASU No. 2013-2 as of March 31, 2013 did not have a material impact on the Company's consolidated financial statements.
2. ACQUISITIONS AND DISPOSITIONS
In February 2013, the Company purchased all of the outstanding stock of UAB Motors. At the time of acquisition, UAB Motors consisted of 18 dealerships and 22 franchises in Brazil, as well as five collision centers. As discussed in Note 1, "Interim Financial Information," in connection with this acquisition, the Company entered into arrangements that are variable interests in a VIE. The Company qualifies as the primary beneficiary of the VIE. The consolidation of the VIE into the financial statements of the Company was accounted for as a business combination. In addition, during the nine months ended September 30, 2013, the Company acquired certain assets of four dealerships in the U.K. and two dealerships in the U.S. In conjunction with these acquisitions, the Company incurred $6.5 million of costs, primarily related to professional services associated with the Brazil transaction. The Company included these costs in selling, general and administrative expenses ("SG&A") in the Consolidated Statement of Operations for the nine months ended September 30, 2013.

9

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Aggregate consideration paid for these acquisitions totaled $190.4 million, including $106.7 million of cash and 1.39 million shares of the Company's common stock. The Company also assumed debt in conjunction with the acquisitions, of which $65.1 million was contemporaneously extinguished. In conjunction with the extinguishment, the Company recognized a loss of $0.8 million that is included in Other Expense, net on the Consolidated Statement of Operations for the nine months ended September 30, 2013. The purchase price has been allocated as set forth below based upon the consideration paid and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The allocation of the purchase price is preliminary and based on estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date). Goodwill was assigned to the U.S., U.K. and Brazil reportable segments in the amounts of $13.6 million, $1.6 million and $112.1 million, respectively.
 
 
As of Acquisition Date
 
 
(In thousands)
Current Assets
 
$
32,370

Inventory
 
105,455

Property and Equipment
 
32,043

Goodwill & Intangible Franchise Rights
 
226,631

Other assets
 
1,869

Total Assets
 
$
398,368

Current Liabilities
 
$
116,993

Deferred Income Taxes
 
22,290

Long-term Debt
 
68,639

Total Liabilities
 
$
207,922

The intangible franchise rights are expected to continue for an indefinite period, therefore these rights are not amortized. These intangible assets will be evaluated on an annual basis in accordance with ASC 350. Goodwill represents the excess of consideration paid compared to net assets received in the acquisition. The goodwill relative to the Brazil reportable segment is not currently deductible for tax purposes.
Our supplemental pro forma revenue and net income had the acquisition date for each of the Company's 2013 acquisitions been January 1, 2012, are as follows:
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
Supplemental Pro forma:
 
2013
 
2012
 
2013
 
2012
 
 
 
(In thousands)
 
Revenue
 
$
2,354,595

 
$
2,234,107

 
$
6,849,938

 
$
6,331,163

 
Net income
 
$
32,260

 
$
36,149

 
$
100,243

 
$
95,867

 
The supplemental pro forma revenue and net income are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated these businesses as of January 1, 2012.
During the three months ended September 30, 2013, the Company sold two dealerships in the U.S. During the nine months ended September 30, 2013, the Company sold six dealerships and one franchise in the U.S. As a result of the dispositions, a net gain of $1.4 million and $10.4 million was recognized for the three and nine months ended September 30, 2013, respectively.
During the nine months ended September 30, 2012, the Company acquired seven dealerships in the U.S. and six dealerships in the U.K. Consideration paid for these dealerships totaled $116.5 million.

10

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The periodic interest rates of the Revolving Credit Facility (as defined in Note 8, “Credit Facilities”), the Mortgage Facility (as defined in Note 9, “Long-Term Debt”) and certain variable-rate real estate related borrowings are indexed to the one-month London Inter Bank Offered Rate (“LIBOR”) plus an associated company credit risk rate. In order to minimize the earnings variability related to fluctuations in these rates, the Company employs an interest rate hedging strategy, whereby it enters into arrangements with various financial institutional counterparties with investment grade credit ratings, swapping its variable interest rate exposure for a fixed interest rate over terms not to exceed the related variable-rate debt.
The Company presents the fair value of all derivatives on its Consolidated Balance Sheets. The Company measures the fair value of its interest rate derivative instruments utilizing an income approach valuation technique, converting future amounts of cash flows to a single present value in order to obtain a transfer exit price within the bid and ask spread that is most representative of the fair value of its derivative instruments. In measuring fair value, the Company utilizes the option-pricing Black-Scholes present value technique for all of its derivative instruments. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service provider, matched to the identical maturity term of the instrument being measured. Observable inputs utilized in the income approach valuation technique incorporate identical contractual notional amounts, fixed coupon rates, periodic terms for interest payments and contract maturity. The fair value estimate of the interest rate derivative instruments also considers the credit risk of the Company for instruments in a liability position or the counterparty for instruments in an asset position. The credit risk is calculated by using the spread between the one-month LIBOR yield curve and the relevant average 10 and 20-year rate according to Standard and Poor’s. The Company has determined the valuation measurement inputs of these derivative instruments to maximize the use of observable inputs that market participants would use in pricing similar or identical instruments and market data obtained from independent sources, which is readily observable or can be corroborated by observable market data for substantially the full term of the derivative instrument. Further, the valuation measurement inputs minimize the use of unobservable inputs. Accordingly, the Company has classified the derivatives within Level 2 of the hierarchy framework as described by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification.
The related gains or losses on these interest rate derivatives are deferred in stockholders’ equity as a component of accumulated other comprehensive loss. These deferred gains and losses are recognized in income in the period in which the related items being hedged are recognized in expense. However, to the extent that the change in value of a derivative contract does not perfectly offset the change in the value of the items being hedged, that ineffective portion is immediately recognized in other income or expense. Monthly contractual settlements of these swap positions are recognized as floorplan or other interest expense in the Company’s accompanying Consolidated Statements of Operations. All of the Company’s interest rate hedges are designated as cash flow hedges.
The Company held interest rate swaps in effect as of September 30, 2013 of $450.0 million in notional value that fixed its underlying one-month LIBOR at a weighted average rate of 2.6%. The Company records the majority of the impact of the periodic settlements of these swaps as a component of floorplan interest expense. For the three and nine months ended September 30, 2013, the impact of the Company’s interest rate hedges in effect increased floorplan interest expense by $2.5 million and $7.4 million, respectively; for the three and nine months ended September 30, 2012, the impact of the Company's interest rate hedges in effect increased floorplan interest expense by $2.4 million and $7.7 million, respectively. Total floorplan interest expense was $10.7 million and $7.9 million for the three months ended September 30, 2013 and 2012, respectively, and $30.9 million and $23.4 million for the nine months ended September 30, 2013 and 2012, respectively.
In addition to the $450.0 million of swaps in effect as of September 30, 2013, the Company held ten additional interest rate swaps with forward start dates between December 2014 and December 2016 and expiration dates between December 2017 and December 2019. As of September 30, 2013, the aggregate notional value of these ten forward-starting swaps was $525.0 million, and the weighted average interest rate was 2.7%. The combination of the interest rate swaps currently in effect and these forward-starting swaps is structured such that the notional value in effect at any given time through December 2019 does not exceed $600.0 million, which is less than the Company's expectation for variable rate debt outstanding during such period.
As of September 30, 2013 and December 31, 2012, the Company reflected liabilities from interest rate risk management activities of $29.2 million and $43.1 million, respectively, in its Consolidated Balance Sheets. In addition, as of September 30, 2013, the Company reflected $2.4 million of assets from interest rate risk management activities included in Other Assets in its Consolidated Balance Sheets. Included in Accumulated Other Comprehensive Loss at September 30, 2013 and 2012 were accumulated unrealized losses, net of income taxes, totaling $16.7 million and $28.2 million, respectively, related to these interest rate swaps.

11

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At September 30, 2013, all of the Company’s derivative contracts that were in effect were determined to be effective. The Company had no gains or losses related to ineffectiveness or amounts excluded from effectiveness testing recognized in the Consolidated Statements of Operations for either the three months ended September 30, 2013 or 2012, respectively. The following table presents the impact during the current and comparative prior year period for the Company's derivative financial instruments on its Consolidated Statements of Operations and Consolidated Balance Sheets.
 
 
Amount of Unrealized Gain (Loss), Net of Tax, Recognized in Other Comprehensive Income (Loss)
 
 
 
Nine Months Ended September 30,
 
Derivatives in Cash Flow Hedging Relationship
 
2013
 
2012
 
 
 
(In thousands)
 
Interest rate swap contracts
 
 
$
4,999

 
$
(12,254
)
 
 
 
 
 
 
 
 
 
 
Amount of Loss Reclassified from Other Comprehensive Income (Loss) into
Statements of Operations
 
Location of Loss Reclassified from Other Comprehensive Loss into Statements of Operations
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
 
(In thousands)
 
Floorplan interest expense
 
 
$
(7,390
)
 
$
(7,720
)
 
Other interest expense
 
 
$
(930
)
 
$
(856
)
 
The amount expected to be reclassified out of other comprehensive income (loss) into earnings (through floorplan interest expense or other interest expense) in the next twelve months is $10.6 million.
4. STOCK-BASED COMPENSATION PLANS
The Company provides stock-based compensation benefits to employees and non-employee directors pursuant to its 2007 Long Term Incentive Plan, as amended (the "Incentive Plan"), as well as to employees pursuant to its Employee Stock Purchase Plan (the "Purchase Plan"), as amended.
2007 Long Term Incentive Plan
The Incentive Plan provides for the issuance up to 7.5 million shares for grants to non-employee directors, officers and other employees of the Company and its subsidiaries of: (a) options (including options qualified as incentive stock options under the Internal Revenue Code of 1986 and options that are non-qualified), the exercise price of which may not be less than the fair market value of the common stock on the date of the grant; and (b) stock appreciation rights, restricted stock, performance awards, and bonus stock, each granted at the market price of the Company’s common stock at the date of grant. The Incentive Plan expires on March 8, 2017. The terms of the awards (including vesting schedules) are established by the Compensation Committee of the Company’s Board of Directors. As of September 30, 2013, there were 804,024 shares available for issuance under the Incentive Plan.
In 2005, the Company began granting to non-employee directors and certain employees, at no cost to the recipient, restricted stock awards or, at their election, restricted stock units pursuant to the Incentive Plan. Restricted stock awards qualify as participating securities as each contain non-forfeitable rights to dividends. As such, the two-class method is required for the computation of earnings per share. See Note 5, “Earnings Per Share,” for further details. Restricted stock awards are considered outstanding at the date of grant but are subject to vesting periods ranging from six months to five years. Vested restricted stock units, which are not considered outstanding at the grant date, will settle in shares of common stock upon the termination of the grantees’ employment or directorship. In the event an employee or non-employee director terminates his or her employment or directorship with the Company prior to the lapse of the restrictions, the shares, in most cases, will be forfeited to the Company. Compensation expense for these awards is calculated based on the market price of the Company’s common stock at the date of grant and recognized over the requisite service period. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted annually based on the extent to which actual or expected forfeitures differ from the previous estimate.

12

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

A summary of these awards as of September 30, 2013, along with the changes during the nine months then ended follows:
 
 
Awards
 
Weighted Average
Grant Date
Fair Value
Nonvested at December 31, 2012
 
1,023,350

 
$
38.19

Granted
 
286,536

 
60.64

Vested
 
(179,856
)
 
35.84

Forfeited
 
(54,520
)
 
41.68

Nonvested at September 30, 2013
 
1,075,510

 
$
44.41

Employee Stock Purchase Plan
In 1997, the Company adopted the Purchase Plan. The Purchase Plan authorizes the issuance of up to 3.5 million shares of common stock and provides that no options to purchase shares may be granted under the Purchase Plan after March 6, 2016. The Purchase Plan is available to all employees of the Company and its participating subsidiaries and is a qualified plan as defined by Section 423 of the Internal Revenue Code. At the end of each fiscal quarter (the “Option Period”) during the term of the Purchase Plan, employees can acquire shares of common stock from the Company at 85% of the fair market value of the common stock on the first or the last day of the Option Period, whichever is lower. As of September 30, 2013, there were 640,561 shares available for issuance under the Purchase Plan. During the nine months ended September 30, 2013 and 2012, the Company issued 83,698 and 85,081 shares, respectively, of common stock to employees participating in the Purchase Plan.
The weighted average fair value of employee stock purchase rights issued pursuant to the Purchase Plan was $13.65 and $11.23 during the nine months ended September 30, 2013 and 2012, respectively. The fair value of stock purchase rights is calculated using the grant date stock price, the value of the embedded call option and the value of the embedded put option.
Stock-Based Compensation
Total stock-based compensation cost was $3.5 million and $3.0 million for the three months ended September 30, 2013 and 2012, respectively, and $10.5 million and $8.9 million for the nine months ended September 30, 2013 and 2012, respectively. Cash received from Purchase Plan purchases was $4.4 million for the nine months ended September 30, 2013. Cash received from both option exercises and Purchase Plan purchases was $4.2 million for the nine months ended September 30, 2012. The tax benefit realized for the tax deductions from the vesting of restricted shares, which increased additional paid in capital, totaled $1.4 million for the nine months ended September 30, 2013; in addition, the tax benefit realized for the tax deductions from both options exercised and vesting of restricted shares, which increased additional paid in capital, totaled $2.4 million for the nine months ended September 30, 2012.
The Company issues new shares or treasury shares, if available, when restricted stock vests. With respect to shares issued under the Purchase Plan, the Company’s Board of Directors has authorized specific share repurchases to fund the shares issuable under the Purchase Plan.
5. EARNINGS PER SHARE
The two-class method is utilized for the computation of Earnings Per Share (“EPS”). The two-class method requires a portion of net income to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents. The Company’s restricted stock awards qualify as participating securities as each contain non-forfeitable rights to dividends. Income allocated to these participating securities is excluded from net earnings available to common shares, as shown in the table below. Basic EPS is computed by dividing net income available to basic common shares by the weighted average number of basic common shares outstanding during the period. Diluted EPS is computed by dividing net income available to diluted common shares by the weighted average number of dilutive common shares outstanding during the period.

13

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table sets forth the calculation of EPS for the three and nine months ended September 30, 2013 and 2012.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands, except per share amounts)
Weighted average basic common shares outstanding
 
23,373

 
21,521

 
22,994

 
21,600

Dilutive effect of contingently convertible notes and warrants
 
2,962

 
926

 
2,153

 
890

Dilutive effect of stock options, net of assumed repurchase of treasury stock
 

 
3

 

 
4

Dilutive effect of employee stock purchases, net of assumed repurchase of treasury stock
 
7

 
8

 
6

 
7

Weighted average dilutive common shares outstanding
 
26,342

 
22,458

 
25,153

 
22,501

Basic:
 
 
 
 
 
 
 
 
Net Income
 
$
32,765

 
$
31,335

 
$
92,271

 
$
83,077

Less: Earnings allocated to participating securities
 
1,460

 
1,702

 
4,144

 
4,525

Earnings available to basic common shares
 
$
31,305

 
$
29,633

 
$
88,127

 
$
78,552

Basic earnings per common share
 
$
1.34

 
$
1.38

 
$
3.83

 
$
3.64

Diluted:
 
 
 
 
 
 
 
 
Net Income
 
$
32,765

 
$
31,335

 
$
92,271

 
$
83,077

Less: Earnings allocated to participating securities
 
1,320

 
1,641

 
3,843

 
4,373

Earnings available to diluted common shares
 
$
31,445

 
$
29,694

 
$
88,428

 
$
78,704

Diluted earnings per common share
 
$
1.19

 
$
1.32

 
$
3.52

 
$
3.50

The weighted average number of stock-based awards not included in the calculation of the dilutive effect of stock-based awards was immaterial for the three and nine months ended September 30, 2013 and 2012.
As discussed in Note 9, “Long-Term Debt” below, the Company is required to include the dilutive effect, if applicable, of the net shares issuable under the 2.25% Notes (as defined in Note 9) and the 2.25% Warrants sold in connection with the 2.25% Notes (“2.25% Warrants”) in its diluted common shares outstanding for the diluted earnings calculation. As a result, the number of shares included in the Company's diluted shares outstanding each period varies based upon the Company's average adjusted closing common stock price during the applicable period. Although the ten-year call options that the Company purchased on its common stock in connection with the issuance of the 2.25% Notes (“2.25% Purchased Options”) have the economic benefit of decreasing the dilutive effect of the 2.25% Notes, the Company cannot factor this benefit into the diluted common shares outstanding for the diluted earnings calculation since the impact would be anti-dilutive. The average adjusted closing price of the Company's common stock for the three months ended March 31, June 30, and September 30, 2013, was more than the conversion price then in effect at the end of those periods. Therefore, the respective dilutive effect of the 2.25% Notes was included in the computation of diluted EPS for the three months ended March 31, June 30, and September 30, 2013. Since the average price of the Company’s common stock for the three months ended March 31, June 30, and September 30, 2012 was less than the conversion price then in effect at the end of those respective periods, no net shares were included in the computation of diluted EPS for the three and nine months ended September 30, 2012, as the impact would have been anti-dilutive. Refer to Note 9, "Long-Term Debt" for a description of the change to the conversion price of the 2.25% Notes, which occurred during the three months ended September 30, 2013 as a result of the Company’s decision to pay a cash dividend in excess of $0.14.
In addition, the Company is required to include the dilutive effect, if applicable, of the net shares issuable under the 3.00% Notes (as defined in Note 9, "Long-Term Debt" ) and the 3.00% Warrants sold in connection with the 3.00% Notes (“3.00% Warrants”). As a result, the number of shares included in the Company's diluted shares outstanding each period varies based upon the Company's average adjusted closing common stock price during the applicable period. Although the ten-year call options that the Company purchased on its common stock in connection with the issuance of the 3.00% Notes (“3.00% Purchased Options”) have the economic benefit of decreasing the dilutive effect of the 3.00% Notes, the Company cannot factor this benefit into the diluted common shares outstanding for the diluted earnings calculation since the impact would be anti-dilutive. Since the average price of the Company’s common stock for the three months ended March 31, June 30, and September 30, of 2013 and 2012, was more than the conversion price then in effect at the end of those periods, the respective

14

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

dilutive effect of the 3.00% Notes was included in the computation of diluted earnings per share for the three months ended March 31, June 30, and September 30, 2013 and 2012. The dilutive effect of the 3.00% Warrants was also included in the computation for the three and nine months ended September 30, 2013. Refer to Note 9, "Long-Term Debt" for a description of the change to the conversion price of the 3.00% Notes, which occurred during the three months ended September 30, 2013 as a result of the Company’s decision to pay a cash dividend.
6. INCOME TAXES
The Company is subject to U.S. federal income taxes and income taxes in numerous U.S. states. In addition, the Company is subject to income tax in the U.K. and Brazil relative to its foreign subsidiaries. The effective income tax rate of 37.3% of pretax income for the three months ended September 30, 2013 differed from the federal statutory rate of 35.0% due primarily to taxes provided for the taxable state and foreign jurisdictions in which the Company operates, and the dispositions of certain dealerships with non-deductible goodwill.
For the nine months ended September 30, 2013, the Company's effective tax rate increased to 39.2% from 37.5% for the same period in 2012. The change was primarily due to the mix of pretax income from the taxable state jurisdictions in which the Company operates, the tax effect of acquisition costs, and the dispositions of certain dealerships with non-deductible goodwill.
As of September 30, 2013 and December 31, 2012, the Company had no unrecognized tax benefits with respect to uncertain tax positions and did not incur any interest and penalties nor did it accrue any interest for the nine months ended September 30, 2013. When applicable, consistent with prior practice, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
Taxable years 2008 and subsequent remain open for examination by the Company’s major taxing jurisdictions.
7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts and notes receivable consisted of the following: 
 
 
September 30, 2013
 
December 31, 2012
 
 
(unaudited)
 
 
 
 
(In thousands)
Amounts due from manufacturers
 
$
68,591

 
$
64,039

Parts and service receivables
 
31,943

 
17,879

Finance and insurance receivables
 
16,545

 
16,060

Other
 
9,282

 
14,895

Total accounts and notes receivable
 
126,361

 
112,873

Less allowance for doubtful accounts
 
2,985

 
1,645

Accounts and notes receivable, net
 
$
123,376

 
$
111,228

Inventories consisted of the following: 
 
 
September 30, 2013
 
December 31, 2012
 
 
(unaudited)
 
 
 
 
(In thousands)
New vehicles
 
$
988,174

 
$
895,484

Used vehicles
 
230,743

 
184,775

Rental vehicles
 
79,459

 
68,014

Parts, accessories and other
 
59,054

 
50,370

Total inventories
 
1,357,430

 
1,198,643

Less lower of cost or market reserves
 
5,711

 
4,355

Inventories, net
 
$
1,351,719

 
$
1,194,288

New and used vehicles are valued at the lower of specific cost or market and are removed from inventory using the specific identification method. Parts and accessories are valued at lower of cost or market determined on either a first-in, first-out basis or on an average cost basis.

15

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Property and equipment consisted of the following:
 
 
Estimated
Useful Lives
in Years
 
September 30, 2013
 
December 31, 2012
 
 
(unaudited)
 
 
 
 
(dollars in thousands)
Land
 
 
$
237,084

 
$
232,944

Buildings
 
30 to 40
 
366,788

 
331,526

Leasehold improvements
 
varies
 
111,461

 
97,651

Machinery and equipment
 
7 to 20
 
75,761

 
69,630

Furniture and fixtures
 
3 to 10
 
69,533

 
61,627

Company vehicles
 
3 to 5
 
8,445

 
9,239

Construction in progress
 
 
18,974

 
28,188

Total
 
 
 
888,046

 
830,805

Less accumulated depreciation
 
 
 
171,532

 
163,037

Property and equipment, net
 
 
 
$
716,514

 
$
667,768

During the nine months ended September 30, 2013, the Company incurred $45.8 million of capital expenditures for the construction of new or expanded facilities and the purchase of equipment and other fixed assets in the maintenance of the Company’s dealerships and facilities. In addition, the Company purchased real estate during the nine months ended September 30, 2013 associated with existing dealership operations totaling $12.5 million. And, in conjunction with the Company’s acquisition of 24 separate dealerships and five collision centers during the nine months ended September 30, 2013, the Company acquired $32.0 million of real estate and other property and equipment.
8. CREDIT FACILITIES
In the U.S., the Company has a $1.7 billion revolving syndicated credit arrangement with 25 financial institutions including six manufacturer-affiliated finance companies (“Revolving Credit Facility”). The Company also has a $200.0 million floorplan financing arrangement with Ford Motor Credit Company (“FMCC Facility”) for financing of Ford new vehicles in the U.S. and with several other automobile manufacturers for financing of a portion of its rental vehicle inventory. In the U.K., the Company has financing arrangements with BMW Financial Services, Volkswagen Finance and Ford Motor Credit Company (“FMCC”) for financing of its new and used vehicles. In Brazil, the Company has financing arrangements for new, used, and rental vehicles with several financial institutions, most of which are manufacturer affiliated. Within the Company's Consolidated Balance Sheets, Floorplan notes payable - credit facility and other primarily reflects amounts payable for the purchase of specific new, used and rental vehicle inventory (with the exception of new and rental vehicle purchases financed through lenders affiliated with the respective manufacturer) whereby financing is provided by the Revolving Credit Facility. Floorplan notes payable - manufacturer affiliates reflects amounts payable for the purchase of vehicles whereby financing is provided by the FMCC Facility, the financing of rental vehicles in the U.S., as well as the financing of new, used, and rental vehicles in both the U.K. and Brazil. Payments on the floorplan notes payable are generally due as the vehicles are sold. As a result, these obligations are reflected in the accompanying Consolidated Balance Sheets as current liabilities.
Revolving Credit Facility
On June 20, 2013, the Company amended its Revolving Credit Facility principally to increase the total borrowing capacity from $1.35 billion to $1.7 billion and to extend the term from an expiration date on June 1, 2016 to June 20, 2018. The Revolving Credit Facility consists of two tranches, providing a maximum of $1.6 billion for U.S. vehicle inventory floorplan financing (“Floorplan Line”), as well as a maximum of $320.0 million and a minimum of $100.0 million for working capital and general corporate purposes, including acquisitions (“Acquisition Line”). The capacity under these two tranches can be re-designated within the overall $1.7 billion commitment, subject to the aforementioned limits. Up to $125.0 million of the Acquisition Line can be borrowed in either euros or pound sterling. The Revolving Credit Facility can be expanded to a maximum commitment of $1.95 billion, subject to participating lender approval. The Floorplan Line bears interest at rates equal to the one-month LIBOR plus 125 basis points for new vehicle inventory and the one-month LIBOR plus 150 basis points for used vehicle inventory. The Acquisition Line bears interest at the one-month LIBOR plus 150 basis points plus a margin that ranges from zero to 100 basis points for borrowings in U.S. dollars and 150 to 250 basis points on borrowings in euros or pound sterling, depending on the Company’s total adjusted leverage ratio. The Floorplan Line also requires a commitment fee of

16

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

0.20% per annum on the unused portion. The Acquisition Line requires a commitment fee ranging from 0.25% to 0.45% per annum, depending on the Company’s total adjusted leverage ratio, based on a minimum commitment of $100.0 million less outstanding borrowings. In conjunction with the Revolving Credit Facility, the Company has $7.2 million of related unamortized costs as of September 30, 2013 that are being amortized over the term of the facility.
After considering the outstanding balance of $908.2 million at September 30, 2013, the Company had $471.8 million of available floorplan borrowing capacity under the Floorplan Line. Included in the $471.8 million available borrowings under the Floorplan Line was $47.7 million of immediately available funds. The weighted average interest rate on the Floorplan Line was 1.4% as of September 30, 2013 and 1.7% as of December 31, 2012, under the Revolving Credit Facility, excluding the impact of the Company’s interest rate swaps. Amounts borrowed by the Company under the Floorplan Line for specific vehicle inventory are to be repaid upon the sale of the vehicle financed, and in no case is a borrowing for a vehicle to remain outstanding for greater than one year. With regards to the Acquisition Line, no borrowings were outstanding as of September 30, 2013 or December 31, 2012, under the Revolving Credit Facility. After considering $27.0 million of outstanding letters of credit and other factors included in the Company’s available borrowing base calculation, there was $227.7 million of available borrowing capacity under the Acquisition Line as of September 30, 2013. The amount of available borrowing capacity under the Acquisition Line is limited from time to time based upon certain debt covenants.
All of the Company’s domestic dealership-owning subsidiaries are co-borrowers under the Revolving Credit Facility. The Company’s obligations under the Revolving Credit Facility are secured by essentially all of the Company’s domestic personal property (other than equity interests in dealership-owning subsidiaries), including all motor vehicle inventory and proceeds from the disposition of dealership-owning subsidiaries. The Revolving Credit Facility contains a number of significant covenants that, among other things, restrict the Company’s ability to make disbursements outside of the ordinary course of business, dispose of assets, incur additional indebtedness, create liens on assets, make investments and engage in mergers or consolidations. The Company is also required to comply with specified financial tests and ratios defined in the Revolving Credit Facility, such as fixed charge coverage, total adjusted leverage, and senior secured adjusted leverage. Further, the Revolving Credit Facility restricts the Company’s ability to make certain payments, such as dividends or other distributions of assets, properties, cash, rights, obligations or securities (“Restricted Payments”). The Restricted Payments cannot exceed the sum of $125.0 million plus (or minus if negative) (a) one-half of the aggregate consolidated net income of the Company for the period beginning on January 1, 2013 and ending on the date of determination and (b) the amount of net cash proceeds received from the sale of capital stock on or after January 1, 2013 and ending on the date of determination less (c) cash dividends and share repurchases (“Restricted Payment Basket”). For purposes of the calculation of the Restricted Payment Basket, net income represents such amounts per the consolidated financial statements adjusted to exclude the Company’s foreign operations, non-cash interest expense, non-cash asset impairment charges, and non-cash stock-based compensation. As of September 30, 2013, the Restricted Payment Basket totaled $158.8 million. As of September 30, 2013, the Company was in compliance with all applicable covenants and ratios under the Revolving Credit Facility.
Ford Motor Credit Company Facility
The FMCC Facility provides for the financing of, and is collateralized by, the Company’s U.S. Ford new vehicle inventory, including affiliated brands. This arrangement provides for $200.0 million of floorplan financing and is an evergreen arrangement that may be canceled with 30 days notice by either party. As of September 30, 2013, the Company had an outstanding balance of $153.1 million under the FMCC Facility with an available floorplan borrowing capacity of $46.9 million. This facility bears interest at a rate of Prime plus 150 basis points minus certain incentives; however, the prime rate is defined to be a minimum of 3.50%. As of September 30, 2013, the interest rate on the FMCC Facility was 5.00% before considering the applicable incentives.
Other Credit Facilities
The Company has credit facilities with BMW Financial Services, Volkswagen Finance and FMCC for the financing of new, used and rental vehicle inventories related to its U.K. operations. These facilities are denominated in pound sterling and are evergreen arrangements that may be canceled with notice by either party and bear interest at a base rate, plus a surcharge that varies based upon the type of vehicle being financed. Dependent upon the type of inventory financed, the interest rates charged on borrowings outstanding under these facilities ranged from 1.16% to 3.95% as of September 30, 2013.
The Company has credit facilities with financial institutions in Brazil, most of which are affiliated with the manufacturers, for the financing of new, used and rental vehicle inventories related to its Brazil operations. These facilities are denominated in Brazilian real and have renewal terms ranging from one month to twelve months. They may be canceled with notice by either party and bear interest at a benchmark rate, plus a surcharge that varies based upon the type of vehicle being financed. As of September 30, 2013, the interest rates charged on borrowings outstanding under these facilities ranged from 13.28% to 17.32%.

17

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Excluding rental vehicles financed through the Revolving Credit Facility, financing for U.S. rental vehicles is typically obtained directly from the automobile manufacturers. These financing arrangements generally require small monthly payments and mature in varying amounts over a period of two years. As of September 30, 2013, the interest rate charged on borrowings related to the Company’s rental vehicle fleet varied up to 5.00%. Rental vehicles are typically transferred to used vehicle inventory when they are removed from rental service and repayment of the borrowing is required at that time.
9. LONG-TERM DEBT
The Company carries its long-term debt at face value, net of applicable discounts. Long-term debt consisted of the following:
 
 
September 30, 2013
 
December 31, 2012
 
 
(dollars in thousands)
2.25% Convertible Senior Notes
 
$
158,283

 
$
152,363

3.00% Convertible Senior Notes
 
83,377

 
80,706

Mortgage Facility
 
48,757

 
56,677

Other Real Estate Related and Long-Term Debt
 
247,988

 
249,710

Capital lease obligations related to real estate, maturing in varying amounts through June 2034 with a weighted average interest rate of 10.6%
 
48,216

 
38,232

 
 
586,621

 
577,688

Less current maturities of mortgage facility and other long-term debt
 
26,194

 
22,672

 
 
$
560,427

 
$
555,016

Included in current maturities of long-term debt and short-term financing in the Company's Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 was $0.8 million and $8.7 million, respectively, of short-term financing that is due within one year of the respective balance sheet date.
Fair Value of Long-Term Debt
The Company’s outstanding 2.25% Convertible Senior Notes due 2036 (“2.25% Notes”) had a fair value of $240.8 million and $214.6 million as of September 30, 2013 and December 31, 2012, respectively. The Company’s outstanding 3.00% Convertible Senior Notes due 2020 (“3.00% Notes”) had a fair value of $247.2 million and $203.5 million as of September 30, 2013 and December 31, 2012, respectively. The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of September 30, 2013 and December 31, 2012. The Company determined the estimated fair value of its long-term debt using available market information and commonly accepted valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on estimated fair values. These amounts have not been revalued since those dates, and current estimates of fair value could differ significantly from the amounts presented. The carrying value of the Company’s variable rate debt approximates fair value due to the short-term nature of the interest rates.

18

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2.25% Convertible Senior Notes
As of September 30, 2013 and December 31, 2012, the carrying value of the 2.25% Notes, related discount and equity component consisted of the following:
 
 
September 30, 2013
 
December 31, 2012
 
 
(In thousands)
Carrying amount of equity component
 
$
65,270

 
$
65,270

Allocated underwriter fees, net of taxes
 
(1,475
)
 
(1,475
)
Allocated debt issuance cost, net of taxes
 
(58
)
 
(58
)
Total net equity component
 
$
63,737

 
$
63,737

Deferred income tax component
 
$
8,750

 
$
10,846

Principal amount of 2.25% Notes
 
$
182,753

 
$
182,753

Unamortized discount
 
(23,547
)
 
(29,244
)
Unamortized underwriter fees
 
(923
)
 
(1,146
)
Net carrying amount of liability component
 
$
158,283

 
$
152,363

Unamortized debt issuance cost
 
$
37

 
$
45

For the nine months ended September 30, 2013 and 2012, the contractual interest expense and the discount amortization, which is recorded as other interest expense in the accompanying Consolidated Statements of Operations, were as follows: 
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
(dollars in thousands)
Year-to-date contractual interest expense
 
$
3,084

 
$
3,084

Year-to-date discount amortization (1)
 
$
5,590

 
$
5,158

Effective interest rate of liability component
 
7.7
%
 
7.7
%
 
(1)    Represents the incremental impact of the accounting for convertible debt as primarily codified in ASC 470, Debt.
The Company determined the discount using the estimated effective interest rate for similar debt with no convertible features. The original effective interest rate of 7.50% was estimated by comparing debt issuances from companies with similar credit ratings during the same annual period as the Company. The effective interest rate differs from the 7.50% due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount and are being amortized to interest expense through 2016. The effective interest rate may change in the future as a result of future repurchases of the 2.25% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 2.25% Notes.
The 2.25% Notes are convertible into cash and, if applicable, common stock based on the then-applicable conversion rate under the following circumstances: (a) during any calendar quarter (and only during such calendar quarter) , if the closing price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the applicable conversion price per share (or $77.15 as of September 30, 2013); (b) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount for each day of the ten day trading period was less than 98% of the product of the last reported sale/bid price of the Company’s common stock and the conversion rate on that day; and (c) upon the occurrence of specified corporate transactions set forth in the indenture governing the 2.25% Notes (the "2.25% Notes Indenture"). Upon conversion, a holder will receive an amount in cash and, if applicable, shares of the Company’s common stock, determined in the manner set forth in the 2.25% Notes Indenture. The if-converted value of the 2.25% Notes exceeded the principal amount of the 2.25% Notes by $56.5 million at September 30, 2013.
The Company may redeem all or part of the 2.25% Notes if the last reported sale price of the Company's common stock is greater than or equal to 130% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date on which the Company mails the redemption notice. Subsequent to September 30, 2013, the 2.25% Notes qualified to be redeemed by the Company. However, the Company has not elected to redeem the 2.25% Notes.
As of September 30, 2013, the conversion rate was 16.8503 shares of common stock per $1,000 principal amount of 2.25% Notes, with a conversion price of $59.35 per share, which was reduced during the third quarter of 2013 as the result of

19

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the Company’s decision to pay a cash dividend in excess of $0.14 per share. As of September 30, 2013, the exercise price of the 2.25% Warrants, which are related to the issuance of the 2.25% Notes, was reduced to $80.20 due to the Company’s decision to pay a cash dividend in excess of $0.14 per share during the third quarter of 2013. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in excess of $0.14 per share in the future, the conversion rate will be further adjusted based on the formula defined in the 2.25% Notes Indenture.
Under the terms of the 2.25% Purchased Options, which become exercisable upon conversion of the 2.25% Notes, the Company has the right to receive a total of 3.1 million shares of its common stock at the conversion price then in effect. The exercise price of the 2.25% Purchased Options is subject to certain adjustments that mirror the adjustments to the conversion price of the 2.25% Notes (including payments of cash dividends in excess of $0.14 per share).
3.00% Convertible Senior Notes
As of September 30, 2013 and December 31, 2012, the carrying value of the 3.00% Notes, related discount and equity component consisted of the following:
 
 
September 30, 2013
 
December 31, 2012
 
 
(In thousands)
Carrying amount of equity component (including temporary equity)
 
$
25,359

 
$
25,359

Allocated underwriter fees, net of taxes
 
(760
)
 
(760
)
Allocated debt issuance cost, net of taxes
 
(112
)
 
(112
)
Total net equity component
 
$
24,487

 
$
24,487

Deferred income tax component
 
$
10,940

 
$
11,844

Principal amount of 3.00% Notes
 
$
115,000

 
$
115,000

Unamortized discount
 
(29,974
)
 
(32,505
)
Unamortized underwriter fees
 
(1,649
)
 
(1,789
)
Net carrying amount of liability component
 
$
83,377

 
$
80,706

Unamortized debt issuance costs
 
$
243

 
$
264

For the nine months ended September 30, 2013 and 2012, the contractual interest expense and the discount amortization, which is recorded as interest expense in the accompanying Consolidated Statements of Operations, were as follows:
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
(dollars in thousands)
Year-to-date contractual interest expense
 
$
2,588

 
$
2,588

Year-to-date discount amortization (1) 
 
$
2,410

 
$
2,199

Effective interest rate of liability component
 
8.6
%
 
8.6
%
(1)    Represents the incremental impact of the accounting for convertible debt as primarily codified in ASC 470, Debt.
The Company determined the discount using the estimated effective interest rate for similar debt with no convertible features. The original effective interest rate of 8.25% was estimated by receiving a range of quotes from the underwriters for the estimated rate that the Company could reasonably expect to issue non-convertible debt for the same tenure. The effective interest rate differs from the 8.25% due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount and are being amortized to interest expense through 2020. The effective interest rate may change in the future as a result of future repurchases of the 3.00% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 3.00% Notes.
The 3.00% Notes are convertible into cash and, if applicable, common stock based on the then-applicable conversion rate under the following circumstances: (a) during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the applicable conversion price per share (or $48.61 as of September 30, 2013) (the “3.00% Stock Price Trigger”); (b) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount for each day of the ten day trading period was less than 98% of the product of the last reported sale/bid price of the Company’s common stock and the conversion rate on that day; and (c) upon the occurrence of specified corporate transactions set forth in the indenture governing the 3.00% 

20

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Notes (the "3.00% Notes Indenture"). Upon conversion, a holder will receive an amount in cash and, if applicable, shares of the Company’s common stock, determined in the manner set forth in the 3.00% Notes Indenture.
As a result of the 3.00% Stock Price Trigger on September 30, 2013, the 3.00% Notes are convertible at the option of the holders during the three months ending December 31, 2013. As such, the Company reclassified the redeemable equity portion of the 3.00% Notes to temporary equity from the additional paid-in capital component of permanent equity on the Consolidated Balance Sheet as of September 30, 2013. The debt portion of the 3.00% Notes continued to be classified as a long-term liability as of September 30, 2013, since the Company has the intent and ability to refinance any conversion of the 3.00% Notes with another long-term debt instrument. The combination of the debt portion and temporary equity portion represents the aggregate principal obligation of the 3.00% Notes redeemable at the option of the holders as of September 30, 2013. The if-converted value of the 3.00% Notes exceeded the principal amount of the 3.00% Notes by $123.9 million at September 30, 2013.
As of September 30, 2013, the conversion rate was 26.7419 shares of common stock per $1,000 principal amount of 3.00% Notes, with a conversion price of $37.39 per share, which was reduced during the third quarter of 2013 as the result of the Company’s decision to pay a cash dividend. As of September 30, 2013, the exercise price of the 3.00% Warrants, which are related to the issuance of the 3.00% Notes, was reduced to $54.95 due to the Company’s decision to pay a cash dividend during the third quarter of 2013. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in the future, the conversion rate will be further adjusted based on the formula defined in the 3.00% Notes Indenture.
Under the terms of the 3.00% Purchased Options, which become exercisable upon conversion of the 3.00% Notes, the Company has the right to receive a total of 3.1 million shares of its common stock at the conversion price then in effect. The exercise price of the 3.00% Purchased Options is subject to certain adjustments that mirror the adjustments to the conversion price of the 3.00% Notes (including payments of cash dividends).
Real Estate Credit Facility
Group 1 Realty, Inc., a wholly-owned subsidiary of the Company, entered into a real estate credit facility with Bank of America, N.A. and Comerica Bank (as amended and restated, the “Mortgage Facility”) providing the right for up to $83.4 million of term loans, of which $60.7 million had been used as of September 30, 2013. The term loans can be expanded provided that (a) no default or event of default exists under the Mortgage Facility; (b) the Company obtains commitments from the lenders who would qualify as assignees for such increased amounts; and (c) certain other agreed upon terms and conditions have been satisfied. This facility is guaranteed by the Company and substantially all of the domestic subsidiaries of the Company and is secured by the real property owned by the Company that is mortgaged under the Mortgage Facility. The Company capitalized debt issuance costs related to the Mortgage Facility that are being amortized over the term of the facility, $0.4 million of which were still unamortized as of September 30, 2013.
The interest rate is equal to (a) the per annum rate equal to one-month LIBOR plus 2.50% per annum, determined on the first day of each month; or (b) 1.45% per annum in excess of the higher of (i) the Bank of America prime rate (adjusted daily on the day specified in the public announcement of such price rate), (ii) the Federal Funds Rate adjusted daily, plus 0.5% or (iii) the per annum rate equal to the one-month LIBOR plus 1.05% per annum. The Federal Funds Rate is the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the business day succeeding such day.
The Company is required to make quarterly principal payments equal to 1.25% of the principal amount outstanding and is required to repay the aggregate amount outstanding on the maturity dates of the individual property borrowings, ranging, from December 29, 2015 through February 27, 2017. For the nine months ended September 30, 2013, the Company made no additional borrowings and principal payments of $7.9 million on outstanding borrowings from the Mortgage Facility. As of September 30, 2013, borrowings outstanding under the Mortgage Facility totaled $48.8 million, with $2.7 million recorded as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.
The Mortgage Facility also contains usual and customary provisions limiting the Company’s ability to engage in certain transactions, including limitations on the Company’s ability to incur additional debt, additional liens, make investments, and pay distributions to its stockholders. In addition, the Mortgage Facility requires certain financial covenants that are identical to those contained in the Company’s Revolving Credit Facility. As of September 30, 2013, the Company was in compliance with all applicable covenants and ratios under the Mortgage Facility.
Real Estate Related Debt
The Company, as well as certain of its wholly-owned subsidiaries, has entered into separate term mortgage loans in the U.S. with four of its manufacturer-affiliated finance partners – Toyota Motor Credit Corporation (“TMCC”), Mercedes-Benz Financial Services USA, LLC (“MBFS”), BMW Financial Services NA, LLC (“BMWFS”), FMCC and several third-party

21

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

financial institutions (collectively, “Real Estate Notes”). The Real Estate Notes are on specific buildings and/or properties and are guaranteed by the Company. Each loan was made in connection with, and is secured by mortgage liens on, the real property owned by the Company that is mortgaged under the Real Estate Notes. The Real Estate Notes bear interest at fixed rates between 3.67% and 9.00%, and at variable indexed rates plus a spread between 2.25% and 3.35% per annum. The Company capitalized debt issuance costs related to the Real Estate Notes that are being amortized over the terms of the notes, $0.8 million of which were still unamortized as of September 30, 2013.
The loan agreements with TMCC consist of eight term loans. As of September 30, 2013, $52.0 million was outstanding under the TMCC term loans, with $7.0 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. The maturity dates vary from three to seven years and provide for monthly payments based on a 20-year amortization schedule. These eight loans are cross-collateralized and cross-defaulted with each other and are cross-defaulted with the Revolving Credit Facility.
The loan agreements with MBFS consist of three term loans. As of September 30, 2013, $45.9 million was outstanding under the MBFS term loans, with $1.7 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. The agreements provide for monthly payments based on a 20-year amortization schedule and have a maturity date of five years. These three loans are cross-collateralized and cross-defaulted with each other and are also cross-defaulted with the Revolving Credit Facility.
The loan agreements with BMWFS consist of 14 term loans. As of September 30, 2013, $71.1 million was outstanding under the BMWFS term loans, with $4.1 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. The agreements provide for monthly payments based on a 15-year amortization schedule and have a maturity date of 7 years. In the case of three properties owned by subsidiaries, the applicable loan is also guaranteed by the subsidiary real property owner. These 14 loans are cross-collateralized with each other. In addition, they are cross-defaulted with each other, the Revolving Credit Facility, and certain dealership franchising agreements with BMW of North America, LLC.
In addition, agreements with third-party financial institutions consist of 11 term loans for an aggregate principal amount of $59.4 million, to finance real estate associated with the Company’s dealerships. These loans are inclusive of the Company's one term loan with FMCC with $5.4 million outstanding and $0.2 million classified as a current maturity of long-term debt. The loans are being repaid in monthly installments that will mature by November 2022. As of September 30, 2013, borrowings under these notes totaled $52.4 million, with $3.0 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. Nine of these loans are cross-defaulted with the Revolving Credit Facility. The other two loans, including the FMCC loan, are subject to separate restrictions and covenants. The Company was in compliance with all applicable covenants and ratios under the agreements.
The Company has also entered into separate term mortgage loans in the U.K. with another third-party financial institution which are secured by the Company’s U.K. properties. These mortgage loans (collectively, “Foreign Notes”) are being repaid in monthly installments that mature August 2027. As of September 30, 2013, borrowings under the Foreign Notes totaled $21.9 million, with $2.8 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.
10. FAIR VALUE MEASUREMENTS
Accounting Standards Codification (“ASC”) 820 defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; requires disclosure of the extent to which fair value is used to measure financial and non-financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date; establishes a three-level valuation hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the measurement date:
Level 1 — unadjusted, quoted prices for identical assets or liabilities in active markets;
Level 2 — quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation; and
Level 3 — unobservable inputs based upon the reporting entity’s internally developed assumptions that market participants would use in pricing the asset or liability.
The Company’s financial instruments consist primarily of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, investments in debt and equity securities, accounts payable, credit facilities, long-term debt and interest rate swaps. The fair values of cash and cash equivalents, contracts-in-transit and vehicle receivables,

22

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

accounts and notes receivable, accounts payable, and credit facilities approximate their carrying values due to the short-term nature of these instruments or the existence of variable interest rates.
The Company periodically invests in unsecured, corporate demand obligations with manufacturer-affiliated finance companies, which bear interest at a variable rate and are redeemable on demand by the Company. Therefore, the Company has classified these demand obligations as cash and cash equivalents in the accompanying Consolidated Balance Sheets. The Company determined that the valuation measurement inputs of these instruments include inputs other than quoted market prices, that are observable or that can be corroborated by observable data by correlation. Accordingly, the Company has classified these instruments within Level 2 of the hierarchy framework.
The Company's derivative financial instruments are recorded at fair market value. See Note 3, "Derivative Instruments and Risk Management Activities" for further details regarding the Company's derivative financial instruments.
The Company evaluated its assets and liabilities for those that met the criteria of the disclosure requirements and fair value framework of ASC 820 and identified investments in marketable securities, debt instruments, and interest rate derivative financial instruments as having met such criteria. The respective fair values measured on a recurring basis as of September 30, 2013 and December 31, 2012, respectively, were as follows:
 
 
As of September 30, 2013
 
 
Level 1
 
Level 2
 
Total
 
 
(In thousands)
Assets:
 
 
 
 
 
 
       Interest rate derivative financial instruments
 
$

 
$
2,413

 
$
2,413

Debt securities:
 
 
 
 
 
 
Demand obligations
 

 
65

 
65

Total
 
$

 
$
2,478

 
$
2,478

Liabilities:
 
 
 
 
 
 
Interest rate derivative financial instruments
 
$

 
$
29,184

 
$
29,184

Total
 
$

 
$
29,184

 
$
29,184

 
 
As of December 31, 2012
 
 
Level 1
 
Level 2
 
Total
 
 
(In thousands)
Assets:
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
Demand obligations
 
$

 
$
616

 
$
616

Total
 
$

 
$
616

 
$
616

Liabilities:
 
 
 
 
 
 
Interest rate derivative financial instruments
 
$

 
$
43,089

 
$
43,089

Total
 
$

 
$
43,089

 
$
43,089

11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company’s dealerships are named in various types of litigation involving customer claims, employment matters, class action claims, purported class action claims, as well as claims involving the manufacturer of automobiles, contractual disputes and other matters arising in the ordinary course of business. Due to the nature of the automotive retailing business, the Company may be involved in legal proceedings or suffer losses that could have a material adverse effect on the Company’s business. In the normal course of business, the Company is required to respond to customer, employee and other third-party complaints. Amounts that have been accrued or paid related to the settlement of litigation are included in SG&A expenses in the Company’s Consolidated Statements of Operations. In addition, the manufacturers of the vehicles that the Company sells and services have audit rights allowing them to review the validity of amounts claimed for incentive, rebate or warranty-related items and charge the Company back for amounts determined to be invalid payments under the manufacturers’ programs, subject to the Company’s right to appeal any such decision. Amounts that have been accrued or paid related to the settlement of manufacturer chargebacks of recognized incentives and rebates are included in cost of sales in the Company’s Consolidated Statements of Operations, while such amounts for manufacturer chargebacks of recognized warranty-related items are included as a reduction of revenues in the Company’s Consolidated Statements of Operations.

23

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Legal Proceedings
Currently, the Company is not party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition, or cash flows, including class action lawsuits. However, the results of current, or future, matters cannot be predicted with certainty, and an unfavorable resolution of one or more of such matters could have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.
In December 2011, an adverse jury verdict was rendered against the Company in the San Diego County Superior Court, awarding $7.5 million to the plaintiff who sought reimbursement for medical expenses, lost wages and pain and suffering arising from an accident involving one of the Company’s customer shuttle vans and the plaintiff’s motorcycle. The Company’s insurance covered any loss in excess of its $1.0 million self-insured retention relative to this matter. The Company fully accrued the amount of the award and the related insurance charge as a current account receivable and a current accrued expense, respectively, in the Consolidated Balance Sheet as of December 31, 2011. During the three months ended September 30, 2013, the insurance company settled this matter with the plaintiff, the Company paid its self-insured retention and the full amount of the current account receivable and current accrued expense was settled as originally anticipated.
Other Matters
The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by the Company’s subsidiaries of their respective dealership premises. Pursuant to these leases, the Company’s subsidiaries generally agree to indemnify the lessor and other parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements in connection with the sale of assets or businesses in which it agrees to indemnify the purchaser, or other parties, from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability would be limited by the terms of the applicable agreement.
From time to time, primarily in connection with dealership dispositions, the Company’s subsidiaries assign or sublet to the dealership purchaser the subsidiaries’ interests in any real property leases associated with such dealerships. In general, the Company’s subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, the Company and its subsidiaries generally remain subject to the terms of any guarantees made by the Company and its subsidiaries in connection with such leases. Although the Company generally has indemnification rights against the assignee or sublessee in the event of non-performance under these leases, as well as certain defenses, and the Company presently has no reason to believe that it or its subsidiaries will be called on to perform under any such assigned leases or subleases, the Company estimates that lessee rental payment obligations during the remaining terms of these leases were $27.2 million as of September 30, 2013. The Company’s exposure under these leases is difficult to estimate and there can be no assurance that any performance of the Company or its subsidiaries required under these leases would not have a material adverse effect on the Company’s business, financial condition, or cash flows. The Company and its subsidiaries also may be called on to perform other obligations under these leases, such as environmental remediation of the leased premises or repair of the leased premises upon termination of the lease. However, the Company does not have any known material environmental commitments or contingencies and presently has no reason to believe that it or its subsidiaries will be called on to so perform.
In the ordinary course of business, the Company is subject to numerous laws and regulations, including automotive, environmental, health and safety, and other laws and regulations. The Company does not anticipate that the costs of such compliance will have a material adverse effect on its business, consolidated results of operations, financial condition, or cash flows, although such outcome is possible given the nature of its operations and the extensive legal and regulatory framework applicable to its business. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, established a new consumer financial protection agency with broad regulatory powers. Although automotive dealers are generally excluded, the Dodd-Frank Act could lead to additional, indirect regulation of automotive dealers through its regulation of automotive finance companies and other financial institutions. In addition, the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, has the potential to increase the Company’s future annual employee health care costs. Further, new laws and regulations, particularly at the federal level, may be enacted, which could also have a materially adverse impact on its business.

24

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

12. INTANGIBLE FRANCHISE RIGHTS AND GOODWILL
The following is a roll-forward of the Company’s intangible franchise rights and goodwill accounts:
 
 
Intangible
Franchise Rights
 
Goodwill
 
 
 
(In thousands)
 
BALANCE, December 31, 2012
 
$
196,058

 
$
582,384

(1)
Additions through acquisitions
 
99,965

 
125,466

 
Disposals
 
(5,826
)
 
(6,333
)
 
Currency Translation
 
(10,391
)
 
(11,546
)
 
Tax adjustments
 

 
(100
)
 
BALANCE, September 30, 2013
 
279,806

 
689,871

(1)
(1) Net of accumulated impairment of $40.3 million
The increase in the Company’s goodwill and intangible franchise rights was primarily related to the purchase of franchises in the U.K. and Brazil.

25

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in the balances of each component of accumulated other comprehensive loss for the nine months ended September 30, 2013 and 2012 were as follows: 
 
 
Nine Months Ended September 30, 2013
 
 
Accumulated foreign currency translation loss
 
Accumulated gain (loss) on marketable securities
 
Accumulated (loss) gain on interest rate swaps
 
Total
 
 
(In thousands)
Balance, December 31, 2012
 
$
(6,126
)
 
$

 
$
(26,931
)
 
$
(33,057
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 

Pre-tax
 
(23,487
)
 

 
7,998

 
(15,489
)
Tax effect
 

 

 
(2,999
)
 
(2,999
)
Amounts reclassified from accumulated other comprehensive income to:
 
 
 
 
 
 
 


Floorplan interest expense
 

 

 
7,390

 
7,390

Other interest expense
 

 

 
930

 
930

Tax effect
 

 

 
(3,120
)
 
(3,120
)
Net current period other comprehensive (loss) income
 
(23,487
)
 

 
10,199

 
(13,288
)
Balance, September 30, 2013
 
$
(29,613
)
 
$

 
$
(16,732
)
 
$
(46,345
)
 
 
Nine Months Ended September 30, 2012
 
 
Accumulated foreign currency translation gain (loss)
 
Accumulated gain (loss) on marketable securities
 
Accumulated (loss) gain on interest rate swaps
 
Total
 
 
(In thousands)
Balance, December 31, 2011
 
$
(7,969
)
 
$
8

 
$
(21,275
)
 
$
(29,236
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
Pre-tax
 
1,850

 
(13
)
 
(19,606
)
 
(17,769
)
Tax effect
 

 
5

 
7,352

 
7,357

Amounts reclassified from accumulated other comprehensive income to:
 
 
 
 
 
 
 
 
Floorplan interest expense
 

 

 
7,720

 
7,720

Other interest expense
 

 

 
856

 
856

Tax effect
 

 

 
(3,216
)
 
(3,216
)
Net current period other comprehensive (loss) income
 
1,850

 
(8
)
 
(6,894
)
 
(5,052
)
Balance, September 30, 2012
 
$
(6,119
)
 
$

 
$
(28,169
)
 
$
(34,288
)

14. SEGMENT INFORMATION
As of September 30, 2013, the Company had three reportable segments: (1) the U.S., (2) the U.K., and (3) Brazil. Each of the reportable segments is comprised of retail automotive franchises, which sell new vehicles, used vehicles, parts and automotive services, finance and insurance products, and collision centers. The vast majority of the Company's corporate activities are associated with the operations of the U.S. operating segments and therefore the corporate financial results are included within the U.S. reportable segment.

26

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The reportable segments identified above are the business activities of the Company for which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance. Our chief operating decision maker is our Chief Executive Officer. Reportable segment revenue, gross profit, SG&A, floorplan interest expense, net income and capital expenditures were as follows for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
U.S.
 
U.K.
 
Brazil
 
Total
 
U.S.
 
U.K.
 
Brazil (1)
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
1,889,378

 
$
234,914

 
$
215,855

 
$
2,340,147

 
$
5,492,819

 
$
613,428

 
$
532,842

 
$
6,639,089

Gross profit
280,265

 
25,513

 
23,684

 
329,462

 
843,683

 
68,428

 
59,114

 
971,225

Selling, general and administrative expense (2)
206,635

 
19,656

 
20,572

 
246,863

 
626,939

 
54,262

 
50,254

 
731,455

Floorplan interest expense
8,087

 
425

 
2,178

 
10,690

 
25,027

 
1,152

 
4,748

 
30,927

Other interest expense (income), net
9,649

 
293

 
29

 
9,971

 
27,990

 
800

 
(7
)
 
28,783

Net income
28,963

 
3,607

 
195

 
32,765

 
82,637

 
8,095

 
1,539

 
92,271

Capital expenditures
12,502

 
311

 
623

 
13,436

 
43,197

 
1,071

 
1,551

 
45,819

(1) Represents financial data from date of acquisition in February 2013.
(2)    Includes a net gain on the disposition of dealerships of $1.4 million and $10.4 million for the three and nine months ended September 30, 2013, respectively, in the U.S. segment. Also, includes losses due to catastrophic events of $0.3 million and $12.2 million for the three and nine months ended September 30, 2013, respectively, in the U.S. segment. For the nine months ended September 30, 2013, includes acquisition costs of $5.2 million, $0.1 million and $1.2 million in the U.S., U.K. and Brazil segments, respectively. Also includes severance cost of $0.3 million each in the U.S. and Brazil segments, as well as lease termination charges of $0.2 million in the U.S. segment for the nine months ended September 30, 2013.
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
 
U.S.
 
U.K.
 
Brazil
 
Total
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
 
(In thousands)
Revenues
$
1,814,186

 
$
162,386

 
$

 
$
1,976,572

 
$
5,158,039

 
$
379,104

 
$

 
$
5,537,143

Gross profit
271,562

 
19,669

 

 
291,231

 
792,046

 
44,953

 

 
836,999

Selling, general and administrative expense (1)
200,980

 
15,102

 

 
216,082

 
593,874

 
35,647

 

 
629,521

Floorplan interest expense
7,613

 
329

 

 
7,942

 
22,640

 
784

 

 
23,424

Other interest expense, net
9,416

 
203

 

 
9,619

 
27,406

 
443

 

 
27,849

Net income
28,633

 
2,702

 

 
31,335

 
78,110

 
4,967

 

 
83,077

Capital expenditures
13,423

 
99

 

 
13,522

 
39,422

 
259

 

 
39,681

(1)    Includes a loss due to catastrophic events of $2.7 million, as well as a net gain on real estate transactions of $1.1 million for the nine months ended September 30, 2012, in the U.S. segment.
Reportable segment goodwill and intangible franchise rights and total assets by segment were as follows:
 
As of September 30, 2013
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Goodwill and Intangible Franchise Rights
$
762,380

 
$
27,663

 
$
179,634

 
$
969,677

Total assets
2,845,727

 
228,192

 
335,989

 
3,409,908

 
As of December 31, 2012
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Goodwill and Intangible Franchise Rights