10-K 1 a2016form10-k.htm 10-K Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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, including zip code)
 
(713) 647-5700
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨        No  þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨ 
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 Act).    ¨        No  þ
The aggregate market value of common stock held by non-affiliates of the registrant was approximately $1.0 billion based on the reported last sale price of common stock on June 30, 2016, which was the last business day of the registrant’s most recently completed second quarter.
As of February 13, 2017, there were 21,383,593 shares of our common stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2017 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2016, are incorporated by reference into Part III of this Form 10-K.





TABLE OF CONTENTS
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
Item 15.

i



CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Form 10-K”) includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information includes statements regarding our strategy, plans, goals or current expectations with respect to, among other things:
our future operating performance;
our ability to maintain or improve our margins;
operating cash flows and availability of capital;
the completion of future acquisitions and divestitures;
the future revenues of acquired dealerships;
future stock repurchases, refinancing of debt, and dividends;
future capital expenditures;
changes in sales volumes and availability of credit for customer financing in new and used vehicles and sales volumes in the parts and service markets;
business trends in the retail automotive industry, including the level of manufacturer incentives, new and used vehicle retail sales volume, customer demand, interest rates and changes in industry-wide inventory levels;
availability of financing for inventory, working capital, real estate and capital expenditures; and
implementation of international or domestic trade tariffs
Although we believe that the expectations reflected in these forward-looking statements are reasonable when and as made, we cannot assure you that these expectations will prove to be correct. When used in this Form 10-K, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may” and similar expressions, as they relate to our company and management, are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause our actual results to differ from those in the forward-looking statements are those described in Part I, “Item 1A. Risk Factors.”
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no responsibility to publicly release the result of any revision of our forward-looking statements after the date they are made.


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PART I
 
Item 1. Business
General
Group 1 Automotive, Inc., a Delaware corporation organized in 1995, is a leading operator in the automotive retail industry. As of December 31, 2016, we owned and operated 210 franchises, representing 31 brands of automobiles, at 159 dealership locations and 38 collision centers worldwide. We own 146 franchises at 111 dealership locations and 29 collision service centers in the United States of America (“U.S.”), 41 franchises at 30 dealership locations and eight collision centers in the United Kingdom (“U.K.”) and 23 franchises at 18 dealership locations and one collision center in Brazil. Through our dealerships, we sell new and used cars and light trucks; arrange related vehicle financing; sell service and insurance contracts; provide automotive maintenance and repair services; and sell vehicle parts. Our operations are primarily located in major metropolitan areas in Alabama, California, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, Oklahoma, South Carolina, and Texas in the U.S., in 20 towns in the U.K., and in key metropolitan markets in the states of Sao Paulo, Parana, Mato Grosso do Sul and Santa Catarina in Brazil.
As discussed in more detail in Note 2 of our Consolidated Financial Statements, “Summary of Significant Accounting Policies and Estimates,” all of our operating subsidiaries are aligned into one of four operating segments (or regions). As of December 31, 2016, our U.S. retail network consisted of the following two regions (with the number of dealerships they comprised): (a) the East (36 dealerships in Alabama, Florida, Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, and South Carolina) and (b) the West (75 dealerships in California, Kansas, Louisiana, Oklahoma, and Texas). Each U.S. region is managed by a regional vice president who reports directly to our Chief Executive Officer and is responsible for the overall performance of their region. The operations of the Company’s international regions are structured similarly to the U.S. regions, each with a regional vice president reporting directly to the Company’s Chief Executive Officer. The financial matters of each U.S. region are managed by a regional chief financial officer who reports directly to our Chief Financial Officer. Our two international regions are also managed locally with direct reporting responsibilities to our corporate management team. Our financial information, including our revenues from external customers, a measure of profit or loss, and total assets, is included in our Consolidated Financial Statements and related notes beginning on page F-1.
Business Strategy
We believe that we have developed a distinguished management team with substantial industry expertise. Our business strategy is to leverage what we believe to be one of our key strengths — the talent of our people — to: (a) sell new and used cars and light trucks; (b) arrange related vehicle financing, service and insurance contracts; (c) provide automotive maintenance and repair services; and (d) sell vehicle parts via an expanding network of franchised dealerships located primarily in growing regions of the U.S., the U.K. and Brazil. With our management structure and level of executive talent, we plan to continue empowering the operators of our dealerships to make appropriate decisions to grow their respective dealership operations and to control fixed and variable costs. We believe this approach allows us to provide the best possible service to our customers, as well as attract and retain talented employees.
We continue to primarily focus on the performance of our existing dealerships to achieve growth, capture market share, and maximize the investment return to our stockholders. For 2017, we will primarily focus on four key areas as we continue to become a best-in-class automotive retailer. These areas are:
sustained growth of our higher margin parts and service business;
improvement of new and used vehicle retail margins, as well as total new and used vehicle retail profitability;
promotion of the customer experience and customer satisfaction;
improvement of operating efficiencies through further development of our operating model that promotes commonality of processes, systems and training and further leveraging of our cost base.
Our focus on growth in our parts and service operations continues to hinge on targeted marketing efforts, strategic selling and operational efficiencies, as well as capital investments designed to support our growth targets. In our new and used retail vehicle operations, our efforts are centered on the efficient and effective use of technology and advertising to enhance our sales efforts. We intend to make resource investments that are focused on the customer experience and customer satisfaction in all areas of our business. We made significant changes in our operating model during the last five years, which were designed to reduce variable and fixed expenses, appropriately leverage our scale and generate operating efficiencies. As our business grows in 2017 and beyond, we intend to manage our costs carefully and to look for additional opportunities to improve our operating efficiencies. We continue to look for opportunities to improve our processes and disseminate best practices. We believe that our management structure supports more rapid decision making and facilitates an efficient and effective roll-out of new processes.

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We continue our efforts to fully leverage our scale, reduce costs, enhance internal controls, and enable further growth and, as such, we are taking steps to standardize key operating processes. We are constantly evaluating opportunities to improve the profitability of our dealerships.
We will continue to focus on opportunities for enhancement of our current dealership portfolio by strategic acquisitions and improving or disposing of underperforming dealerships in the U.S., the U.K. and Brazil. We believe that substantial opportunities for growth through acquisitions remain in our industry. An absolute acquisition target has not been established for 2017, but we expect to acquire dealerships that provide attractive returns on investment. We believe that as of December 31, 2016, we have sufficient financial resources to support additional acquisitions. We plan to focus our growth in geographically diverse areas with positive economic outlooks over the longer-term. Further, we intend to critically evaluate our return on invested capital in our current dealership portfolio for disposition opportunities. In 2016, we completed the acquisition of 12 U.K. dealerships, inclusive of 15 franchises, and opened two additional dealerships for two awarded franchises in the U.K., with expected aggregate annualized revenues, estimated at the time of acquisition, of $640.0 million. In addition, we completed the acquisition of one dealership in Brazil, representing one franchise, and opened two dealerships for one acquired and two previously awarded franchises, with expected aggregate annualized revenues, estimated at the time of acquisition, of $20.0 million. For more information on our acquisitions and dispositions, including those occurring in 2016, see “Acquisition and Divestiture Program” below.

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Dealership Operations
Our operations are located in geographically diverse markets that extend domestically across 14 states aggregated into two U.S. regions, East and West, and internationally in the U.K. and Brazil. We consolidated four regions into three reportable segments; U.S., U.K. and Brazil. By reportable segment, our revenues from external customers for the years ended December 31, 2016, 2015, and 2014 was $8,734.7 million, $8,894.0 million, and $8,175.2 million from our U.S. operations, respectively, and $1,723.2 million, $1,220.2 million, and $987.3 million from our U.K. operations, respectively. For the years ended December 31, 2016, 2015, and 2014, our revenues from external customers from our Brazil operations were $429.8 million, $518.3 million, and $775.4 million, respectively. Net income by segment for the years ended December 31, 2016, 2015, and 2014 were $139.6 million, $142.4 million, and $97.2 million from our U.S. operations, respectively, and $14.4 million, $15.2 million, and $14.3 million from our U.K. operations, respectively. In our Brazil operations, we realized a net loss of $7.0 million, $63.6 million, and $18.5 million for the years ended December 31, 2016, 2015, and 2014, respectively. As of December 31, 2016, 2015, and 2014, our aggregate long-lived assets other than goodwill and intangible assets and financial instruments in our U.S. operations were $997.7 million, $922.2 million, and $846.4 million, respectively, and in our U.K. operations were $120.9 million, $107.6 million, and $100.7 million, respectively. As of December 31, 2016, 2015, and 2014, our long-lived assets other than goodwill and intangible assets and financial instruments in our Brazil operations were $19.3 million, $15.9 million, and $22.1 million, respectively. For a discussion of the risks associated with our operations in the U.K. and Brazil, please see Part I, “Item 1A. Risk Factors.” The following table sets forth the regions and geographic markets in which we operate, the percentage of new vehicle retail units sold in each region in 2016 and the number of dealerships and franchises in each region: 
Region
 
Geographic Market
 
Percentage of Our New Vehicle Retail Units Sold During the Year Ended December 31, 2016
 
As of December 31, 2016
Number of
Dealerships
 
Number of
Franchises
East
 
Massachusetts
 
4.8
%
 
5

 
5

 
 
Georgia
 
4.3
%
 
7

 
10

 
 
Florida
 
2.6
%
 
4

 
4

 
 
New Hampshire
 
1.9
%
 
3

 
3

 
 
New Jersey
 
1.6
%
 
4

 
4

 
 
Louisiana
 
1.5
%
 
3

 
4

 
 
Mississippi
 
1.5
%
 
3

 
3

 
 
South Carolina
 
1.4
%
 
3

 
3

 
 
Alabama
 
0.9
%
 
2

 
2

 
 
Maryland
 
0.5
%
 
2

 
2

 
 
 
 
21.0

 
36

 
40

West
 
Texas
 
36.5

 
50

 
68

 
 
California
 
9.1

 
7

 
12

 
 
Oklahoma
 
6.8

 
13

 
20

 
 
Kansas
 
1.8

 
4

 
4

 
 
Louisiana
 
0.6

 
1

 
2

 
 
 
 
54.8

 
75

 
106

International
 
United Kingdom
 
18.4

 
30

 
41

 
 
Brazil
 
5.8

 
18

 
23

Total
 
 
 
100
%
 
159

 
210

Each of our local operations has a management structure designed to promote and reward entrepreneurial spirit and the achievement of team goals. The general manager of each dealership, with assistance from the managers of new vehicle sales, used vehicle sales, parts, service, and finance and insurance departments, is ultimately responsible for the operation, personnel and financial performance of the dealership. Our dealerships are operated as distinct profit centers, and our general managers have a reasonable degree of empowerment within our organization. In the U.S., each general manager reports to one of our market directors or one of two regional vice presidents. Our U.S. regional vice presidents report directly to our Chief Executive Officer and are responsible for the overall performance of their regions, as well as for overseeing the market directors and dealership general managers that report to them. Our U.K. and Brazil operations are structured similarly, with a regional vice president reporting directly to our Chief Executive Officer.

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New Vehicle Retail Sales
In 2016, we sold or leased 172,053 new vehicles in retail transactions at our dealerships, representing 34 brands. Our retail sales of new vehicles accounted for 19.8% of our gross profit in 2016. In addition to the profit related to the transactions, a typical new vehicle retail sale or lease may create the following additional profit opportunities for our dealerships:
manufacturer dealer incentives;
the resale of any used vehicle trade-in purchased by the dealership;
arrangement of third-party financing in connection with the retail sale;
the sale of vehicle service and insurance contracts in connection with the retail sale;
the sale of vehicle parts, accessories or other after-market products; and
the service and repair of the vehicle both during and after the warranty period.

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We consider brand diversity to be one of our strengths. The following table sets forth our consolidated new vehicle sales revenue by brand and the number of new vehicle retail units sold in the year ended, and the number of franchises we owned as of, December 31, 2016: 
 
 
New Vehicle
Revenues
 
New Vehicle
Unit Sales
 
% of Total
Units Sold
 
Franchises Owned
as of
December 31, 2016
 
 
(In thousands)
 
 
 
 
 
 
Toyota (1)
 
$
1,016,055

 
34,870

 
20.2
 
16

BMW
 
831,613

 
17,777

 
10.3
 
28

Ford
 
671,417

 
18,727

 
10.9
 
18

Audi
 
583,949

 
15,967

 
9.3
 
12

Mercedes-Benz
 
405,741

 
6,769

 
3.9
 
8

Honda
 
364,588

 
14,132

 
8.2
 
11

Lexus
 
356,061

 
7,444

 
4.3
 
3

Chevrolet
 
332,610

 
8,261

 
4.8
 
6

Nissan
 
326,342

 
12,256

 
7.1
 
10

MINI
 
138,054

 
5,528

 
3.2
 
18

GMC
 
117,818

 
2,460

 
1.4
 
5

Acura
 
116,075

 
2,899

 
1.7
 
4

Hyundai
 
110,730

 
4,240

 
2.5
 
5

Jeep
 
100,159

 
2,906

 
1.7
 
6

RAM
 
89,281

 
1,988

 
1.2
 
6

Volkswagen
 
68,369

 
2,918

 
1.7
 
7

Kia
 
74,337

 
3,016

 
1.8
 
4

Cadillac
 
74,132

 
1,343

 
0.8
 
2

Dodge
 
50,487

 
1,517

 
0.9
 
6

Subaru
 
42,724

 
1,568

 
0.9
 
2

Land Rover
 
31,858

 
488

 
0.3
 
3

Buick
 
26,641

 
747

 
0.4
 
5

Sprinter
 
23,519

 
453

 
0.3
 
6

Jaguar
 
17,077

 
310

 
0.2
 
4

Chrysler
 
14,720

 
390

 
0.2
 
6

Scion (1)
 
13,707

 
704

 
0.4
 
N/A

SEAT
 
11,389

 
980

 
0.6
 
2

Lincoln
 
9,364

 
199

 
0.1
 
3

Mazda
 
7,759

 
296

 
0.2
 
1

Peugeot
 
5,925

 
356

 
0.2
 

Skoda
 
4,486

 
304

 
0.2
 

Porsche
 
3,863

 
50

 
0.0
 

Volvo
 
3,099

 
63

 
0.0
 
1

Smart
 
2,126

 
127

 
0.1
 
2

Total
 
$
6,046,075

 
172,053

 
100.0
 
210

 
(1)
The Scion brand is not considered a separate franchise, but rather is governed by our Toyota franchise agreements. We sell the Scion brand at our Toyota franchised locations.



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Our diversity by manufacturer, based on new vehicle unit sales for the years ended December 31, 2016, 2015, and 2014, is set forth below:
 
 
For the Year Ended December 31,
 
 
2016
 
% of
Total
 
2015
 
% of
Total
 
2014
 
% of
Total
Toyota
 
42,922

 
24.9
%
 
46,157

 
26.5
%
 
44,621

 
26.7
%
BMW
 
23,305

 
13.5

 
20,283

 
11.6

 
19,125

 
11.5

Volkswagen
 
18,935

 
11.0

 
12,106

 
6.9

 
10,243

 
6.1

Ford
 
18,925

 
11.0

 
19,882

 
11.4

 
18,161

 
10.9

Honda
 
17,031

 
9.9

 
19,019

 
10.9

 
18,776

 
11.3

General Motors
 
12,811

 
7.4

 
13,307

 
7.6

 
10,691

 
6.4

Nissan
 
12,256

 
7.1

 
14,570

 
8.4

 
15,664

 
9.4

Daimler (1)
 
7,349

 
4.3

 
7,466

 
4.3

 
7,442

 
4.5

Hyundai
 
7,256

 
4.2

 
10,046

 
5.6

 
9,151

 
5.5

FCA US (formerly Chrysler)
 
6,801

 
4.0

 
7,962

 
4.6

 
7,268

 
4.4

Other
 
4,462

 
2.7

 
3,816

 
2.2

 
5,754

 
3.3

Total
 
172,053

 
100.0
%
 
174,614

 
100.0
%
 
166,896

 
100.0
%
(1)
Daimler includes Mercedes-Benz, smart and Sprinter brands.
Our new vehicle unit sales mix was affected by our acquisitions and dispositions during 2016, 2015 and 2014.
Some new vehicles we sell are purchased by customers under lease or lease-type financing arrangements with third-party lenders. New vehicle leases generally have shorter terms, bringing the customer back to the vehicle market, and our dealerships specifically, sooner than if the vehicle purchase was debt financed. In addition, lease or lease-type customer financing arrangements provide our dealerships with a steady supply of late-model, off-lease vehicles to be sold as used vehicles. Generally, leased vehicles remain under factory warranty, allowing the opportunity for our dealerships to provide maintenance and repair services for the contract term. However, the penetration rate for other finance and insurance product sales on leases and lease-type customer financing arrangements tends to be less than in other financing arrangements (such as debt financed vehicles). We typically do not guarantee residual values on lease transactions. Lease vehicle unit sales represented 16.7%, 16.5% and 15.1% of our total new vehicle retail unit sales for the years ended December 31, 2016, 2015 and 2014, respectively.
Used Vehicle Sales, Retail and Wholesale
We sell used vehicles at each of our franchised dealerships. In 2016, we sold or lease-financed 129,131 used vehicles at our dealerships, and sold 57,339 used vehicles in wholesale markets. Our retail sales of used vehicles accounted for 11.2% of our gross profit in 2016. Used vehicles sold or lease-financed at retail typically generate higher gross margins on a percentage basis than new vehicles primarily because of their relatively limited comparability, which is dependent on a vehicle’s age, mileage and condition, among other things.
Valuations of used vehicles vary based on supply and demand factors, the level of new vehicle incentives, and the availability of retail financing and general economic conditions. Profit from the sale of used vehicles depends primarily on a dealership’s ability to obtain a high-quality supply of used vehicles at reasonable prices and to effectively manage that inventory. Our new vehicle operations generally provide our used vehicle operations with a large supply of high-quality trade-ins and off-lease vehicles, and are the best source of high-quality used vehicles. Our dealerships supplement their used vehicle inventory with purchases at auctions, including manufacturer-sponsored auctions available only to franchised dealers. We continue to extensively utilize a common used vehicle management software tool in all of our U.S. dealerships with the goal to enhance the management of used vehicle inventory, focusing on the more profitable retail used vehicle business and reducing our wholesale used vehicle business. This internet-based software tool is an integral part of our used vehicle process, enabling our managers to make used vehicle inventory decisions based on real time market valuation data. It also allows us to leverage our size and local market presence by expanding the pool from which used vehicles can be sold within a given market or region within the U.S., effectively broadening the demand for our used vehicle inventory. In addition, this software supports increased oversight of our assets in inventory, allowing us to better control our exposure to declines in used vehicles market valuations, the values of which typically occur over time.
In addition to active management of the quality and age of our used vehicle inventory, we are focused on increasing the total lifecycle profitability of our used vehicle operations by participating in manufacturer certification programs where available. Manufacturer certified pre-owned (“CPO”) vehicles offer customers in the U.S. and U.K. the opportunity to purchase a used vehicle that has passed a rigorous array of manufacturer-defined tests, and that are eligible for manufacturer support,

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such as subsidized finance rates, the extension of manufacturer’s service warranty and other benefits. With the extended service warranty, the sale of CPO vehicles tends to generate better ongoing customer loyalty for maintenance and repair services at the selling dealership. CPO vehicles typically cost more to recondition, but sell at a premium compared to other used vehicles and are available only from franchised new vehicle dealerships. Our CPO vehicle sales in the U.S. and U.K. represented 27.2% of total U.S and U.K. used retail sales in 2016. CPO vehicles are not yet available in Brazil.
Parts and Service Sales
We sell replacement parts and provide maintenance and repair services at each of our franchised dealerships and provide collision repair services at the 38 collision centers that we operate. Our parts and service business accounted for 42.6% of our gross profit in 2016. We perform both warranty and non-warranty service work at our dealerships, primarily for the vehicle brand(s) sold at a particular location. Warranty, customer pay, collision business and wholesale accounted for 20.4%, 44.9%, 14.2% and 20.5%, respectively, of the revenues from our parts and service business in 2016. Our parts and service departments also perform used vehicle reconditioning and new vehicle enhancement services for which they realize a profit. However, the revenue for that internal work is eliminated from our parts and service revenue in the consolidation of our financial statements.
The automotive repair industry is highly fragmented, with a significant number of independent maintenance and repair facilities in addition to those of the franchised dealerships. We believe, however, that the increasing complexity of new vehicles, especially in the area of electronics, is making it difficult for many independent repair shops to retain the expertise necessary to perform major or technical repairs. We have made investments in recruiting, training, and retaining qualified technicians to work in our service and repair facilities. And, we have made investments in state of the art diagnostic and repair equipment to be utilized by these technicians.
Manufacturers only permit warranty and recall work to be performed at franchised dealerships. Currently, a trend exists in the automobile industry towards longer new vehicle warranty periods and more diligence with manufacturer recalls. As a result, we believe that over time an increasing percentage of all repair work will be performed at franchised dealerships that have the sophisticated equipment and skilled personnel necessary to perform repairs and warranty work on today’s complex vehicles.
Our strategy to capture an increasing share of the parts and service work performed by franchised dealerships and enhance profitability includes the following elements:
Focus on Customer Relationships; Emphasize Preventative Maintenance.   Our dealerships seek to retain customers of our new and used vehicles as ongoing clients of our parts and service departments. To accomplish this goal, we use computer systems that track the vehicle owners’ maintenance records and provide advance notice to them when their vehicles are due for periodic service. Our use of computer-based customer relationship management tools increases the reach and effectiveness of our marketing efforts, allowing us to target our promotional offerings to areas in which service capacity is under-utilized or profit margins are greatest. We continue to train our service personnel to establish relationships with their service clients to promote a long-term business relationship. And, we are focused on enhancing access to our service facilities by providing patrons with readily-accessible means to schedule service appointments. We believe our parts and service activities are an integral part of the customer service experience, allowing us to maintain ongoing relationships with our dealerships’ clients thereby deepening customer loyalty to the dealership as a whole.
Sell Vehicle Service Contracts in Conjunction with Vehicle Sales.   Our finance and insurance sales departments attempt to connect new and used vehicle customers with vehicle service contracts, and thereby secure repeat customer business for our parts and service departments.
Efficient Management of Parts Inventory.   Our dealerships’ parts departments support their vehicle sales and service departments, selling factory-approved parts for the respective vehicle makes and models. Parts are either used in repairs made in the service department, sold at retail to customers, or sold at wholesale to independent repair shops and other franchised dealerships. Our dealerships also frequently share parts with each other. Our dealerships employ parts managers who oversee parts inventories and sales. Software programs are used to monitor parts inventory, maximize sales, avoid obsolete and unused parts, and make the best use of manufacturer return procedures.
Expansion of Collision Center Operations. We plan to continue to grow our collision center operations. Expansion in this segment of the business is not restricted by franchise agreements or manufacturer relationships. We believe that our concentration of dealership operations in certain of the markets in which we operate significantly enhances the profit model opportunities for our collision center operations.
Finance and Insurance Sales
Revenues from our finance and insurance operations consist primarily of fees for arranging financing and selling vehicle service and insurance contracts in connection with the retail purchase of a new or used vehicle. Our finance and insurance

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business accounted for 26.4% of our gross profit in 2016. We offer a wide variety of third-party finance, vehicle service and insurance products in a convenient manner and at competitive prices. To increase transparency to our customers, we offer all of our products on menus that display pricing and other information, allowing customers to choose the products that suit their needs.
Financing.   We arrange third-party purchase and lease financing for our customers. In return, we receive a fee from the third-party finance company upon completion of the financing. These third-party finance companies include manufacturers’ captive finance subsidiaries, selected commercial banks and a variety of other third-parties, including credit unions and regional auto finance companies. Generally, we do not retain substantial credit risk after a customer has received financing. The fees we receive from the third-party finance companies are subject to chargeback, or repayment, to the finance company, if a customer defaults or prepays the financing contract, typically during some limited time period at the beginning of the contract term. We have negotiated incentive programs with some finance companies pursuant to which we receive additional fees upon reaching a certain volume of business.
Extended Warranty, Vehicle Service and Insurance Products.   We offer our customers a variety of vehicle warranty and extended protection products in connection with purchases of new and used vehicles, including:
extended warranties;
maintenance, or vehicle service, products and programs;
guaranteed asset protection insurance, which covers the shortfall between a customer’s contract balance and insurance payoff in the event of a total vehicle loss; and
lease “wear and tear” insurance.
The products our dealerships offer are generally underwritten and administered by independent third parties, including the vehicle manufacturers’ captive finance subsidiaries. Under our arrangements with the providers of these products, we either sell these products on a straight commission basis, or we sell the product, recognize commission and participate in future underwriting profit, if any, pursuant to a retrospective commission arrangement. These commissions may be subject to chargeback, in full or in part, if the contract is terminated prior to its scheduled maturity.
New and Used Vehicle Inventory Financing
Our dealerships finance their inventory purchases through the Floorplan Line (defined below) of our Revolving Credit Facility (defined below), separate floorplan credit facility arrangements with manufacturers and other third-party financial institutions in the U.S., U.K. and Brazil. Our revolving syndicated credit facility matures in June 2021 and provides a total borrowing capacity of $1.8 billion, (the “Revolving Credit Facility”). The Revolving Credit Facility consists of two tranches: a maximum of $1.75 billion for vehicle inventory financing (“Floorplan Line”), as well as a maximum of $360.0 million and a minimum of $50.0 million for working capital and general corporate purposes, including acquisitions (“Acquisition Line”). We utilize our Floorplan Line to finance up to 85% of the value of our used vehicle inventory in the U.S., and up to 100% of the value of all new vehicle inventory in the U.S., other than new vehicles purchased from Ford. The capacity under these two tranches can be re-designated within the overall $1.8 billion commitment, subject to the aforementioned limits. However, the amount of available borrowing capacity under the Acquisition Line is limited from time to time based upon certain debt covenants under the Revolving Credit Facility. We can expand the Revolving Credit Facility to its maximum commitment of $2.1 billion, subject to participating lender approval.
We have a floorplan arrangement with Ford Motor Credit Company (“FMCC”) that provides $300.0 million of floorplan financing capacity (“FMCC Facility”). We use the funds available under this arrangement to exclusively finance our U.S. inventories of new Ford vehicles sold by the lender’s manufacturer affiliate. The FMCC Facility is an evergreen arrangement that may be canceled with 30 days’ notice by either party. Should the FMCC Facility no longer be available to us for financing of our new U.S. Ford inventory, we could utilize the available capacity under our Floorplan Line to finance our new Ford vehicle inventory.
In addition, we finance certain rental vehicles in the U.S. through separate arrangements with the respective automobile manufacturers. We also utilize credit facilities with BMW Financial Services, Volkswagen Finance, FMCC and a third-party financial institution for the financing of new, used, and rental vehicle inventories associated with our U.K. operations.
In addition, we have 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 our Brazil operations. These facilities 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.

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Acquisition and Divestiture Program
We pursue an acquisition and divestiture program focused on delivering an attractive return on investment.
Acquisition Strategy.   We seek to acquire large, profitable, well-established dealerships and franchises that are leaders in their markets to:
enhance brand and geographic diversity with primary focus on import and luxury brands;
expand into geographic areas we currently do not serve;
expand our brand, product, and service offerings in our existing markets;
capitalize on economies of scale in our existing markets; and/or
increase operating efficiency and cost savings in areas such as used vehicle sourcing, advertising, purchasing, data processing, personnel utilization, and the cost of floorplan financing.
We typically pursue dealerships with superior operational management, whom we seek to retain. By retaining existing personnel who have experience and in-depth knowledge of their local market, we believe that we can mitigate the risks involved with employing and training new and untested personnel. In addition, our acquisition strategy targets the purchase of the related real estate to provide maximum operating flexibility.
We focus on the acquisition of dealerships or groups of dealerships that we believe offer opportunities for higher returns, and particularly on brands which provide growth opportunities for our parts and service operations and strengthen our operations in geographic regions in which we currently operate with attractive long-term economic prospects.
Recent Acquisitions. In 2016, we acquired 12 U.K. dealerships, inclusive of 15 franchises and opened two additional dealerships for two awarded franchises in our U.K. segment. We also acquired one dealership in Brazil, representing one franchise, and opened two additional dealerships in Brazil representing one acquired and two previously awarded franchises. The expected aggregate annualized revenues, estimated at the time of acquisition, for these acquisitions, were $660.0 million.
Divestiture Strategy.   We continually review the investments in our dealership portfolio for disposition opportunities, based upon a number of criteria, including:
the rate of return on our capital investment over a period of time;
location of the dealership in relation to existing markets and our ability to leverage our cost structure;
potential future capital investment requirements;
the brand; and
existing real estate obligations, coupled with our ability to exit those obligations or identify an alternate use for real estate.
While it is our desire to only acquire profitable, well-established dealerships, we have at times, acquired dealerships that do not fit our acquisition strategy in connection with the acquisition of a larger dealership group. We acquire such dealerships with the understanding that we may need to divest some or all of them at some future time. The costs associated with such potential divestitures are included in our analysis of whether we acquire all dealerships in the same acquisition. Additionally, we may acquire a dealership whose profitability is marginal, but which we believe can be increased through various factors, such as: (a) change in management, (b) expansion or improvement in facility operations, (c) relocation of facility based on demographic changes, (d) reduction in costs, and/or (e) sales training. If, after a period of time, a dealership’s profitability does not positively respond, we will seek to sell the dealership to a third party, or, in a rare case, surrender the franchise back to the manufacturer. In conjunction with the disposition of certain of our dealerships, we may also dispose of the associated real estate. Management constantly monitors the performance of all of our dealerships, and routinely assesses the need for divestiture. In connection with divestitures, we are sometimes required to incur additional charges associated with lease terminations or the impairment of long-lived and/or intangible, indefinite-lived assets. We continue to rationalize our dealership portfolio and focus on increasing the overall profitability of our operations.
Recent Dispositions.   During 2016, we disposed of five U.S dealerships, four dealerships in Brazil and one dealership in the U.K., with annualized revenues of approximately $240.0 million.
Competition
We operate in a highly competitive industry. In each of our markets, consumers have a number of choices when deciding where to purchase a new or used vehicle and how the purchase will be financed. Consumers also have options for the purchase of related parts and accessories, as well as the maintenance service and repair of vehicles. In the U.S., according to The

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National Automobile Dealers Association, there were approximately 16,545 franchised automobile dealerships as of January 1, 2016, which was up from 16,396 as of January 1, 2015. In the U.K., according to the National Franchised Dealers Association, there were approximately 4,065 franchised dealerships as of January 1, 2016, which was down from 4,127 as of January 1, 2015. In Brazil, according to The National Association of Automobile Manufacturers, there were approximately 4,389 franchised automobile dealerships as of January 1, 2015, which was up from 4,364 as of January 1, 2014.
Our competitive success depends, in part, on national and regional automobile-buying trends, local and regional economic factors, and other regional competitive pressures. Conditions and competitive pressures affecting the markets in which we operate, or in any new markets we enter, could adversely affect us, although the retail automobile industry as a whole might not be affected. Some of our competitors may have greater financial, marketing and personnel resources, and lower overhead and sales costs than we do. We cannot guarantee that our operating performance and our acquisition or disposition strategies will be more effective than the strategies of our competitors.
New and Used Vehicles.   We believe the principal competitive factors in the automotive retailing business are location, suitability of the facility, on-site management, the acceptance of a franchise to the market in which it is located, concentration of same franchises in the surrounding markets, service, price, and selection. In the new vehicle market, our dealerships compete with other franchised dealerships in their market areas, as well as auto brokers, leasing companies, and internet companies that provide referrals to, or broker vehicle sales with, other dealerships or customers. We are subject to competition from dealers that sell the same brands of new vehicles that we sell and from dealers that sell other brands of new vehicles that we do not sell in a particular market. Our new vehicle dealer competitors also have franchise agreements with the various vehicle manufacturers and, as such, generally have access to new vehicles on the same terms as we do. We do not have any cost advantage in purchasing new vehicles from vehicle manufacturers, and our franchise agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area.
In the used vehicle market, our dealerships compete both in their local market and nationally, including over the internet, with other franchised dealers, large multi-location used vehicle retailers, local independent used vehicle dealers, automobile rental agencies, and private parties for the supply and resale of used vehicles.
Parts, Service and Collision Businesses.   We believe the principal competitive factors in the parts and service business are the quality of customer service, the use of factory-approved replacement parts, familiarity with a manufacturer’s brands and models, accessibility and convenience, access to and use of technology required for certain repairs and services (e.g., software patches, diagnostic equipment, etc.), location, price, the competence of technicians, and the availability of training programs to enhance such expertise. In the parts and service market, our dealerships compete with other franchised dealers to perform warranty maintenance and repairs, conduct manufacturer recall services and sell factory replacement parts. Our dealerships also compete with other automobile dealers, franchised and independent service center chains, and independent repair shops for non-warranty repair and maintenance business. In addition, our dealerships sell replacement and aftermarket parts both locally and nationally over the internet in competition with franchised and independent retail and wholesale parts outlets. A number of regional or national chains offer selected parts and services at prices that may be lower than ours. Our collision centers compete with other large, multi-location companies, as well as local, independent, collision service operations.
Finance and Insurance. We believe the principal competitive factors in the finance and insurance business are convenience, interest rates, product availability, product knowledge and flexibility in contract length, further increasing the competition for customer financing. We face competition in arranging financing for our customers’ vehicle purchases from a broad range of financial institutions. Many financial institutions now offer finance and insurance products over the internet, which may reduce our profits from the sale of these products. We may be charged back for unearned financing, insurance contracts or vehicle service contract fees in the event of early termination of the contracts by customers.
Acquisitions.   We compete with other national dealer groups and individual investors for acquisitions. Increased competition, especially for certain luxury and import brands, may raise the cost of acquisitions. In the future, we cannot guarantee that there will be opportunities to complete acquisitions, nor are we able to guarantee that we will be able to complete acquisitions on terms acceptable to us.
Financing Arrangements and Indebtedness
As of December 31, 2016, our outstanding indebtedness, coupled with lease and other obligations totaled $3,593.6 million, including the following:
$1,072.1 million under the Floorplan Line of our Revolving Credit Facility;
$540.5 million in carrying value of 5.00% senior notes due 2022 (“5.00% Notes”);
$394.5 million of future commitments under various operating leases;

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$327.3 million of estimated future interest payments on existing floorplan notes payable and other long-term debt obligations;
$321.9 million of mortgage term loans in the U.S., entered into independently with three of our manufacturer-affiliated finance partners, Toyota Motor Credit Corporation (“TMCC”), BMWFS, and FMCC, as well as several third-party financial institutions, primarily to finance the purchase of real estate;
$295.6 million in carrying value of 5.25% senior notes due 2023 (“5.25% Notes”);
$222.4 million under floorplan notes payable to various manufacturer affiliates and third-party financial institutions for foreign and rental vehicles;
$149.7 million under our FMCC Facility;
$50.4 million of mortgage term loans in the U.K. (collectively, “U.K. Notes”);
$47.6 million of capital lease obligations related to real estate, as well as $30.8 million of estimated interest;
$42.6 million of other short and long-term purchase commitments;
$37.1 million of letters of credit, to collateralize certain obligations, issued under the Acquisition Line; 
$31.9 million of estimated future net obligations from interest rate risk management activities; as of December 31, 2016, the estimated fair value of such obligations was $24.4 million; and
$29.2 million of various other debt and other capital lease obligations;
As of December 31, 2016, we had the following amounts available for additional borrowings under our various U.S. credit facilities:
$367.9 million under the Floorplan Line of our Revolving Credit Facility, including $59.6 million of immediately available funds;
$322.9 million under the Acquisition Line of our Revolving Credit Facility, which is limited based upon a borrowing base calculation within certain debt covenants under the Revolving Credit Facility; and
$150.2 million under our FMCC Facility, including $25.5 million of immediately available funds.
In addition, the indentures relating to our other debt instruments allow us to incur additional indebtedness and enter into additional operating leases, subject to certain conditions.
For additional information regarding our financing arrangements and indebtedness, please read Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Stock Repurchase Program
From time to time, our Board of Directors gives authorization to repurchase shares of our common stock, subject to the restrictions of various debt agreements and our judgment. We are limited under the terms of the Revolving Credit Facility, certain mortgage term loans, 5.00% Notes and 5.25% Notes in our ability to make restricted payments, such as repurchase shares of our outstanding common stock and make payments of cash dividends to our stockholders, among other things. As of December 31, 2016, the restricted payment baskets limited us to $132.3 million in restricted payments. Generally, these restricted payment baskets will increase in the future periods by 50.0% of our future cumulative net income, adjusted to exclude the Company’s foreign operations, non-cash interest expense, non-cash asset impairment charges, and non-cash stock-based compensation, plus the net proceeds received from the sale of our capital stock, and decrease by the amount of future payments for cash dividends and share repurchases.
In February 2016, the Board of Directors approved a new authorization of $150.0 million, replacing the authorization remaining at that time. Under the authorizations, we repurchased 2,282,579 shares during 2016 at an average price of $55.90 per share, for a total of $127.6 million, leaving $22.4 million available for future repurchases as of December 31, 2016. Future repurchases are subject to the discretion of our Board of Directors after considering our results of operations, financial condition, cash flows, capital requirements, existing debt covenants, outlook for our business, general business conditions and other factors.
Dividends
During 2016, our Board of Directors approved four quarterly cash dividends. The first dividend was approved and paid at $0.22 per share, the second, third and fourth were increased to $0.23 per share for a total of $0.91 per share, or $20.0 million, for the year ended December 31, 2016. The payment of dividends in the future is subject to the discretion of our Board of Directors, after considering our results of operations, financial condition, cash flows, capital requirements, outlook for our

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business, general business conditions, the political and legislative environments, and other factors. As noted above, we are also limited in our ability to make cash dividend payments to our stockholders under the terms of several of our debt financing arrangements.
Relationships and Agreements with our Manufacturers
Each of our U.S. dealerships operates under one or more franchise agreements with vehicle manufacturers (or authorized distributors). The franchise agreements grant the franchised automobile dealership a non-exclusive right to sell the manufacturer’s or distributor’s brand of vehicles and offer related parts and service within a specified market area. These franchise agreements also grant franchised dealerships the right to use the manufacturer’s or distributor’s trademarks in connection with their operations, and impose numerous operational requirements and restrictions relating to, among other things:
inventory levels;
working capital levels;
the sales process;
minimum sales performance requirements;
customer satisfaction standards;
marketing and branding;
facility standards and signage;
personnel;
changes in management;
change in control; and
monthly financial reporting.
Our dealerships’ franchise agreements are for various terms, ranging from one year to indefinite. Each of our franchise agreements may be terminated or not renewed by the manufacturer for a variety of reasons, including unapproved changes of ownership or management and performance deficiencies in such areas as sales volume, sales effectiveness, and customer satisfaction. In most cases, manufacturers have renewed the franchises upon expiration so long as the dealership is in compliance with the terms of the agreement. From time to time, certain manufacturers may assert sales and customer satisfaction performance deficiencies under the terms of our framework and franchise agreements. We work with these manufacturers to address any performance issues.
In general, the U.S. jurisdictions in which we operate have automotive dealership franchise laws that provide that, notwithstanding the terms of any franchise agreement, it is unlawful for a manufacturer to terminate or not renew a franchise unless “good cause” exists. It generally is difficult for a manufacturer to terminate, or not renew, a franchise under these laws, which were designed to protect dealers. Though unsuccessful to date, manufacturers’ lobbying efforts may lead to the repeal or revision of dealer laws. If dealer laws are repealed in the states in which we operate in the U.S., manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or showing of good cause. Without the protection of dealer laws, it may also be more difficult for our dealers to renew their franchise agreements upon expiration. Further, U.S. federal law, including any federal bankruptcy law, may preempt U.S. state law and allow manufacturers greater freedom to terminate or not renew franchises.
The U.K. generally does not have automotive dealership franchise laws and, as a result, our U.K. dealerships operate without these types of specific protections. However, similar protections may be available as a matter of general U.K. contractual law. In addition, our U.K. dealerships are subject to European Union (“EU”) and U.K. antitrust rules prohibiting certain restrictions on the sale of new vehicles and spare parts and on the provision of repairs and maintenance across the EU. For example, authorized dealers are generally able to, subject to manufacturer facility requirements, relocate or add additional facilities throughout the EU, offer multiple brands in the same facility, allow the operation of service facilities independent of new car sales facilities and ease restrictions on cross supplies (including on transfers of dealerships) between existing authorized dealers within the EU. However, certain restrictions on dealerships may be permissible provided the conditions set out in the relevant EU Block Exemption Regulations are met. On June 23, 2016, the British Citizens voted on a referendum in favor of exiting the E.U. The majority vote in favor of Brexit has created uncertainty in the global markets and in the regulatory environment in the U.K., as well as the overall European Union. The impact on our financial results and operations may not be known for some time, but could be adverse. In addition, automotive dealers in the U.K. rely on the legislative doctrine of Block

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Exemption to govern market representation activities of competing dealers and dealer groups. To date, there has been no clear indication of how such legislation may be effected by Brexit, but a change to such legislation could be adverse.
The sale of vehicles in Brazil is regulated by federal law, commonly referred to in Brazil as the Ferrari Law. Such law sets forth the terms and conditions of distribution agreements executed among manufacturers and dealerships, specifically with regard to the distribution of cars, trucks, buses, tractors, motorbikes and similar vehicles. In addition, the Ferrari Law establishes the geographical area of a dealership, termination of distribution agreements and their consequences, among other things. Any contractual provision that conflicts with the Ferrari Law is considered void in Brazil. The distribution agreements contemplate the commercialization of vehicles and components fabricated by the manufacturer, the rendering of technical assistance relating to such products and the usage by the dealerships of the manufacturers’ brand. According to the Ferrari Law, distribution agreements may be executed for either a determined or an undetermined term. In the case of a distribution agreement executed for a determined term, its initial term may not be less than 5 years. At the end of this initial 5 year term, such distribution agreement will be automatically converted into an undetermined term distribution agreement, unless any of the parties thereto expressly waives such right with a 180 days prior notice. In the case of an early termination of a distribution agreement other than as a result of a persistent breach or force majeure, the Ferrari law entitles the non-breaching party to, among other things, certain termination payments. 
The U.S. economic recession, that began in 2008, caused domestic manufacturers to critically evaluate their respective dealer networks and terminate certain brands, and, as a result, the respective franchises. For example, General Motors chose to discontinue the Pontiac brand and, as a result, both of our Pontiac franchises were terminated. In addition, Ford chose to discontinue the Mercury brand and, as a result, all four of our Mercury franchises were terminated. Subject to similar future economic factors and material changes to the regulations discussed above, we generally expect our franchise agreements to survive for the foreseeable future and, when the agreements do not have indefinite terms, anticipate routine renewals of the agreements without substantial cost or modification.
Our dealership service departments perform vehicle repairs and service for customers under manufacturer warranties. We are reimbursed for the repairs and service directly from the manufacturer. Some manufacturers offer rebates to new vehicle customers that we are required, under specific program rules, to adequately document, support, and typically collect. In addition, some manufacturers provide us with incentives to order and/or sell certain models and/or volumes of inventory over designated periods of time. Under the terms of our dealership franchise agreements, the respective manufacturers are able to perform warranty, incentive, and rebate audits and charge us back for unsupported or non-qualifying warranty repairs, rebates or incentives.
In addition to the individual dealership franchise agreements discussed above, we have entered into framework agreements in the U.S. with most major vehicle manufacturers and distributors. These agreements impose a number of restrictions on our operations, including our ability to make acquisitions and obtain financing, and on our management. These agreements also impose change of control provisions related to the ownership of our common stock. For a discussion of these restrictions and the risks related to our relationships with vehicle manufacturers, please read “Item 1A. Risk Factors.”
The following table sets forth the percentage of our new vehicle retail unit sales attributable to our top five manufacturers in terms of percent of new vehicle retail units sold:
 
Manufacturer
Percentage of New
Vehicle Retail
Units Sold during
the Year Ended
December 31, 2016
Toyota
24.9%
BMW
13.5%
Ford
11.0%
Volkswagen
11.0%
Honda
9.9%

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Governmental Regulations
Automotive and Other Laws and Regulations
We operate in a highly regulated industry. A number of U.S. state and federal laws and regulations affect our business and the business of our manufacturers. In every state in which we operate in the U.S., we must obtain various licenses in order to conduct our businesses, including dealer, sales and finance, and insurance licenses issued by state regulatory authorities. Numerous laws and regulations govern our conduct of business, including those relating to our sales, operations, financing, insurance, advertising and employment practices. These laws and regulations include franchise laws and regulations, consumer protection laws, and other extensive laws and regulations applicable to new and used motor vehicle dealers, as well as a variety of other laws and regulations. These laws also include U.S. federal and state wage-hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to U.S. federal truth-in-lending, consumer leasing, and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, usury laws, and other installment sales laws and regulations. Some states in the U.S. regulate finance fees and charges that may be paid as a result of vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us, or our dealerships, by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines.
Our U.S. operations are subject to the National Traffic and Motor Vehicle Safety Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and the rules and regulations of various state motor vehicle regulatory agencies. The imported automobiles that we purchase in the U.S. are subject to U.S. customs duties, and in the ordinary course of our business, we may, from time to time, be subject to claims for duties, penalties, liquidated damages or other charges.
Our U.S. operations are subject to consumer protection laws known as Lemon Laws. These laws typically require a manufacturer or dealer to replace a new vehicle or accept it for a full refund within one year after initial purchase, if the vehicle does not conform to the manufacturer’s express warranties and the dealer or manufacturer, after a reasonable number of attempts, is unable to correct or repair the defect. U.S. federal laws require various written disclosures to be provided on new vehicles, including mileage and pricing information. We are aware that several states in the U.S. are considering enacting consumer “bill-of-rights” statutes to provide further protection to the consumer which could affect our profitability in such states.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established the Consumer Financial Protection Bureau (the “CFPB”) with broad regulatory powers. Although automotive dealers are generally excluded from the CFPB’s regulatory authority, we are required to comply with regulations applicable to privacy notices, and the CFPB acted to regulate automotive financing activities through its regulation of automotive finance companies and other financial institutions that service the automotive industry. The CFPB has issued regulatory guidance instructing financial institutions to monitor dealer loans for potential discrimination resulting from the system used to compensate dealers for assisting in the customer financing transaction. The CFPB has instructed lenders that, if discrimination is found, the lender would be required to change dealer compensation practices. In addition, the CFPB has announced its intention to regulate the sale of other finance and insurance products. If the result of either of these initiatives is to substantially restrict our ability to generate revenue from arranging financing for our customers for the purchase of vehicles and associated products and services, it could have a material adverse effect on our business and results of operations.
Environmental and Occupational Health and Safety Laws and Regulations
Our operations in the United States as well as the United Kingdom and Brazil involve the use, handling and storage of materials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries, cleaning products, lubricants, degreasing agents, tires, and fuel. We contract for recycling and/or dispose of used fluids, filters and other waste materials generated by our operations. In the United States, our business is subject to numerous laws and regulations governing management and disposal of materials and wastes, protection of the environment and occupational health and safety. These laws and regulations affect many aspects of our operations, such as requiring the acquisition of permits or other governmental approvals to conduct regulated activities, restricting the manner in which we handle, recycle and dispose of our wastes, requiring capital and operating expenditures to construct, maintain and upgrade pollution control and containment equipment and facilities, imposing specific health and safety criteria addressing worker protection, and imposing substantial liabilities for pollution caused by our operations or attributable to former operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties, imposition of investigatory, remedial and corrective action obligations, delays in permitting or in the performance of projects, and issuance of injunctions delaying, restricting or prohibiting some or all of our operations in affected areas. We may not be able to recover some or any of these costs from insurance.

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Most of our dealerships utilize above-ground storage tanks, primarily for storing and dispensing petroleum-based products, and above-ground lifts used to raise vehicles. To a lesser extent, our dealerships use underground storage tanks and in-ground lifts. Storage tanks in the U.S. are subject to testing, containment, upgrading and removal requirements under the Resource Conservation and Recovery Act, or RCRA, and its state law counterparts. Similarly, below ground lifts may contain fluid reservoirs that may leak. RCRA imposes requirements relating to the handling and disposal of hazardous and non-hazardous wastes and requires us to comply with stringent and costly requirements in connection with our storage and recycling or disposal of the various used fluids, paints, batteries, tires, and fuels generated by our operations. Clean-up or other remedial action may be necessary in the event of leaks or other unauthorized discharges from storage tanks or other equipment operated by us. In addition, water quality protection programs under the Federal Water Pollution Control Act (commonly known as the Clean Water Act) and comparable state and local programs in the U.S. govern certain wastewater and storm water discharges from our operations, which discharges may require permitting. Similarly, certain sources of air emissions from our operations including, for example, paint booths, may be subject to permitting, monitoring and reporting requirements, pursuant to the federal Clean Air Act and related state and local laws. Certain health and safety standards imposed under the Federal Occupational Safety and Health Act or otherwise promulgated by the Occupational Safety and Health administration of the U.S. Department of Labor and related state agencies are also applicable to protection of the health and safety of our employees.
We generally conduct environmental studies on dealerships to be acquired regardless of whether we are leasing or acquiring the underlying real property, and as necessary, implement environmental management practices or remedial or corrective actions to reduce the risk of noncompliance with environmental laws and regulations. We currently own or lease, and in connection with our acquisition program anticipate in the future owning or leasing, properties that in some instances have been used for auto retailing and servicing for many years. Laws regarding the prevention of pollution or remediation of environmental contamination generally apply regardless of whether we lease or purchase the land and facilities. Although we, or our predecessors, may have utilized operating and disposal practices that were standard in the industry at the time, a risk exists that petroleum products and wastes such as new and used motor oil, transmission fluids, antifreeze, lubricants, solvents and motor fuels could have been spilled or released on, under or from the properties owned or leased by us or on, or under or from other locations where such materials were taken for recycling or disposal. Further, we believe that structures found on some of these properties may contain asbestos-containing materials, although in an undisturbed condition that does not require removal or other corrective action under applicable regulations. In addition, many of these properties have been operated by third parties whose use, handling and disposal of such petroleum products or wastes were not under our control. In the United States, these properties and the materials transported and disposed from, or released on, them may be subject to the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA,” also known as the Superfund law), RCRA and analogous state laws in the U.S., pursuant to which we could be required to remove or remediate previously disposed wastes or property contamination or to perform remedial activities to prevent future contamination.
The trend in environmental regulation is to often place more restrictions and limitations on activities that may affect the environment. Consequently, any changes in environmental laws and regulations or re-interpretations of enforcement policies that result in more stringent and costly vehicular pollution control equipment or waste handling, storage, transport, disposal or remediation requirements, or delays or restrictions in permitting or performance of projects could have a material adverse effect on our business, results of operations and financial position. For example, vehicle manufacturers in the United States are subject to regulations adopted in 2012 by the U.S. Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”) that establish greenhouse gas (“GHG”) emissions and corporate average fuel economy (“CAFE”) standards applicable to light-duty vehicles for model year 2017 through 2021, with procedure in place to extend the application of these standards through model year 2025. Pursuant to these regulations, the EPA and NHTSA are expected to conduct mid-term reviews in 2017 to determine the technological progress and economic implications for extending these standards to model years 2022-2025. On January 12, 2017, the EPA completed its mid-term review and signed a determination to maintain the current GHG emissions standards for model year 2022-2025 vehicles. Whereas the CAFE standards are designed to improve vehicle fuel economy, the GHG standards are based on determinations made by the EPA, that emissions of carbon dioxide and certain other gases, comprising GHGs, present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the Earth’s atmosphere and other climatic changes. Moreover, climate-change legislation and regulatory changes have been made or are being considered at United States’ federal and state levels as well as at international levels. For example, in December 2015, the United States joined other countries of the United Nations in preparing an agreement requiring member countries to review and establish goals for limiting GHG emissions. This “Paris agreement” was signed by the United States in April 2016 and entered into force in November 2016; however, this agreement does not create any binding obligations for nations to limit their GHG emissions but, rather includes pledges to voluntarily limit or reduce future emissions. Although it is not possible at this time to predict how or when the United States might impose restrictions on GHGs as a result of the Paris agreement, the adoption of any laws or regulations requiring significant increases in fuel economy requirements or new federal or state restrictions on emissions of GHGs on vehicles and automotive fuels in the United States could adversely affect prices of and demand for the vehicles we sell.

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Legal controls similar to those used in the United States and relating to the management and disposal of materials and wastes as well as protection of the environment exist in the United Kingdom and Brazil, where we also conduct operations. These legal controls as implemented and enforced in the United Kingdom and Brazil also affect many aspects of our operations in those countries. For example, with regards to the Paris agreement, the United Kingdom and Brazil each signed that agreement in April 2016. We may incur significant capital expenditures, operational costs and risks of liability and sanction as we seek to comply with those foreign-country environmental legal requirements.
Insurance and Bonding
Our operations expose us to the risk of various liabilities, including:
claims by employees, customers or other third parties for personal injury or property damage resulting from our operations; and
fines and civil and criminal penalties resulting from alleged violations of federal and state laws or regulatory requirements.
The automotive retailing business is also subject to substantial risk of real and personal property loss as a result of the significant concentration of real and personal property values at dealership locations. Under self-insurance programs, we retain various levels of risk associated with aggregate loss limits, per claim deductibles and claims handling expenses, including property and casualty, automobile physical damage, and employee medical benefits. In certain cases, we insure costs in excess of our retained risk under various contracts with third-party insurance carriers. Risk retention levels may change in the future as a result of changes in the insurance market or other factors affecting the economics of our insurance programs. Although we believe our insurance coverage is adequate, we cannot assure that we will not be exposed to uninsured losses that could have a material adverse effect on our business, results of operations and financial condition.
We make provisions for retained losses and deductibles by reflecting charges to expense based upon periodic evaluations of the estimated ultimate liabilities on reported and unreported claims. Actuarial estimates for the portion of claims not covered by insurance are based on historical claims experience, adjusted for current trends and changes in claims-handling procedures. The insurance companies that underwrite our insurance require that we secure certain of our obligations for self-insured exposures with collateral. Our collateral requirements are set by the insurance companies and, to date, have been satisfied by posting surety bonds, letters of credit and/or cash deposits. Our collateral requirements may change from time to time based on, among other things, our total insured exposure and the related self-insured retention assumed under the policies. We are subject to potential premium cost fluctuations with the annual renewal of these programs.
Employees
We believe our relationship with our employees is favorable. As of December 31, 2016, we employed 13,500 (full-time, part-time and temporary) people in the U.S., U.K. and Brazil, of whom:
1,702 were employed in managerial positions;
3,520 were employed in non-managerial vehicle sales department positions;
6,186 were employed in non-managerial parts and service department positions; and
2,129 were employed in administrative support positions.
In Brazil, all employees are represented by a local union.
Because of our dependence on vehicle manufacturers, we may be affected by labor strikes, work slowdowns and walkouts at vehicle manufacturing facilities and/or their suppliers. Additionally, labor strikes, work slowdowns and walkouts at businesses participating in the distribution of manufacturers’ products may also affect us.
For further discussion, please read “Item 1A. Risk Factors.”
Seasonality
We generally experience higher volumes of vehicle 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. The first quarter is generally the weakest in Brazil, driven by heavy consumer vacations and activities associated with Carnival. In addition, in some regions of the U.S., vehicle purchases decline during the winter months due to inclement weather. For the U.K., the first and third calendar quarters tend to be stronger, driven by plate change months of March and September. As a result of all these factors, our consolidated 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,

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inventory availability, manufacturer incentive programs or shifts in governmental taxes or regulations may exaggerate seasonal or cause counter-seasonal fluctuations in our revenues and operating income.
For further discussion, please read “Item 1A. Risk Factors.”
Internet Website and Availability of Public Filings
Our internet address is www.group1auto.com. We make the following information available free of charge on our internet website:
Annual Report on Form 10-K;
Quarterly Reports on Form 10-Q;
Current Reports on Form 8-K;
Amendments to the reports filed or furnished electronically with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act;
Our Corporate Governance Guidelines;
The charters for our Audit, Compensation, Finance/Risk Management and Nominating/Governance Committees;
Our Code of Conduct for Directors, Officers and Employees; and
Our Code of Ethics for our Chief Executive Officer, Chief Financial Officer and Controller.
We make our filings with the Securities and Exchange Commission (“SEC”) available on our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. The SEC also maintains an internet website at http://sec.gov that contains reports, proxy and information statements, and other information regarding our company that we file and furnish electronically with the SEC. The above information is available in print to anyone who requests it free of charge. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, DC 20549 and may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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Item 1A. Risk Factors
Demand for and pricing of our products and services is subject to economic conditions and other factors, which have had and, in the future, could have a material adverse effect on our business and results of operations.
The automotive retail industry, and especially new vehicle unit sales, is influenced by general economic conditions, particularly consumer confidence, the level of personal discretionary spending, interest rates, fuel prices, supply conditions, unemployment rates and credit availability. During economic downturns, such as the recession the U.S. experienced in 2008 and much of 2009, retail new vehicle sales typically experience periods of decline characterized by oversupply and weak demand. In addition, periods of economic uncertainty, as well as volatility in consumer preference around fuel-efficient vehicles in response to volatile fuel prices, and concern about manufacturer viability, may adversely impact future consumer spending and result in a difficult business environment. Any tightening of the credit markets and credit conditions may decrease the availability of automotive loans and leases and adversely impact our new and used vehicle sales and margins. In particular, if sub-prime finance companies apply higher credit standards or if there is a decline in the overall availability of credit in the sub-prime lending market, the ability of consumers to purchase vehicles could be limited, which could have a material adverse effect on our business and results of operations.
Volatile fuel prices may also continue to affect consumer preferences in connection with the purchase of our vehicles. Rising fuel prices may make consumers less likely to purchase larger, more expensive vehicles, such as sports utility vehicles or luxury automobiles, and more likely to purchase smaller, less expensive and more fuel efficient vehicles. Conversely, lower fuel prices could have the opposite effect. Sudden changes in customer preferences make maintenance of an optimal mix of large and small vehicle inventory a challenge. Further increases or sharp declines in fuel prices could have a material adverse effect on our business and results of operations.
In addition, local economic, competitive and other conditions affect the performance of our dealerships. Our results of operations depend substantially on general economic conditions and spending habits in those regions of the U.S. where we maintain most of our operations. Since a large concentration of our new vehicle sales are in the states of Texas and Oklahoma (43.3%) for the year ended December 31, 2016 which are dependent upon the oil and gas industry, the recent decline in commodity prices has had and could continue to have an adverse effect on our business and results of operations in those regions.
The recently inaugurated president of the U.S., President Donald Trump, has discussed with his advisers the idea of supporting a major tax reform package which would include a tax on products imported into the U.S. (“border adjustment tax”). A border adjustment tax would tax imported goods flowing into the U.S. at the existing corporate income tax rate and exempt exports flowing out from the U.S. The tax is designed to stimulate domestic economic production. Foreign companies with large U.S. customer bases, such as some of our manufacturers, as well as domestic retailers that rely heavily on imported goods, may have to pay a higher cost for their imported products in the short-to-medium term. Those increased costs may be passed on to our customers ultimately increasing the price of the products we sell. If such border adjustment tax were to be enacted and implemented in the U.S., it could adversely affect the volume of our new vehicles and parts sales, which could have an adverse effect on our operations and our business.
We are subject to a concentration of risk in the event of financial distress, merger, sale or bankruptcy, including potential liquidation, of, or other adverse economic impacts on, certain major vehicle manufacturers.
Toyota, Nissan, Honda, Ford, BMW, Volkswagen, Hyundai, Daimler, FCA US (formerly Chrysler) and General Motors dealerships represented approximately 97.3% of our total new vehicle retail units sold in 2016. In particular, sales of Toyota/Scion/Lexus new vehicles represented 24.9% of our new vehicle unit sales in 2016. The success of our dealerships is dependent on vehicle manufacturers in several key respects. First, we rely exclusively on the various vehicle manufacturers for our new vehicle inventory. Our ability to sell new vehicles is dependent on a vehicle manufacturer’s ability to produce and allocate to our dealerships an attractive, high quality, and desirable product mix at the right time in order to satisfy customer demand. Second, manufacturers generally support their franchisees by providing direct financial assistance in various areas, including, among others, incentives, floorplan assistance and advertising assistance. A discontinuation or change in our manufacturers’ warranty and incentive programs could adversely affect our business. Third, manufacturers provide product warranties and, in some cases, service contracts to customers. Our dealerships perform warranty and service contract work for vehicles under manufacturer product warranties and service contracts and we bill the manufacturer directly as opposed to invoicing the customer. In addition, we rely on manufacturers to varying extents for original equipment manufactured replacement parts, training, product brochures and point of sale materials, and other items for our dealerships.
Vehicle manufacturers may be adversely impacted by economic downturns or recessions, significant declines in the sales of their new vehicles, increases in interest rates, adverse fluctuations in currency exchange rates, declines in their credit ratings, reductions in access to capital or credit, labor strikes or similar disruptions (including within their major suppliers), supply shortages, rising raw material costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products (including due to bankruptcy), product defects, litigation, poor product mix or unappealing vehicle

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design, governmental laws and regulations, natural disasters, or other adverse events. These and other risks could materially adversely affect the financial condition of any manufacturer and impact its ability to profitably design, market, produce or distribute new vehicles, which in turn could have a material adverse effect on our business, results of operations and financial condition.
We are dependent on our relationships with manufacturers and if we are unable to enter into new franchise agreements in connection with dealership acquisitions or maintain or renew our existing franchise agreements on favorable terms, our operations may be significantly impaired.
We are dependent on our relationships with manufacturers, which exercise a great degree of influence over our operations through the franchise agreements. For example, delays in obtaining, or failing to obtain, manufacturer approvals and franchise agreements for dealership acquisitions could adversely affect our acquisition program. In determining whether to approve an acquisition, manufacturers may consider many factors, including the moral character and business experience of the dealership principals, the financial condition, and ownership structure, as well as Customer Satisfaction Index scores, sales efficiency, and other performance measures of our other dealerships. Manufacturers may use these performance indicators, as well as sales performance numbers, as conditions for certain payments and as factors in evaluating applications for additional acquisitions. In unusual cases where performance indicators, such as the ones described above, are not met to the satisfaction of the manufacturer, certain manufacturers may either limit our ability to acquire additional dealerships or require the disposal of existing dealerships or both. From time to time, we have not met all of the manufacturers’ requirements to make acquisitions and have received requests to dispose of certain of our dealerships. In the event one or more of our manufacturers sought to prohibit future acquisitions, or imposed requirements to dispose of one or more of our dealerships, our acquisition and growth strategy could be adversely affected.
A manufacturer may also limit the number of its dealerships that we may own or the number that we may own in a particular geographic area. For example, in the U.S., we may acquire only six primary Lexus dealerships or six outlets nationally. As of December 31, 2016, we owned three primary Lexus dealerships. Also, under the manufacturer’s interpretation of existing guidelines, as of December 31, 2016, we owned the maximum number of Toyota dealerships permitted in the Gulf States region, which is comprised of Texas, Oklahoma, Louisiana, Mississippi and Arkansas, as well as in the Boston region, which is comprised of Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.
In addition, each of our franchise agreements may be terminated or not renewed by the manufacturer for a variety of reasons, including any unapproved changes of ownership or management, sales and customer satisfaction performance deficiencies and other material breaches of the franchise agreements. Manufacturers may also have a right of first refusal if we seek to sell dealerships. We cannot guarantee all of our franchise agreements will be renewed or that the terms of the renewals will be as favorable to us as our current agreements. In addition, we cannot guarantee that our manufacturers will not attempt to terminate our franchise agreements if they perceive that performance deficiencies exist. If such an instance occurs, although we are generally protected by automotive dealership franchise laws requiring “good cause” be shown for such termination, we cannot guarantee that the termination of the franchise will not be successful. Actions taken by manufacturers to exploit their bargaining position in negotiating the terms of renewals of franchise agreements could also have a material adverse effect on our results of operations. Further, the terms of certain of our real estate-related indebtedness require the repayment of all amounts outstanding in the event that the associated franchise is terminated. Our results of operations may be materially and adversely affected to the extent that our franchise rights become compromised or our operations restricted due to the terms of our franchise agreements or if we lose substantial franchises.
Finally, our franchise agreements do not give us the exclusive right to sell a manufacturer’s product within a given geographic area. Subject to state laws in the U.S. that are generally designed to protect dealers, a manufacturer may grant another dealer a franchise to start a new dealership near one of our locations, or an existing dealership may move its dealership to a location that would more directly compete against us. The location of new dealerships near our existing dealerships could have a material and adverse effect on our operations and reduce the profitability of our existing dealerships.
Our inability to acquire new dealerships and successfully integrate those dealerships into our business could adversely affect the growth of our revenues and earnings.
Growth in our revenues and earnings partially depends on our ability to acquire new dealerships and successfully integrate those dealerships into our existing operations. We cannot guarantee that we will be able to identify and acquire dealerships in the future. In addition, we cannot guarantee that any acquisitions will be successful or on terms and conditions consistent with past acquisitions. Restrictions by our manufacturers, as well as covenants contained in our debt instruments, may directly or indirectly limit our ability to acquire additional dealerships. In addition, increased competition for acquisitions may develop, which could result in fewer acquisition opportunities available to us and/or higher acquisition prices. And, some of our competitors may have greater financial resources than us.
We will continue to need substantial capital in order to acquire additional automobile dealerships. We currently intend to finance future acquisitions by using cash generated from operations, borrowings under our Acquisition Line, proceeds

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from debt and/or equity offerings and/or issuing shares of our common stock as partial consideration for acquired dealerships. If potential acquisition candidates are unwilling to accept our common stock, we will rely solely on available cash or proceeds from debt or equity financings, which could adversely affect our acquisition program. Access to funding through the debt or equity capital markets could become challenging in the future. Also, in the future, the cost of obtaining money from the credit markets could increase if lenders and institutional investors increase interest rates, enact tighter lending standards, refuse to refinance existing debt at maturity on terms similar to current debt or at all, and reduce or, in some cases, cease to provide funding to borrowers. Accordingly, our ability to complete acquisitions could be adversely affected if the price of our common stock is depressed or if our access to capital is limited.
In addition, managing and integrating additional dealerships into our existing mix of dealerships may result in substantial costs, diversion of our management’s attention, delays, or other operational or financial problems. Acquisitions involve a number of special risks, including, among other things:
incurring significantly higher capital expenditures and operating expenses;
failing to integrate the operations and personnel of the acquired dealerships;
entering new markets with which we are not familiar;
incurring undiscovered liabilities at acquired dealerships, generally, in the case of stock acquisitions;
disrupting our ongoing business;
failing to retain key personnel of the acquired dealerships;
impairing relationships with employees, manufacturers and customers; and
incorrectly valuing acquired entities.
These risks could have a material adverse effect on our business, results of operations and financial condition. Although we conduct what we believe to be a prudent level of investigation regarding the operating condition of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these acquired businesses.
We are subject to substantial regulations, which may adversely affect our business and results of operations.
A number of state and federal laws and regulations applicable to automotive companies affect our business. We are also subject to laws and regulations relating to business corporations generally. Any failure to comply with these laws and regulations may result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory remedial obligations or the issuance of injunctions limiting or prohibiting our operations. In every jurisdiction in which we operate, we must obtain various licenses in order to operate our businesses, including dealer, sales, finance and insurance-related licenses issued by government authorities. These laws also regulate our conduct of business, including our advertising, operating, financing, employment and sales practices. Other laws and regulations include state franchise laws and regulations in the U.S., anti-trust laws and other extensive laws and regulations applicable to new and used motor vehicle dealers, as well as U.S. federal and state wage-hour, anti-discrimination and other employment practices laws. Though unsuccessful to date, manufacturers’ lobbying efforts may lead to the repeal or revision of U.S. franchise laws. If U.S. franchise laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or showing of good cause. Without the protection of U.S. franchise laws, it may also be more difficult for us to renew our franchise agreements upon expiration. Further, U.S. federal law, including any federal bankruptcy law, may preempt state law in the U.S. and allow manufacturers greater freedom to terminate or not renew franchises. Furthermore, some states have initiated consumer “bill of rights” statutes which involve increases in our costs associated with the sale of vehicles, or decreases in some of our profit centers.
A substantial amount of our business is related to the real estate we own or lease to conduct our various automotive operations. Often times, the success of such automotive operations is dependent upon our ability to locate, purchase and lease real estate on favorable terms. We are highly dependent upon the availability of real estate in each of our automotive markets. Additionally, real estate we are interested in acquiring will be subject to local municipal laws of county, township, parish and other local municipalities that often times will govern what type of real estate we can purchase for our various automotive operations. Local ordinances, deed restrictions, zoning and other land use restrictions may prohibit the type of business permitted on a given leased or purchased property which can add to the challenge of locating appropriate real estate. The costs and length of time associated with changing the permitted use of a leased or purchased property may affect our ability to enter a market or expand our operations in an existing market. Our inability to locate, and lease or purchase additional suitable properties to meet the needs of our various automotive operations in multiple markets would adversely affect our business, results of operations and financial condition.

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Our financing activities with customers are subject to U.S. federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states in the U.S. regulate finance fees and charges that may be paid as a result of vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us or our dealerships by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines.
Our operations are also subject to the National Traffic and Motor Vehicle Safety Act, the Magnusson-Moss Warranty Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and various state motor vehicle regulatory agencies. The imported automobiles we purchase are subject to U.S. customs duties and, in the ordinary course of our business, we may, from time to time, be subject to claims for duties, penalties, liquidated damages, or other charges.
Our U.S. operations are subject to consumer protection laws known as Lemon Laws. These laws typically require a manufacturer or dealer to replace a new vehicle or accept it for a full refund within one year after initial purchase if the vehicle does not conform to the manufacturer’s express warranties and the dealer or manufacturer, after a reasonable number of attempts, is unable to correct or repair the defect. Federal laws require various written disclosures to be provided on new vehicles, including mileage and pricing information.
In July 2010, the Dodd-Frank Act was signed into law and established the CFPB with broad regulatory powers in the U.S. Although automotive dealers are generally excluded from the CFPB’s regulatory authority, we are required to comply with regulations applicable to privacy notices, and the CFPB acted to regulate automotive financing activities through its regulation of automotive finance companies and other financial institutions that service the automotive industry. The CFPB has issued regulatory guidance instructing financial institutions to monitor dealer loans for potential discrimination resulting from the system used to compensate dealers for assisting in the customer financing transaction. The CFPB has instructed lenders that, if discrimination is found, the lender would be required to change dealer compensation practices. If this initiative substantially restricts our ability to generate revenue from arranging financing for our customers for the purchase of vehicles, the result could have an adverse effect on our business and results of operations.
In addition, the Dodd-Frank Act established federal oversight and regulation of derivative markets and entities, such as us, that participate in those markets. The Dodd-Frank Act requires the CFTC and the SEC to promulgate rules and regulations implementing the Dodd-Frank Act. Although the CFTC has finalized certain regulations, others remain to be finalized or implemented and it is not possible at this time to predict when this will be accomplished.
Pursuant to the Dodd-Frank Act, the CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and exchange trading. To the extent we engage in such transactions that are or become subject to such rules in the future, we will be required to comply or to take steps to qualify for an exemption to such requirements. In addition, the Dodd-Frank Act, the CFTC and banking regulators established margin rules for uncleared swaps. Although we believe that we qualify for the end-user exceptions to the mandatory clearing and margin requirements with respect to swaps entered to hedge our commercial risks, the application of such requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that we use for hedging. If any of our swaps do not qualify for the commercial end-user exception, clearing our transactions or posting of initial or variation margin could impact our liquidity and reduce cash available for capital expenditures, therefore reducing our ability to execute hedges to reduce risk and protect cash flows. In addition, the European Union and other non-U.S. jurisdictions are implementing regulations with respect to the derivatives market. To the extent we transact with counterparties in foreign jurisdictions, we may become subject to such regulations. At this time, the impact of such regulations is not clear.
The full impact of the Dodd-Frank Act and related regulatory requirements upon our business will not be known until the regulations are implemented and the market for derivative contracts has adjusted. The Dodd-Frank Act and any new regulations could significantly increase the cost of derivative contracts, materially alter the terms of derivative contracts, reduce our ability to monetize or restructure our existing derivative contracts. If we reduce our use of derivatives as a result of the Dodd-Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Any of these consequences could have a material adverse effect on our financial condition, results of operations and cash available for distributions to our shareholders.
Our U.K. finance operations also arrange for the sale of various contracts for products and services in connection with the sale of new and used vehicles. Those activities in the U.K. are regulated by the Financial Conduct Authority (FCA). The FCA is an independent watchdog that regulates financial services of our dealerships. The FCA was created in the wake of the financial crisis as a result of passage of the Financial Services Act of 2012 (the “FSA Act”). The FSA Act sets out a system for regulating financial services in order to protect and improve the U.K.’s economy. Its purpose was to make sure markets

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work well by confirming that financial services maintain and ensure the integrity of the markets, regulate financial services firms so that they give consumers a fair deal and ensure the financial services market is competitive.
The Patient Protection and Affordable Care Act, signed into law on March 23, 2010, has and may continue to increase our annual employee health care costs that we fund. We cannot predict the extent of the effect that this statute, or any future state or federal healthcare legislation or regulation, will have on us. However, any additional expansion in government’s role in the U.S. healthcare industry could result in significant long-term costs to us, which could in turn adversely affect our business, results of operations and financial condition.
Possible penalties for violation of any of these laws or regulations include revocation or suspension of our licenses and/or civil or criminal fines and penalties. In addition, many laws may give customers a private cause of action. Violation of these laws, the cost of compliance with these laws, or changes in these laws could have a material adverse effect on our business and results of operations.
Our operations are subject to environmental laws and regulations that may expose us to significant costs and liabilities.
In the course of our operations in the United States, United Kingdom and Brazil, we generate, handle, store and recycle or dispose of various used products and wastes. These business activities are subject to stringent federal, regional, state and/or local laws, regulations and other controls governing the release of materials into the environment or otherwise relating to environmental protection. These laws, regulations and controls may impose numerous obligations upon our operations including the acquisition of permits to conduct regulated activities, the imposition of restrictions on where or how to manage or dispose of used products and wastes, the incurrence of capital expenditures to limit or prevent releases of such material, and the imposition of substantial liabilities for pollution resulting from our operations. Failure to comply with these laws, regulations, and permits may result in the assessment of sanctions, including administrative, civil, and criminal penalties, the imposition of investigatory remedial and corrective action obligations, delays in permitting or in the performance of projects and the issuance of injunctions limiting or preventing some or all of our operations in affected areas.
There is a risk of incurring significant environmental costs and liabilities in the operations of our automotive dealerships due to our handling of regulated used products and wastes, because of releases arising in the course of our operations, especially from storage tanks and in-ground lifts, and due to contamination arising from historical operations and waste disposal practices, including by predecessor operators or owners over whom we had no control or supervision. We could be subject to joint and several, strict liability for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination or if the operations were in compliance with all applicable laws at the time those actions were taken.
The trend in environmental regulation is to often place more restrictions and limitations on activities that may affect the environment, and thus any changes in environmental laws and regulations that result in more stringent and costly pollution control equipment or waste containment, management or disposal requirements could have a material adverse effect on our business, results of operation and financial condition. For instance, in the United States vehicle manufacturers are subject to federal regulations requiring GHG reduction and CAFE standards for light-duty vehicles for model years 2017 through 2021. Under these regulations, most manufacturers are required to modify their vehicle platforms and powertrains to achieve a fleet-wide average fuel efficiency equivalent of 44.7 miles per gallon by model year 2021. The EPA and NHTSA are expected to conduct mid-term reviews in 2017 to determine the technological progress and economic implications for extending these standards to model years 2022-2025, which extended standards will include meeting a proposed 2025 standards for fleet-wide average fuel efficiency equivalent of 54.5 miles per gallon. On January 12, 2017, the EPA completed its mid-term review and signed a determination to maintain the current GHG emissions standards for model year 2022-2025 vehicles. Similarly, these regulations impose fleet-wide average carbon dioxide emission tailpipe compliance levels of 243 grams per mile on model 2017 vehicles and would impose similar tailpipe compliance levels of 163 grams per mile on model year 2025 vehicles. These increased fuel efficiency and carbon dioxide, or GHG, reduction requirements are expected to increase the cost of new vehicles over time, which could potentially result in a reduction in new vehicle sales.
Whereas the CAFE standards are designed to improve vehicle fuel economy in the United States, the GHG standards are based on determinations made by the EPA that emissions of GHGs present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the Earth’s atmosphere and other climatic changes. Congress and numerous states have from time to time considered and — in the case of some states, adopted — legislation to restrict GHG. These laws generally take the form of cap and trade programs, requiring large sources of GHG emissions to purchase allowances or take steps to reduce emissions to comply with the cap. Climate-change legal requirements are also being considered on an international level. For example, in December 2015, the United States joined other countries of the United Nations in preparing an agreement requiring member countries to review and establish goals for limiting GHG emissions. This “Paris agreement” was signed by the United States, the United Kingdom and Brazil in April 2016 and the agreement entered into force in November 2016; however, this agreement does not create any binding obligations for nations to limit their GHG emissions but, rather includes pledges to voluntarily limit or reduce future

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emissions. Although it is not possible at this time to predict how or when the United States, United Kingdom and Brazil might impose restrictions on GHGs as a result of the Paris agreement, the adoption of any laws or regulations requiring significant increases in fuel economy requirements or new federal or state restrictions on emissions of the GHGs on vehicles and automotive fuels in the United States could adversely affect prices of an demand for the vehicles we sell, which could adversely affect our revenues and earnings. Please see “Item 1. Business — Governmental Regulations — Environmental and Occupational Health and Safety Laws and Regulations” for more information.
If we lose key personnel or are unable to attract additional qualified personnel, our business could be adversely affected because we rely on the industry knowledge and relationships of our key personnel.
We believe our success depends to a significant extent upon the efforts and abilities of our executive officers, senior management and key employees, including our regional vice presidents. The unexpected or unanticipated loss of the services of one or more members of our senior management team could have an adverse effect on our business and impair the efficiency and productivity of our operations. We do not have key man insurance for any of our executive officers or key personnel. In addition, the market for qualified employees in the industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods of low unemployment. We do not have employment agreements with most of our dealership general managers and other key dealership personnel. Accordingly, the inability to retain key employees or the failure to attract qualified personnel could have an adverse effect on our business and may impact the ability of our dealerships to conduct their operations in accordance with our standards.
Substantial competition in automotive sales and services may materially and adversely affect our results of operations due to our need to lower prices to sustain sales.
The automotive retail industry is highly competitive. Depending on the geographic market, we compete with:
franchised automotive dealerships in our markets that sell the same or similar makes of new and used vehicles that we offer, occasionally at lower prices than we do;
other national or regional affiliated groups of franchised dealerships and/or of used vehicle dealerships;
private market buyers and sellers of used vehicles;
internet-based vehicle brokers that sell vehicles obtained from franchised dealers directly to consumers;
auto parts retailers;
local, regional and national collision centers;
service center chain stores; and
independent service and repair shops.
We do not have any cost advantage in purchasing new vehicles from vehicle manufacturers and typically rely on advertising, merchandising, sales expertise, service reputation, product demand and dealership location in order to sell new vehicles. Our franchise agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. If competing dealerships expand their market share or are awarded additional franchises by manufacturers it could have a material and adverse effect on our business and results of operations.
In addition to competition for vehicle sales, our dealerships compete with franchised dealerships to perform warranty maintenance and repair services and with other automotive dealers, franchised and independent service center chains and independent garages for non-warranty repair and routine maintenance business. Our parts operations compete with other automotive dealers, service stores and auto parts retailers. We believe the principal competitive factors in the parts and service business are the quality of customer service, the use of factory-approved replacement parts, familiarity with a manufacturer’s brands and models, convenience, access to and use of technology required for certain repairs and services, location, price, the competence of technicians and the availability of training programs to enhance such expertise. A number of regional or national chains offer selected parts and services at prices that may be lower than our dealerships’ prices. We also compete with a broad range of financial institutions in arranging financing for our customers’ vehicle purchases.
The internet has also become a significant part of the advertising and sales process in our industry. Customers are using the internet as part of the sales process to compare pricing for cars and related finance and insurance services, which may reduce gross profit margins for new and used cars and profits for related finance and insurance services. Some retailers offer vehicles for sale over internet websites without the benefit of having a dealership franchise, although they must currently source their vehicles from a franchised dealer. One or more companies are currently manufacturing electric vehicles for sale solely through the internet without using the traditional dealer-network, and circumventing the state franchise laws of several states in the United States. If those companies are successful in selling their vehicles without the requirements of establishing

24



a dealer-network, they may be able to have a competitive advantage over the traditional dealers, which could adversely affect our sales in those states. If internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, or if dealerships are able to effectively use the internet to sell outside of their markets, our business could be materially adversely affected. Our business would also be materially adversely affected to the extent that internet companies acquire dealerships or align themselves with our competitors’ dealerships.
Please see “Item 1. Business — Competition” for more discussion of competition in our industry.
A data security breach with regard to personally identifiable information (“PII”) about our customers or employees could negatively affect operations and result in high costs.
The protection of customer, employee, and our data is critical to our business. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements across business units. In addition, customers have a high expectation that we will adequately protect their PII from cyber-attack or other security breaches. A significant breach of customer, employee, or our data could attract a substantial amount of media attention, damage our customer relationships and reputation, and result in lost sales, fines, or lawsuits.
In the ordinary course of business, we and our business affiliates receive significant PII about our customers in order to complete the sale or service of a vehicle and related products. We also receive PII from our employees. Numerous state and federal regulations in the U.S., as well as payment card industry and other vendor standards, govern the collection and maintenance of PII from consumers and other individuals. Although many companies across many industries are affected by malicious efforts to obtain access to PII, news reports suggest that the automotive dealership industry is a particular target of identity thieves. Moreover, there are numerous opportunities for a data security breach, including cyber-security breaches, burglary, lost or misplaced data, scams, or misappropriation of data by employees, vendors or unaffiliated third parties. Despite the security measures we have in place and any additional measures we may implement or adopt in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, scams, burglary, human errors, acts of vandalism, or other events. Alleged or actual data security breaches can increase costs of doing business, negatively affect customer satisfaction and loyalty, expose us to negative publicity, individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe on proprietary information, any of which could have a material adverse effect on our business, results of operations or financial condition.
Our business is sensitive to manufacturer recalls, and the effects such recalls have on the reputation of our manufacturers.
Our business is highly dependent on consumer demand and brand preferences of our manufacturer’s products. Manufacturer recall campaigns are a common occurrence that have accelerated in frequency and scope over the last several years. Manufacturer recall campaigns could adversely affect our new and used vehicle sales or customer residual trade-in valuations, could cause us to temporarily remove vehicles from our inventory available for sale, could force us to incur increased costs and could expose us to litigation and adverse publicity related to the sale of recalled vehicles, which could have a material adverse effect on our business, sales and results of operations.
The impairment of our goodwill, our indefinite-lived intangibles and our other long-lived assets has had, and could in the future have, a material adverse effect on our results of operations.
We assess goodwill and other indefinite-lived intangibles for impairment on an annual basis, or more frequently when events or circumstances indicate that an impairment may have occurred. We assess the carrying value of our long-lived assets when events or circumstances indicate that an impairment may have occurred.
Based on the organization and management of our business, we determined that each of our regions represents a reporting unit for the purpose of assessing goodwill for impairment. In evaluating goodwill, we compare the carrying value of our reporting units to their respective fair values. To determine the fair value of our reporting units we use a combination of the discounted cash flow and market approaches. In addition, we evaluate the carrying value of our indefinite-lived, intangible franchise rights at a dealership level using a discounted cash flow based approach. Both these analyses are based upon a series of assumptions. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies and Accounting Estimates — Goodwill” and “Intangible Franchise Rights” for additional information regarding the assumptions that underlie our analysis.
Performance issues at individual dealerships, as well as broader economic and retail automotive industry trends can result in changes to the assumptions in our fair value estimates. In addition, until the full effect of our business practices, scale leverage and other cost savings initiatives can be realized, the carrying value of goodwill and other intangibles associated with an acquisition are generally more subject to impairment in the years immediately following the acquisition. For example, the decline in the Brazilian economy and retail auto industry since our acquisition of the Brazil dealerships in

25



March 2013 adversely impacted the results of the impairment test performed in the fourth quarter of 2015. As a result, in our fourth quarter 2015 impairment analysis, we determined that there had been material changes to the previous assumptions underlying the amount of goodwill and/or intangible assets associated with our Brazilian dealerships, and we wrote down the value of those assets, which resulted in a material non-cash impairment charge.
On June 23, 2016, the British Citizens voted on a referendum in favor of exiting the E.U. The majority vote in favor of Brexit has created uncertainty in the global markets and in the regulatory environment in the U.K., as well as the overall European Union. The impact on our financial results and operations may not be known for some time, but could be adverse. In addition, automotive dealers in the U.K. rely on the legislative doctrine of "Block Exemption" to govern market representation activities of competing dealers and dealer groups. To date, there has been no clear indication of how such legislation may be effected by Brexit, but a change to such legislation could be adverse. If, as a result of the clarification of any of these uncertainties, the estimates, assumptions and inputs utilized in our annual impairment test for goodwill and intangible franchise rights change or fail to materialize, the resulting decline in the estimated fair market value of such assets could result in a material non-cash impairment charge. While we are not aware of any changes in circumstances that has resulted in a decline in fair value of these assets at this time, we continue to closely monitor the situation.
We are required to evaluate the carrying value of our long-lived assets at the lowest level of identifiable cash flows. To test the carrying value of assets to be sold, we generally use independent, third-party appraisals or pending transactions as an estimate of fair value. In the event of an adverse change in the real estate market, the resulting decline in our estimated fair value could result in a material non-cash impairment charge to the associated long-lived assets.
Changes in interest rates could adversely impact our results of operations.
Borrowings under our credit facilities and various other notes payable bear interest based on a floating rate. Therefore, our interest expense would increase with any rise in interest rates. A rise in interest rates may also have the effect of depressing demand in the interest rate sensitive aspects of our business, particularly new and used vehicle sales, because many of our customers finance their vehicle purchases. As a result, a rise in interest rates may have the effect of simultaneously increasing our costs and reducing our revenues. To mitigate the impact, we have entered into derivative transactions to convert a portion of our variable-rate debt to fixed rates to partially mitigate this risk. In addition, we receive interest assistance from certain automobile manufacturers, which is reflected as a reduction in cost of sales on our statements of operations. Please see Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our interest rate sensitivity.
Natural disasters and adverse weather events can disrupt our business.
Some of our dealerships are concentrated in states and regions in the U.S., U.K. and Brazil in which actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes, snow storms, flooding, and hail storms) have in the past, and may in the future, disrupt our dealership operations. A disruption in our operations may adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, the automotive retailing business is subject to substantial risk of property loss due to the significant concentration of property value at dealership locations. Natural disasters and severe weather events have in the past and may in the future impair the value of our dealership property. Although we have, subject to certain limitations and exclusions, substantial insurance, including business interruption insurance, we may be exposed to uninsured losses that could have a material adverse effect on our business, results of operations and financial condition.
Our insurance does not fully cover all of our operational risks, and changes in the cost of insurance or the availability of insurance could materially increase our insurance costs or result in a decrease in our insurance coverage.
The operation of automobile dealerships is subject to compliance with a wide range of laws and regulations and is subject to a broad variety of risks. While we have insurance on our real property, comprehensive coverage for our vehicle inventory, general liability insurance, workers’ compensation insurance, employee dishonesty coverage, employment practices liability insurance, pollution coverage and errors and omissions insurance in connection with vehicle sales and financing activities, we are self-insured for a portion of our potential liabilities. We purchase insurance policies for worker’s compensation, liability, auto physical damage, property, pollution, employee medical benefits and other risks consisting of large deductibles and/or self-insured retentions.
In certain instances, our insurance may not fully cover an insured loss depending on the magnitude and nature of the claim. Additionally, changes in the cost of insurance or the availability of insurance in the future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance coverage and increase the portion of our risks that we self-insure.

26



Our indebtedness and the associated covenants could materially adversely affect our ability to obtain additional financing, including for acquisitions and capital expenditures, limit our flexibility to manage our business, prevent us from fulfilling our financial obligations and restrict our use of capital.
Our indebtedness could impact us, in the following ways:
our ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes may be impaired in the future;
a portion of our current cash flow from operations must be dedicated to the payment of principal on our indebtedness, thereby reducing the funds available to us for our operations and other corporate purposes;
some of our borrowings are and will continue to be at variable rates of interest, which exposes us to the risk of increasing interest rates; 
we may be more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to changing market conditions and regulations; and
during periods of economic downturn, we may be more susceptible to a breach of our debt covenants and default on our indebtedness.
Our debt instruments contain numerous covenants that limit our discretion with respect to business matters, including mergers or acquisitions, paying dividends, repurchasing our common stock, international investments, incurring additional debt or disposing of assets. A breach of any of these covenants could result in a default under the applicable agreement or indenture. In addition, a default under one agreement or indenture could result in a default and acceleration of our repayment obligations under the other agreements or indentures under the cross default provisions in those agreements or indentures. If a default or cross default were to occur, we may be required to renegotiate the terms of our indebtedness, which would likely be on less favorable terms than our current terms and cause us to incur additional fees to process. Alternatively, we may not be able to pay our debts or borrow sufficient funds to refinance them. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with the covenants in these agreements and indentures.
We are subject to risks associated with our non-U.S. operations that could have a material adverse effect on our business, results of operations and financial condition.
Over the past several years, we have significantly increased our operations outside the U.S market. Expanding our operations in the U.K. and Brazil are important elements of our growth strategy. Operations outside of the U.S. are subject to various risks which may not be present or as significant for operations within U.S. markets, and our exposure to these risks increases as we expand. Government actions, both in terms of policy-setting, as well as actions directly affecting our operations, and economic uncertainty in some geographic regions in which we operate, such as emerging markets, could result in the disruption of markets and negatively affect our results of operations and cash flows in those areas.
Risks inherent in our international operations include, but are not limited to:
exposure to local economic conditions;
wage inflation in emerging markets;
social plans that prohibit or increase the cost of certain restructuring actions;
increases in working capital requirements related to long supply chains or regional terms of business;
currency exchange controls;
exposure to currency exchange rate fluctuations;
variations in protection of legal rights;
import or export licensing requirements;
the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;
restrictions on transfer or repatriation of funds and trade protection matters, including antidumping duties, tariffs, embargoes and other laws and regulations creating tax inefficiencies and prohibitions or restrictions on acquisitions or joint ventures;
increased risk of corruption;
changes in laws and regulations, including the laws and policies of the U.S. affecting trade and foreign investment;

27



more expansive legal rights of foreign labor unions;
the potential for nationalization of enterprises;
exposure to local public health concerns and the resultant impact on economic and political conditions;
transparency issues in general and, more specifically, the U.S. Foreign Corrupt Practices Act of 1974, as amended (the “FCPA”), the U.K. Bribery Act, and other anti-corruption compliance laws and issues;
unsettled social and political conditions, in general, and possible terrorist attacks, drug cartel related violence or acts of war, civil unrest, expansion of hostilities and other political risks; and
lack of franchise protection, which creates greater competition.
The likelihood of these occurrences and their potential effect on us vary from country to country and are unpredictable. These and other factors may have a material adverse effect on our international operations and, therefore, on our business, results of operations and financial condition, which may become more pronounced as we expand our international presence.
Our Consolidated Financial Statements reflect that our results of operations and financial position are reported in local currency and are converted into U.S. dollars at the applicable currency rate. Fluctuations in such currency rates may have a material effect on our results of operations or financial position as reported in U.S. dollars. Management evaluates the Company’s results of operations on both an as reported and a constant currency basis. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on constant currency basis. See Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Exchange Rates” for additional information on foreign currency exchange rate sensitivity.
We may be exposed to liabilities under the FCPA and similar anti-corruption laws, and any determination that we violated such laws could have a material adverse effect on our business.
We are subject to the FCPA and similar anti-bribery and anti-corruption laws that generally prohibit companies and their personnel and intermediaries from offering, authorizing, or making improper payments to government officials for the purpose of obtaining or retaining business, or securing some improper advantage in business or engaging in conduct involving money-laundering. We do business and may do additional business in the future in countries and regions where strict compliance with anti-bribery laws may not be customary. Our personnel and intermediaries may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future. As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees or intermediaries, even if such parties are not always subject to our control or are not themselves subject to the FCPA or other anti-bribery laws to which we may be subject. Existing compliance safeguards and any future improvements may not prevent all such conduct, and it is possible that our employees and intermediaries may engage in conduct for which we might be investigated by U.S. and other authorities, and held responsible. Violations of the FCPA and other anti-bribery and other anticorruption laws (either due to our acts or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operations.
Our growth in emerging markets, such as Brazil, is subject to special risks that could have a material adverse effect on our operations.
In February 2013, we acquired UAB Motors Participações S.A. (“UAB Motors”), which allowed us to enter the Brazilian market. At the time we entered the Brazilian market, it was an emerging growth market. Since then, Brazil has experienced a significant economic downturn and is in the midst of a recession. Since February 2013, Brazil has experienced financial instability with significant currency fluctuations. There is no assurance that our future growth strategies in Brazil will be successful or that Brazil will return to a growth market in the near-term. If the Brazil financial recovery is longer than expected, it could have a material adverse effect on our business, results of operations and financial condition. See also “We are subject to risks associated with our non-U.S. operations that could have a material adverse effect on our business, results of operations and financial condition.” Further, our growth in emerging markets by acquisition of existing dealerships, such as our acquisition of UAB Motors, is subject to additional risk as discussed under “Our ability to acquire new dealerships and successfully integrate those dealerships into our business could adversely affect the growth of our revenues and earnings” above.
Certain restrictions relating to our management and ownership of our common stock could deter prospective acquirers from acquiring control of us and adversely affect our ability to engage in equity offerings.
As a condition to granting their consent to our previous acquisitions and our initial public offering, some of our manufacturers have imposed other restrictions on us. These restrictions prohibit, among other things:

28



the removal of a non-employee director from office only for cause;
any one person or entity, who in the opinion of the manufacturer is unqualified to own its franchised dealership or has interests incompatible with the manufacturer, from acquiring more than a specified percentage of our common stock (ranging from 20% to 50% depending on the particular manufacturer’s restrictions) and this trigger level can fall to as low as 5% if another vehicle manufacturer is the entity acquiring the ownership interest or voting rights;
certain material changes in our business or extraordinary corporate transactions, such as a merger or sale of a material amount of our assets;
the removal of a dealership general manager without the consent of the manufacturer; and
a change in control of our Board of Directors or a change in management.
Our manufacturers may also impose additional similar restrictions on us in the future. Actions by our stockholders or prospective stockholders, which would violate any of the above restrictions, are generally outside our control. If we are unable to comply with or renegotiate these restrictions, we may be forced to terminate or sell one or more franchises, which could have a material adverse effect on our business. These restrictions may prevent or deter prospective acquirers from acquiring control of us and, therefore, may adversely impact the value of our common stock. These restrictions also may impede our ability to acquire dealership groups, to raise required capital or to issue our stock as consideration for future acquisitions.
Our certificate of incorporation, bylaws and franchise agreements contain provisions that make a takeover of us difficult.
Our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if such change of control would be beneficial to our stockholders. These include provisions:
allowing only the Board of Directors to set the number of non-employee directors;
requiring super-majority or class voting to affect certain amendments to our certificate of incorporation and bylaws;
limiting the persons who may call special stockholders’ meetings;
limiting stockholder action by written consent; and
establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholders’ meetings.
In addition, our certificate of incorporation authorizes us to issue “blank check” preferred stock, the designation, number, voting powers, preferences, and rights of which may be fixed or altered from time to time by our Board of Directors. Accordingly, the Board of Directors has the authority, without stockholder approval, to issue preferred stock with rights that could materially adversely affect the voting power or other rights of the common stockholders or the market value of the common stock and prevent a change of our control.
Finally, certain of our franchise agreements prohibit the acquisition of more than a specified percentage of our common stock without the consent of the relevant manufacturer. These terms of our franchise agreements could also make it more difficult for a third party to acquire control of us.

29



Item 1B. Unresolved Staff Comments    
None.

30




Item 2. Properties
We presently lease our corporate headquarters, which is located at 800 Gessner, Suite 500, Houston, Texas. In addition, as of December 31, 2016, we had 210 franchises situated in 159 dealership locations throughout the U.S., U.K. and Brazil. As of December 31, 2016, we leased 86 of these dealership locations and owned the remainder. We have one location in Massachusetts, one location in Alabama, one location in California and one in Brazil where we lease the land, but own the building facilities. These locations are included in the leased column of the table below.
 
 
 
 
Dealerships
Region
 
Geographic Location
 
Owned
 
Leased
East
 
Georgia
 
7

 

 
 
Massachusetts
 
4

 
1

 
 
New Jersey
 
4

 

 
 
Louisiana
 
1

 
2

 
 
Mississippi
 
3

 

 
 
Florida
 
3

 
1

 
 
South Carolina
 
3

 

 
 
Maryland
 
2

 

 
 
Alabama
 
1

 
1

 
 
New Hampshire
 
1

 
2

 
 
 
 
29

 
7

West
 
Texas
 
18

 
32

 
 
Kansas
 
4

 

 
 
Oklahoma
 
2

 
11

 
 
California
 
2

 
5

 
 
Louisiana
 
1

 

 
 
 
 
27

 
48

International
 
United Kingdom
 
15

 
15

 
 
Brazil
 
2

 
16

Total
 
 
 
73

 
86

We use a number of facilities to conduct our dealership operations. Each of our dealerships may include facilities for (1) new and used vehicle sales, (2) vehicle service operations, (3) retail and wholesale parts operations, (4) collision business operations, (5) storage and (6) general office use. Prior to 2005, we tried to structure our operations so as to avoid the ownership of real property. Since 2005, we have strategically increased the number of purchased properties particularly in relation to dealership acquisition activity to enhance our flexibility in managing performing and underperforming dealerships and control our costs. As a result, we own 45.9% of our dealership properties as of December 31, 2016. See Note 18 to our Consolidated Financial Statements, “Operating Leases.”
Since 2005, Group 1 Realty, Inc., one of our wholly-owned subsidiaries, has typically acquired the property in connection with our U.S. dealership acquisitions and relocations and acts as the landlord for those dealership operations. For the year ended December 31, 2016, we acquired $59.6 million of real estate, of which $20.4 million was purchased in conjunction with our dealership acquisitions. With these acquisitions, the capitalized value of the real estate used in operations that we own was $885.1 million as of December 31, 2016. Of this capitalized value, $644.2 million was mortgaged through our real estate related borrowing arrangements. The related mortgage indebtedness outstanding as of December 31, 2016 was $376.1 million, excluding unamortized debt issuance costs of $1.0 million.
We do not believe that any single facility is material to our operations and, if necessary, we would obtain a replacement facility.

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Item 3. Legal Proceedings
From time to time, our 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, we may be involved in legal proceedings or suffer losses that could have a material adverse effect on our business. In the normal course of business, we are 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 Selling, General and Administrative expenses (“SG&A”) in our Consolidated Statements of Operations. In addition, the manufacturers of the vehicles that we sell and service have audit rights allowing them to review the validity of amounts claimed for incentive, rebate or warranty-related items and charge us back for amounts determined to be invalid payments under the manufacturers’ programs, subject to our 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 our Consolidated Statements of Operations, while such amounts for manufacturer chargebacks of recognized warranty-related items are included as a reduction of revenues in our Consolidated Statements of Operations.
In September 2015, Volkswagen admitted that certain of its diesel models were intentionally programmed to meet various regulatory emissions standards only during laboratory emissions testing. In late June 2016, Volkswagen agreed to pay up to an aggregate of $14.7 billion to settle claims stemming from the diesel emissions scandal. On October 25, 2016, a U.S. Federal judge approved this settlement. On or about September 30, 2016, Volkswagen agreed to allocate $1.21 billion among its 652 dealers for a class settlement in exchange for their agreement not to sue Volkswagen. In October 2016, we received notification from Volkswagen that we are entitled to receive, in the aggregate, approximately $13.2 million in connection with our current and prior ownership of seven Volkswagen dealerships in the U.S. As of February 12, 2017, we have received half of the compensation in a lump sum amount, and the rest of the compensation will be received in 18 monthly installments. The Volkswagen brand represented 1.7% of our total new vehicle retail unit sales during the year ended December 31, 2016.
We are not party to any legal proceedings, including class action lawsuits that, individually or in the aggregate, are reasonably expected to have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations or financial condition. 
Item 4. Mine Safety Disclosures
Not Applicable.

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PART II

Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol “GPI.” There were 45 holders of record of our common stock as of February 13, 2017. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
The following table presents the quarterly high and low sales prices for our common stock, as reported on the New York Stock Exchange Composite Tape under the symbol “GPI” and dividends paid per common share for 2015 and 2016:
 
 
High
 
Low
 
Dividends
Declared
2015:
 
 
 
 
 
 
First Quarter
 
$
90.67

 
$
74.45

 
$
0.20

Second Quarter
 
92.69

 
77.79

 
0.20

Third Quarter
 
97.34

 
81.10

 
0.21

Fourth Quarter
 
89.64

 
73.83

 
0.22

2016:
 
 
 
 
 
 
First Quarter
 
$
75.70

 
$
47.67

 
$
0.22

Second Quarter
 
68.47

 
48.40

 
0.23

Third Quarter
 
64.19

 
47.31

 
0.23

Fourth Quarter
 
82.35

 
55.06

 
0.23

We expect comparable cash dividends to be paid in the future. However, payment of dividends in the future is subject to the discretion of our Board of Directors after considering our results of operations, financial condition, cash flows, capital requirements, outlook for our business, general business conditions, the political and legislative environments and other factors.
Further, we are limited under the terms of the Revolving Credit Facility, certain mortgage term loans, the 5.00% Notes and the 5.25% Notes in our ability to make restricted payments, such as cash dividend payments to our stockholders and the repurchase of shares of our outstanding common stock. As of December 31, 2016, the restricted payment baskets totaled $132.3 million. Generally, these restricted payment baskets will increase in the future periods by 50.0% of our future cumulative net income, adjusted to exclude the Company’s foreign operations, non-cash interest expense, non-cash asset impairment charges, and non-cash stock-based compensation, plus the net proceeds received from the sale of our capital stock, and decrease by the amount of future payments for cash dividends and share repurchases.

33




Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act except to the extent that we specifically incorporate it by reference into such filing.
The graph compares the performance of our common stock to the S&P 500 Index and to an industry peer group for our last five fiscal years. The members of the peer group are Asbury Automotive Group, Inc., AutoNation, Inc., Lithia Motors, Inc., Penske Automotive Group, Inc. and Sonic Automotive, Inc. The source for the information contained in this table is Zack’s Investment Research, Inc.
The returns of each member of the peer group are weighted according to each member’s stock market capitalization as of the beginning of each period measured. The graph assumes that the value of the investment in our common stock, the S&P 500 Index and the peer group was $100 on the last trading day of December 2011, and that all dividends were reinvested. Performance data for Group 1 Automotive, Inc., the S&P 500 Index and for the peer group is provided as of the last trading day of each of our last five fiscal years.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURNS
AMONG GROUP 1 AUTOMOTIVE, INC., S&P 500 INDEX AND A PEER GROUP
performancegraph2016.jpg
TOTAL RETURN BASED ON $100 INITIAL INVESTMENT & REINVESTMENT OF DIVIDENDS
Measurement Date
 
Group 1
Automotive, Inc.
 
S&P 500
 
Peer Group
December 2011
 
$100.00
 
$100.00
 
$100.00
December 2012
 
120.96
 
116.00
 
128.02
December 2013
 
139.96
 
153.57
 
182.54
December 2014
 
178.19
 
174.60
 
217.04
December 2015
 
152.01
 
177.01
 
210.22
December 2016
 
158.84
 
198.18
 
202.38

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Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer
The following table provides information about purchases of equity securities that are registered by us pursuant to Section 12 of the Exchange Act during the three months ended December 31, 2016:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
 
 
 
 
 
 
 
 
(In thousands, excluding commissions)
October 1 - October 31, 2016
 

 
$

 

 
$
22,394

November 1 - November 30, 2016
 

 
$

 

 
$
22,394

December 1 - December 31, 2016
 

 
$

 

 
$
22,394

Total
 

 
$

 

 
 
(1)  In February 2016, the Board of Directors approved a new authorization of $150.0 million, replacing the authorization remaining at that time. Under the authorizations, we repurchased 2,282,579 shares during 2016 at an average price of $55.90 per share, for a total of $127.6 million, leaving $22.4 million available for future repurchases. Future repurchases are subject to the discretion of our Board of Directors after considering our results of operations, financial condition, cash flows, capital requirements, existing debt covenants, outlook for our business, general business conditions and other factors. As shown in the table above, we did not purchase any shared during the three months ended December 31, 2016.

35




Item 6. Selected Financial Data
The following selected historical financial data as of December 31, 2016, 2015, 2014, 2013, and 2012, and for the five years in the period ended December 31, 2016, have been derived from our audited Consolidated Financial Statements. This selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere in this Form 10-K.
We have accounted for all of our dealership acquisitions using the purchase method of accounting. As a result, we do not include in our financial statements the results of operations of these dealerships prior to the date we acquired them, which may impact the comparability of the financial information presented. Also, as a result of the effects of our acquisitions, dispositions, and other potential factors in the future, the historical financial information described in the selected financial data is not necessarily indicative of our results of operations and financial position in the future or the results of operations and financial position that would have resulted had such transactions occurred at the beginning of the periods presented in the selected financial data.
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
(In thousands, except per share amounts)
 
 
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
10,887,612

 
$
10,632,505

 
$
9,937,889

 
$
8,918,581

 
$
7,476,100

Cost of sales
 
9,292,543

 
9,098,533

 
8,489,951

 
7,626,035

 
6,358,848

Gross profit
 
1,595,069

 
1,533,972

 
1,447,938

 
1,292,546

 
1,117,252

Selling, general and administrative expenses
 
1,170,763

 
1,120,833

 
1,061,964

 
976,856

 
848,446

Depreciation and amortization expense
 
51,234

 
47,239

 
42,344

 
35,826

 
31,534

Asset impairments
 
32,838

 
87,562

 
41,520

 
6,542

 
7,276

Income from operations
 
340,234

 
278,338

 
302,110

 
273,322

 
229,996

Other income and (expense):
 
 
 
 
 
 
 
 
 
 
Floorplan interest expense
 
(44,927
)
 
(39,264
)
 
(41,614
)
 
(41,667
)
 
(31,796
)
Other interest expense, net
 
(67,936
)
 
(56,903
)
 
(49,693
)
 
(38,971
)
 
(37,465
)
Loss on extinguishment of long-term debt
 

 

 
(46,403
)
 

 

Other expense, net
 

 

 

 
(789
)
 

Income from continuing operations before income taxes
 
227,371

 
182,171

 
164,400

 
191,895

 
160,735

Provision for income taxes
 
(80,306
)
 
(88,172
)
 
(71,396
)
 
(77,903
)
 
(60,526
)
Net income
 
$
147,065

 
$
93,999

 
$
93,004

 
$
113,992

 
$
100,209

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
6.67

 
$
3.91

 
$
3.82

 
$
4.72

 
$
4.39

Diluted:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
6.67

 
$
3.90

 
$
3.60

 
$
4.32

 
$
4.19

Dividends per share
 
$
0.91

 
$
0.83

 
$
0.70

 
$
0.65

 
$
0.59

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
21,161

 
23,148

 
23,380

 
23,096

 
21,620

Diluted
 
21,170

 
23,152

 
24,885

 
25,314

 
22,688


36




 
 
December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
(Dollars in thousands)
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
97,470

 
$
149,102

 
$
101,958

 
$
81,613

 
$
150,852

Inventories
 
1,651,815

 
1,737,751

 
1,556,705

 
1,542,318

 
1,194,288

Total assets
 
4,461,903

 
4,396,716

 
4,127,198

 
3,796,762

 
3,001,413

Floorplan notes payable — credit facility and other (1)
 
1,077,028

 
1,154,960

 
1,103,630

 
1,086,906

 
856,698

Floorplan notes payable — manufacturer affiliates (2)
 
367,161

 
363,571

 
285,156

 
346,572

 
211,965

Long-term debt, including current portion (3)
 
1,269,027

 
1,251,555

 
1,078,235

 
697,511

 
575,835

Temporary Equity (4) 
 

 

 

 
29,094

 
32,505

Stockholders’ equity
 
$
930,200

 
$
918,252

 
$
978,010

 
$
1,035,175

 
$
860,284

Long-term debt to capitalization (5) 
 
58
%
 
58
%
 
52
%
 
40
%
 
39
%
(1) Includes immediately available funds of $59.6 million, $110.8 million, $39.6 million, $56.2 million, and $112.3 million, respectively, that we temporarily invest as an offset to the gross outstanding borrowings, as well as $4.9 million, $4.1 million, $5.5 million and $18.1 million as of December 31, 2016, 2015, 2014 and 2013, respectively, of floorplan borrowings under credit facilities with financial institutions in the U.K and Brazil.
(2) Includes immediately available funds of $25.5 million, $25.5 million and $22.5 million as of December 31, 2016, 2015 and 2014, respectively, that we temporarily invest as an offset to the gross outstanding borrowings.
(3) Includes the 5.00% Notes, 5.25% Notes, 3.00% Notes, 2.25% Notes, Acquisition Line, real estate related and other long-term debt and excludes short-term financing.
(4) Redeemable equity portion of the 3.00% Notes reclassified from additional paid in capital.
(5) Includes temporary equity as a component of capitalization.


37




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with Part I, including the matters set forth in “Item 1A. Risk Factors,” and our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.
In preparation of our financial statements and reporting of our operating results in accordance with United States generally accepted accounting principles ("U.S. GAAP"), certain non-core business items are required to be presented. Examples of items that we consider non-core include non-cash asset impairment charges, gains and losses on dealership, franchise or real estate transactions, and catastrophic events such as hail storms, hurricanes, and snow storms. In order to improve the transparency of our disclosures, provide a meaningful presentation of results from our core business operations and improve period-over-period comparability, we have included certain adjusted financial measures that exclude the impact of these non-core business items. These adjusted measures are not measures of financial performance under U.S. GAAP, but are instead considered non-GAAP financial performance measures.
In addition, our results, which are reported in U.S. dollars, are impacted by fluctuations in exchange rates relating to our U.K. and Brazil segments. For example, if the British pound sterling were to weaken against the U.S. dollar, our U.K. results of operations would translate into less U.S. dollar reported results. During the twelve months ended December 31, 2016, the British pound sterling weakened against the U.S. dollar as the average exchange rate decreased 13.2% compared to the same period in 2015 from 0.65 to 0.74. The Brazilian real also weakened against the U.S. dollar as the average exchange rate declined 4.9% as compared to the same period in 2015 from 3.32 to 3.49. For the twelve months ended December 31, 2015, the British pound weakened against the U.S. dollar as the average rate decreased 7.7%, as compared to the same period in 2014. The Brazilian real also weakened against the U.S. dollar as compared to the same period in 2014 as the average rate declined 41.6%. As such, management evaluates the Company's results of operations on both an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our underlying business and results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages by converting our current period reported results for entities reporting in currencies other than U.S. dollars using comparative period exchange rates rather than the actual exchange rates in effect during the respective periods. The constant currency performance measures should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with U.S. GAAP.
Our management uses these adjusted measures in conjunction with U.S. GAAP financial measures to assess our business, including communication with our Board of Directors, investors and industry analysts concerning financial performance. Therefore, we believe these adjusted financial measures are relevant and useful to users of the following financial information. For further explanation and reconciliation to the most directly comparable U.S. GAAP measures, see "Non-GAAP Financial Measures" below.
Overview
We are a leading operator in the automotive retail industry. Through our dealerships, we sell new and used cars and light trucks; arrange related vehicle financing; sell service and insurance contracts; provide automotive maintenance and repair services; and sell vehicle parts. Our operations are aligned into four geographic regions: the East and West Regions in the U.S., the U.K. Region, and the Brazil Region. Our U.S. regional vice presidents report directly to our Chief Executive Officer and are responsible for the overall performance of their regions, as well as for overseeing the dealership operations management that report to them. Further, 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. As a result, we aggregate the East and West Regions of the U.S. into one reportable segment. The operations of our international regions are structured similarly to the U.S. regions, each with a regional vice president reporting directly to our Chief Executive Officer. As such, our three reportable segments are the U.S., which includes the activities of our corporate office, the U.K. and Brazil.
As of December 31, 2016, we owned and operated 210 franchises, representing 31 brands of automobiles, at 159 dealership locations and 38 collision centers worldwide. We own 146 franchises at 111 dealerships and 29 collision centers in the U.S., 41 franchises at 30 dealerships and eight collision centers in the U.K., and 23 franchises at 18 dealerships and one collision center in Brazil. Our operations are primarily located in major metropolitan areas in Alabama, California, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, Oklahoma, South Carolina and Texas in the U.S., in 20 towns of the U.K. and in key metropolitan markets in the states of Sao Paulo, Parana, Mato Grosso do Sul and Santa Catarina in Brazil.
Our typical acquisition strategy is to acquire large, profitable, well-established and well-managed dealerships that are leaders in their respective market areas. From January 1, 2012 through December 31, 2016, we have purchased 93 franchises with expected annual revenues, estimated at the time of acquisition, of $3.8 billion and been granted six new franchises by our

38




manufacturer partners, with expected annual revenues, estimated at the time of acquisition, of $55.0 million. In 2016, we acquired 12 U.K. dealerships, inclusive of 15 franchises and opened two additional dealerships for two awarded franchises in our U.K. segment. We also acquired one dealership in Brazil, representing one franchise, and opened two additional dealerships in Brazil representing one acquired and two previously awarded franchises. The expected aggregate annualized revenues, estimated at the time of acquisition, for these acquisitions, were $660.0 million. We make disposition decisions based principally on the rate of return on our capital investment, the location of the dealership, our ability to leverage our cost structure, the brand, future capital investments required and existing real estate obligations. From January 1, 2012 through December 31, 2016, we disposed of or terminated 40 franchises with annual revenues of approximately $1.3 billion. Specifically, during 2016, we disposed five U.S. dealerships, four dealerships in Brazil and one dealership in the U.K., with annual revenues of approximately $240.0 million.
We account for our dealership acquisitions using the purchase method of accounting. As a result, we do not include in our financial statements the results of operations of these dealerships prior to the date we acquired them, which may impact the comparability of the financial information presented. Also, as a result of the effects of our acquisitions, dispositions, and other potential factors in the future, our historical financial information is not necessarily indicative of our results of operations and financial position in the future or the results of operations and financial position that would have resulted had such transactions occurred at the beginning of the periods presented. In the following discussion and analysis, we report certain performance measures of our newly acquired and disposed dealerships separately from those of our existing dealerships.
Our operating results reflect the combined performance of each of our interrelated business activities, which include the sale of new vehicles, used vehicles, finance and insurance products, and parts, as well as maintenance, repair and collision business. Historically, each of these activities has been directly or indirectly impacted by a variety of supply/demand factors, including vehicle inventories, consumer confidence, discretionary spending levels, availability and affordability of consumer credit, manufacturer incentives, weather patterns, fuel prices, and interest rates. For example, during periods of sustained economic downturn or significant supply/demand imbalances, new vehicle sales may be negatively impacted as consumers tend to shift their purchases to used vehicles. Some consumers may even delay their purchasing decisions altogether, electing instead to continue to maintain and repair their existing vehicles. In such cases, however, we believe the new vehicle sales impact on our overall business is mitigated by our ability to offer other products and services, such as used vehicles and parts, as well as maintenance, repair and collision business. In addition, our ability to expediently adjust our cost structure in response to changes in new vehicle sales volumes also tempers any negative impact of such volume changes.
In the U.S., we generally experience higher volumes of vehicle sales and service in the second and third calendar quarters of each year. 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, our U.S. revenues and operating income are typically lower in the first and fourth quarters and higher in the second and third quarters. For the U.K., the first and third calendar quarters tend to be stronger, driven by the vehicle license plate change months of March and September. For Brazil, we expect higher volumes in the third and fourth calendar quarters. The first quarter is generally the weakest, driven by heavy consumer vacations and activities associated with Carnival. Other factors unrelated to seasonality, such as changes in economic condition, manufacturer incentive programs and changes in currency exchange rates may exaggerate seasonal or cause counter-seasonal fluctuations in our consolidated reported revenues and operating income.
According to U.S. industry experts, the annual new light vehicle unit sales for 2016 increased 94 thousand units, or 0.5%, to 17.5 million units, compared to 17.4 million units in 2015. The U.K. economy represents the fifth largest economy in the world. Vehicle registrations in the U.K. increased 2.3% to 2.7 million during 2016 as compared to the same period a year ago. The majority vote in favor of the Referendum of the United Kingdom’s Membership of the European Union (referred to as Brexit), advising for the exit of the United Kingdom from the European Union, created much uncertainty in the U.K., as well as the global markets. The U.K. industry's new vehicle sales experienced more volatility than normal following the Brexit vote. We expect industry sales to remain volatile in the near future and potentially down about 10% in 2017. In addition, the announcement of Brexit initially caused significant exchange rate fluctuations that resulted in the weakening of the British pound sterling, in which we conduct business in the U.K., against the U.S. dollar and other global currencies. The weakening of the British pound sterling has and may continue to adversely affect our results of operations, as well as have a negative impact on the pricing and affordability of the vehicles in the U.K. Volatility in exchange rates is expected to continue in the short term.
The Brazilian economy represents the ninth largest economy in the world. At present, the Brazilian economy is in recession and is facing many challenges. New vehicle registrations in Brazil declined 19.8% during 2016 as compared to the same period a year ago to 2.0 million. We expect macro-economic conditions in Brazil to remain challenged in the near term and automobile industry sales in 2017 to be about equal to 2016 levels. Longer term, we expect improvements in industry sales volumes and are utilizing a strategy of aligning with growing brands. In conjunction with this strategy, we added four franchises in Brazil during the twelve months ended December 31, 2016. These franchises are expected to generate approximately $20 million in annual revenues. In addition, since December 31, 2015, we have disposed of four franchises in Brazil. These four

39




franchises combined to generate roughly $35.0 million in trailing twelve month revenues. We expect a positive net impact to our profitability from this adjustment to our portfolio.
On a consolidated basis for the year ended December 31, 2016, our total revenues increased 2.4% from 2015 to $10.9 billion and gross profit improved 4.0% to $1.6 billion. For the years ended December 31, 2015 and 2014, total revenues were $10.6 billion and $9.9 billion, respectively. For the years ended December 31, 2015 and 2014, gross profits were $1.5 billion and $1.4 billion, respectively. We generated net income of $147.1 million, or $6.67 per diluted common share for the year ended December 31, 2016, compared to $94.0 million, or $3.90 per diluted share for the year ended December 31, 2015 and $93.0 million, or $3.60 per diluted share for the year ended December 31, 2014. In addition to the matters described above, the following factors impacted our financial condition and results of operations in 2016, 2015, and 2014:
Year Ended December 31, 2016:
Non-cash Asset Impairments: Due to our determination that the fair value of indefinite-lived intangible franchise rights related to certain of our franchises did not exceed their carrying value, we recorded a $30.0 million pretax non-cash impairment charge, of which $19.9 million related to intangible franchise rights in our two U.S. reporting units and $10.1 million related to intangible franchise rights in our Brazil reporting unit. We also recognized a total of $2.8 million in pre-tax non-cash asset impairment charges related to impairment of various real estate holdings and other long-lived assets.
Catastrophic Events: Our results were negatively impacted by several catastrophic events. Insurance deductibles and other related expenses totaling $5.9 million were recognized as SG&A expenses as a result of vehicle damage from hailstorms and flooding in the U.S., during the year.
Real Estate and Dealership Transactions: We disposed of ten franchises: five in the U.S. segment, four in the Brazil segment and one in the U.K. segment. Primarily as a result of these dispositions, a net pre-tax gain of $2.7 million and net pre-tax losses of $0.8 million and $0.3 million, respectively, were recognized for the year ended December 31, 2016.
OEM Settlement: We recognized a net pre-tax gain of $11.7 million associated with the Volkswagen diesel emissions scandal claims settlement, in connection with our ownership of Volkswagen dealerships in the U.S.
Severance Costs: Negatively impacting our results was $2.0 million of severance costs paid to employees.
Foreign deferred income tax benefit: We recognized a tax benefit of $1.7 million associated with a dealership disposition in Brazil.
Year Ended December 31, 2015:
Non-cash Asset Impairments: As a result of our determination that the fair value of goodwill in our Brazil reporting units did not exceed its carrying value, we recorded a $55.4 million pretax non-cash asset impairment charge. In addition, as a result of our determination that the fair value of indefinite-lived intangible franchise rights related to certain of our dealership franchises did not exceed their carrying value, we recognized a $30.1 million pretax non-cash impairment charge, of which $18.1 million related to intangible franchise rights in our two U.S. reporting units and $12.0 million related to intangible franchise rights in our Brazil reporting unit. Also, we recognized $2.1 million in pre-tax non-cash asset impairment charges associated with non-operating real estate holdings and other long-lived assets of our existing dealership facilities. In total, we recognized $87.6 million in pretax non-cash impairment charges.
Catastrophic Events: Our results were negatively impacted by several catastrophic events. Insurance deductibles and other related expenses totaling $1.6 million were recognized as SG&A expenses as a result of snow storms and flooding in the U.S., during the year.
Real Estate and Dealership Transactions: We disposed of two U.S. dealerships and terminated one U.S. dealership franchise. We also terminated two franchises in Brazil. As a result, we recognized a pre-tax net gain on sale of dealerships and real estate transactions of $8.2 million, as a reduction of SG&A expenses. In addition, we disposed of real estate during the year and received cash proceeds of $3.3 million, recognizing a net gain of $0.2 million.
Year Ended December 31, 2014:
Extinguishment of Long-Term Debt: We extinguished our 2.25% Convertible Senior Notes due 2036 (“2.25% Notes”) and 3.00% Convertible Senior Notes due 2020 (“3.00% Notes”) and recognized an aggregate loss for 2014 of $46.4 million.
Non-cash Asset Impairments: Primarily related to our determination that the fair value of indefinite-lived intangible franchise rights related to certain of our franchises did not exceed their carrying value and an impairment charge was

40




required, we recorded a $31.0 million pretax non-cash impairment charge. We also recognized a total of $10.5 million in pre-tax non-cash asset impairment charges related to impairment of various real estate holdings and other long-lived assets.
Non-Cash Interest Expense: Our 2014 results were negatively impacted by $7.2 million of non-cash interest expense relative to the amortization of the discount associated with our 2.25% Notes and 3.00% Notes prior to their extinguishment, representing the impact of the accounting for convertible debt as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470, Debt (“ASC 470”).
Catastrophic Events: Our results were negatively impacted by several catastrophic events. Insurance deductibles and other related expenses totaling $2.8 million were recognized as SG&A expense as a result of snow storms, windstorms, and hail damage in the U.S., during the year.
Real Estate and Dealership Disposition Transactions: Positively impacting our 2014 results was a pre-tax net gain on sale of dealerships of $13.3 million.
Foreign Deductible Goodwill: We recognized a $3.4 million tax benefit in 2014, as a result of a restructuring in Brazil that created tax deductible goodwill.

41




Key Performance Indicators
The following table highlights certain of the key performance indicators we use to manage our business:
Consolidated Statistical Data  
 
 
For the Year Ended December 31,
 
 
2016
 
2015
 
2014
Unit Sales
 
 
 
 
 
 
Retail Sales
 
 
 
 
 
 
New Vehicle
 
172,053

 
174,614

 
166,896

Used Vehicle
 
129,131

 
124,153

 
109,873

Total Retail Sales
 
301,184

 
298,767

 
276,769

Wholesale Sales
 
57,339

 
57,226

 
54,602

Total Vehicle Sales
 
358,523

 
355,993

 
331,371

Gross Margin
 
 
 
 
 
 
New Vehicle Retail Sales
 
5.2
%
 
5.1
%
 
5.4
%
Total Used Vehicle Sales
 
5.6
%
 
5.8
%
 
6.5
%
Parts and Service Sales
 
53.9
%
 
54.1
%
 
52.8
%
Total Gross Margin
 
14.7
%
 
14.4
%
 
14.6
%
SG&A as a % of Gross Profit
 
73.4
%
 
73.1
%
 
73.3
%
Adjusted SG&A as a % of Gross Profit (1)
 
73.7
%
 
73.4
%
 
73.9
%
Operating Margin
 
3.1
%
 
2.6
%
 
3.0
%
Adjusted Operating Margin (1)
 
3.4
%
 
3.4
%
 
3.4
%
Pretax Margin
 
2.1
%
 
1.7
%
 
1.7
%
Adjusted Pretax Margin (1)
 
2.3
%
 
2.5
%
 
2.5
%
Finance and Insurance Revenues per Retail Unit Sold
 
$
1,397

 
$
1,368

 
$
1,324

(1)   See “Non-GAAP Financial Measures” for more details.
 
 
 
 
 
 
The following discussion briefly highlights certain of the results and trends occurring within our business. Throughout the following discussion, references may be made to Same Store results and variances which are discussed in more detail in the “Results of Operations” section that follows.
2016 compared to 2015
Our consolidated revenues from new vehicle retail sales increased 0.7% for the twelve months ended December 31, 2016, as compared to the same period in 2015, as growth in our U.K. segment was offset by declines in the U.S. and Brazil. Our new vehicle retail unit sales in the U.K. rose 68.8%, for the year ended 2016 as compared to 2015, primarily reflecting the acquisition of a dealership group in early February, as well as the overall strength of the auto retail industry in the U.K. during 2016 and the continued successful execution by our operating team on key initiatives. During the second half of 2016, the U.K. experienced more volatility than normal following the Brexit vote. However, industry sales in the U.K. experienced another record year with registrations of 2.7 million units, an increase of 2.3% as compared to the same period in 2015. Excluding the impact of acquisitions, for the twelve months ended December 31, 2016, new vehicle retail unit sales increased 9.1% in our U.K. segment. In the U.S. segment during the year ended December 31, 2016, new vehicle retail unit sales decreased 8.3% over the same period last year. The decline in our new vehicle retail unit sales was driven by our over-weight exposure to many energy-dependent markets in Texas and Oklahoma, which have been particularly soft as a result of depressed oil prices. For the twelve months ended December 31, 2016, our new vehicle unit sales in Texas were down 7.9%, while our Oklahoma unit sales were down 12.4% when compared to the same period a year ago. As a result, our U.S. revenues from new vehicle retail sales declined 4.5%, as the reduced volumes were partially offset with an increase in our average new vehicle retail sales price of 4.2%. The increase in our average sales price was primarily due to the shift in the mix of new retail units sold, as our truck unit sales increased to 56.5% of total new vehicle retail units sold for the twelve months ended December 31, 2016, as compared to 51.3% last year, generally correlating with lower gas prices. For the year ended December 31, 2016, Brazil new vehicle retail unit sales declined 26.7% and new vehicle retail revenues declined 21.0%, when compared to the same period in 2015, reflecting decreased consumer confidence, higher interest rates and continued weakness in the Brazilian economy. Consolidated new vehicle retail gross margin improved 10 basis points to 5.2%, for the twelve months ended December 31, 2016, as compared to the same period in 2015, driven by a 30 basis point increase in the U.S. segment. This was primarily attributable to our U.S. operating team that took a more disciplined approach to new vehicle pricing, which focused on increased gross profit

42




per unit. As a result, we improved new vehicle gross profit per retail unit “PRU” sold in the U.S. by 10.1% for the year ended December 31, 2016, as compared to last year. The increase in the U.S. was partially offset by the competitive selling environment in the U.K., the worsening economic conditions in Brazil, and the impact of the change in exchange rates between periods.
Our used vehicle results are directly affected by economic conditions, the level of manufacturer incentives on new vehicles and new vehicle financing, the number and quality of trade-ins and lease turn-ins, the availability of consumer credit, and our ability to effectively manage the level and quality of our overall used vehicle inventory. Our total revenues from used vehicle retail sales increased 4.5% for the twelve months ended December 31, 2016, as compared to the same period in 2015, as a result of growth in both our U.S. and U.K. segments. In the U.S., used vehicle retail revenues increased 1.7%, as a result of a 1.2% increase in the average used vehicle retail sales price coupled with a 0.5% increase in used vehicle retail units sold. Principal contributors to these improvements were an increase in the number of off-lease vehicles which provided our U.S. dealerships with a better supply of late model, lower mileage units in the first part of 2016 and an overall strong performance by our operating teams. The U.K. generated increases in used vehicle retail revenue of 23.6%, primarily reflecting the acquisition of a dealership group in early February, as well as an exceptional performance by our operating team. The increase in the U.K., as measured in U.S. dollars, was dampened by the impact of exchange rates between periods. In Brazil, our used vehicle retail revenues declined by 2.3%, for the twelve months ended December 31, 2016, due to the impact of the change in the currency rates between periods. On a constant currency basis, used vehicle retail sales increased 2.4% for year ended December 31, 2016, compared to the same period in 2015. Total used vehicle retail gross profit increased 1.7% for the twelve months ended December 31, 2016, as improvements in used vehicle retail unit sales were partially offset by a decline in used vehicle retail gross profit PRU of 2.3%. The decline in used vehicle retail gross profit PRU primarily reflects a decline of 11.1% in the U.K., as compared to the same period in 2015 that was driven by the change in the exchange rates between periods. On a constant currency basis, used vehicle retail gross profit PRU in the U.K. remained flat for the year ended 2016, as compared to prior year. In Brazil, used vehicle retail gross profit PRU increased 52.0% for the twelve months ended December 31, 2016 in Brazil primarily due to improved sales processes and the overall strong performance of our operating team. In the U.S., used vehicle gross profit PRU declined 1.7% for the year ended December 31, 2016 when compared to a year ago. The used vehicle gross profit PRU decline in the U.S. was primarily a result of an increasingly competitive selling environment. The rise in U.S. supply of used vehicle inventory during the fourth quarter of 2016 was particularly challenging in our more car-centric brands, such as Toyota.
Our parts and service sales increased 6.3% for the twelve months ended December 31, 2016 as compared to the same periods in 2015. This growth was driven by increases in all aspects of our business: customer-pay parts and service, warranty parts and service, collision and wholesale parts. Primarily, these increases were due to the execution of key management initiatives, dealership acquisition activity, a rise in the number of units being recalled, and growth in the number of the late-model vehicles in operation, which tend to more consistently return to the dealership for warranty, maintenance and repair services. The increase in our customer-pay parts and service and wholesale parts revenues was driven by the U.S. segment, primarily as a result of the execution of management initiatives. These initiatives in the U.S. include focusing on customer relationships utilizing computer-based customer relationship management tools and an emphasis with customers on preventive maintenance. Further, the growth we have achieved in our finance and insurance portion of the business, specifically the increase in sales of our vehicle service contracts, secures repeat customer business for our parts and service departments. During 2016, our warranty parts and service revenues were bolstered from high volume recall campaigns by manufacturers in the U.S. and Brazil, particularly in our Toyota, Ford, Nissan, Honda, Mercedes-Benz, and General Motor brands. Additionally, as manufacturer paid maintenance programs continue to expand in the U.S., there has been an ongoing shift of business from our customer-pay to our warranty parts and service business. The increase in our collision business was primarily the result of enhanced operational processes, the addition of technicians to add operating capacity, and the expansion of our relationships with insurance providers. The increase in wholesale parts revenues was primarily due to increased focus and better overall management of this portion of our business in a few key markets in our U.S. segment. Our parts and service gross margin decreased 20 basis points for the twelve months ended December 31, 2016, as compared to the same period in 2015, driven primarily by a decline in the U.S. parts and service gross margin of 30 basis points, partially offset by an increase of 60 basis points in the U.K. The decline in our U.S. parts and service gross margin was primarily the result of less lucrative, Original Equipment Manufacturer ("OEM") paid recall warranty campaigns in 2016 as compared to those in 2015. And, as a result of a decline in U.S. retail new and used unit sales, our internal work contributed relatively less to the overall gross profit of our parts and service business in 2016. The increase in the U.K. during 2016 reflects a mix shift away from lower margin wholesale parts business towards customer-pay business that generates higher margins on a relative basis.
Our consolidated finance and insurance revenues PRU sold increased 2.1% for the twelve months ended December 31, 2016, as compared to the same period in 2015. Growth in both our income per contract and penetration rates on many of our product offerings was partially offset by an increase in our overall chargeback experience. We generated a 4.9% increase in finance and insurance revenues PRU to $1,599 in the U.S. and a 15.9% improvement in Brazil. These improvements were partially offset by a 2.2% decline in finance and insurance revenues PRU in the U.K, coupled with the mix effect of a relatively

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greater contribution from our U.K. segment. The 2.2% decline in the PRU in the U.K. was directly related to the change in exchange rates between periods, as on a constant currency basis, our finance and insurance revenues PRU improved 10.6%.
Our total consolidated gross margin increased 30 basis points for the twelve months ended December 31, 2016, to 14.7%, as compared to the same period in 2015. Declines in the parts and service and used vehicle sectors of our business were more than offset by improvements in our new vehicle results.
Our consolidated SG&A expenses increased in absolute dollars by 4.5% for the twelve months ended December 31, 2016, as compared to the same period in 2015, primarily as a result of the incremental number of dealerships owned and operated and increased personnel costs, as well as higher insurance deductible charges in the U.S. relating to catastrophic events. The increase in personnel costs was primarily driven by commission payments that grew as a result of higher new vehicle margins, as well as severance costs. Consolidated SG&A expenses increased in 2016 compared to 2015 also as a result of a decline in the gains recognized on real estate and dealership transactions in 2016 when compared to 2015. Further, during 2016, we experienced additional loaner vehicle costs as we continued to service a large amount of customers affected by recalled vehicles. Offsetting these increases, we recorded a net gain of $11.7 million in the fourth quarter of 2016 relative to a settlement with an OEM. For the twelve months ended December 31, 2016, our consolidated SG&A expenses as a percentage of gross profit increased 30 basis points on both a U.S. GAAP and adjusted basis to 73.4% and 73.7%, respectively, as compared to the same period a year ago. These increases were partially due to the mix effect of a greater contribution from our U.K. operations that inherently have a higher cost structure, as well as the additional U.K. dealerships acquired in 2016. As a partial offset, SG&A as a percent of gross profit in our U.S. segment improved 40 basis points on both a U.S. GAAP and adjusted basis to 71.2% and 71.7%, respectively.
The combination of all of these factors, as well as non-cash asset impairments of $32.8 million, resulted in an operating margin of 3.1% for the twelve months ended December 31, 2016. This reflects a 50 basis-point improvement compared to the same period in 2015. On an adjusted basis, operating margin remained flat for the twelve months ended December 31, 2016, as compared to the same period in 2015, at 3.4%.
Floorplan interest expense increased 14.4% for the year ended December 31, 2016, as compared to the same period in 2015, primarily driven by the U.S. and U.K., due to a higher average London Interbank Offered Rate (“LIBOR”) interest rate in the U.S. when compared to 2015 and the impact of acquisitions in the U.K. segment in early 2016. For the twelve months ended December 31, 2016, the increase in our consolidated floorplan interest expense was also attributable to an increase in our supply of luxury brand units beginning in the fourth quarter of 2015, as our OEM partners redirected additional supply to the U.S. and U.K. to offset weakness in other global markets. By the end of 2016, however, we had worked our way through this oversupply of inventory and as a result for the three months ended December 31, 2016 as compared to the same period in 2015, our weighted average floorplan borrowings outstanding declined by $82.3 million. Furthermore, for most of 2016, several manufacturers issued stop sales on a number of vehicle models, due to recall campaigns, which contributed to an increase in our new and used vehicle inventory as compared to the same period in 2015. The increases in the U.S. and U.K. were offset by a decline in Brazil as a result of improvements in vehicle inventory management processes. Other interest expense, net increased 19.4% for the twelve months ended December 31, 2016, as compared to the same periods in 2015, primarily attributable to interest incurred on our 5.25% Notes offerings. As a partial offset, the vast majority of the proceeds from the 5.25% Notes offering was used to fund the outstanding borrowings of the Company’s Acquisition Line and pay off certain mortgages. We address these items further, and other variances between the periods presented, in the “Results of Operations” section below.
2015 compared to 2014
Our consolidated revenues from new vehicle retail sales increased 4.5% for the twelve months ended December 31, 2015, as compared to the same period in 2014. This growth was primarily a result of better industry conditions in both the U.S. and the U.K., dealership acquisition activity, and the continued execution of key initiatives by our operating team. U.S. industry sales rose 5.8% to a then-record 17.4 million units for the year ended 2015 as compared to 16.5 million units in 2014. In the U.K., industry sales also set a record at that time with registrations increasing 6.3% to 2.6 million units as compared to the same period in 2014. In the U.S. and U.K., our new vehicle retail unit sales rose 5.1% and 27.3%, for the year ended December 31, 2015, respectively, from 2014 levels. Our new vehicle unit sales growth in the U.S. and U.K. was partially offset by a 19.2% decline in Brazil for the year ended December 31, 2015 as compared to the same period in 2014. The decline in Brazil reflects overall weaker economy and industry unit sales and dealership dispositions. In Brazil, industry sales declined for the year ended December 31, 2015 by 25.6%, as compared to the same period in 2014, to 2.5 million units. This decline was primarily due to decreased consumer confidence, higher interest rates and the expiration of the government sponsored auto purchase tax incentive at the end of 2014. Consolidated new vehicle retail gross margin declined 30 basis points to 5.1% for the twelve months ended December 31, 2015, as compared to the same period in 2014, primarily reflecting the competitive selling environments in most of the U.S. and U.K. markets in which we operate.

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Our used vehicle results are directly affected by economic conditions, the level of manufacturer incentives on new vehicles and new vehicle financing, the number and quality of trade-ins and lease turn-ins, the availability of consumer credit, and our ability to effectively manage the level and quality of our overall used vehicle inventory. The improving industry conditions in the U.S. and U.K. that have benefited new vehicle sales also supported used vehicle demand. As a result, our revenues from used vehicle retail sales increased 13.5% for the twelve months ended December 31, 2015, as compared to the same period in 2014. We generated increases of 14.6% and 24.1% in the U.S. and U.K., respectively. These increases were partially offset by a 29.7% decline in Brazil, as the result of weaker exchange rates in 2015. On a constant currency basis, Brazil's used vehicle retail revenues were relatively flat for the year ended December 31, 2015, compared to the same period in 2014. Used vehicle retail gross profit increased for the twelve months ended December 31, 2015, primarily as a result of growth in used vehicle retail unit sales of 13.0%, reflecting increases of 12.1% and 30.7% in the U.S. and U.K., respectively. These improvements in used vehicle retail unit sales were partially offset by a decline in used vehicle retail gross profit per retail unit ("PRU") of 8.4% for the twelve months ended December 31, 2015, reflecting declines of 6.3%, 16.3% and 44.4% in the U.S., U.K. and Brazil, respectively, as compared to the same period in 2014.
Our parts and service sales increased 5.4% for the twelve months ended December 31, 2015, as compared to 2014. This growth was driven by increases in all aspects of our business: warranty parts and service, wholesale parts, customer-pay parts and service, and collision business. Generally, this is due to the execution of key management initiatives, dealership acquisition activity, an increase in the number of units being recalled by manufacturers (which can only be repaired by franchised dealerships), and growth in the number of the late-model vehicles in operation (which tend to more consistently return to the dealership for warranty, maintenance and repair services). Specifically, during 2015, our warranty parts and service revenues were bolstered from high volume recall campaigns by a number of manufacturers in each of our regions, including BMW, Toyota, Honda, Acura, Ford, and FCA US (formerly Chrysler). Additionally, as manufacturer paid maintenance programs continue to expand in the U.S., our parts and service business shifts from customer-pay to warranty. The increase in our collision business was the result of enhanced operational processes, the addition of technicians to add operating capacity and the expansion of our relationships with insurance providers. The increase in our customer-pay parts and service and parts wholesales revenues was driven by improvements in the U.S., primarily as a result of the execution of management initiatives and dealership acquisition activity. Our parts and service gross margin increased 130 basis points for the twelve months ended December 31, 2015, as compared to 2014 predominantly driven by improvements in the U.S. of 120 basis points. These increases in U.S. gross margin were primarily due to improved profitability in both our customer-pay parts and service wholesale parts businesses, as well as a higher volume of internal work between the parts and service departments and the new and used vehicle departments of our dealerships, which stemmed from improved new and used retail vehicle sales volumes.
For the twelve months ended December 31, 2015 as compared to the same period a year ago, our consolidated finance and insurance revenues increased 11.5%, due to a 7.9% increase in retail unit sales and a 3.3% increase in finance and insurance revenues PRU. These improvements were primarily driven by our U.S. and U.K. segments. In the U.S., finance and insurance revenues increased 12.2%, reflecting an 8.0% increase in new and used retail unit sales and a 3.9% increase in finance and insurance revenues PRU driven by increases in income per contract and penetration rates. In the U.K., our finance and insurance revenues improved 27.0%, explained by a 28.7% increase in new and used retail sales volume. These increases were partially offset by a 36.2% decline in our finance and insurance revenues in Brazil, driven by a 16.5% decrease in new and used retail unit sales and a 23.5% decline in finance and insurance revenues PRU. The decline in the Brazilian finance and insurance revenues PRU is more than explained by the change in exchange rates between periods as the finance and insurance revenues PRU increased 8.5% on a constant currency basis.
Our total consolidated gross margin decreased 20 basis points for the twelve months ended December 31, 2015 to 14.4%, as compared to 2014. Improvements in the parts and service, as well as finance and insurance sectors of our business were more than offset by declines in new and used retail vehicle margins.
Our consolidated SG&A expenses increased in absolute dollars for the twelve months ended December 31, 2015, as compared to the same period in 2014, primarily as a result of dealership acquisitions, as well as higher vehicle sales volumes. Consolidated SG&A expenses increased in 2015 compared to 2014 also as a result of a $5.0 million decline in the gains recognized on real estate and dealership transactions and also due to a legal settlement of $1.0 million. For the twelve months ended December 31, 2015, our consolidated SG&A expenses as a percentage of gross profit fell on a U.S. GAAP basis by 20 basis points to 73.1% and on an adjusted basis by 50 basis points to 73.4% as compared to the same period in 2014, primarily reflecting the leverage of our cost structure with the improved gross profit, as well as a reduction in charges for catastrophic events and severance costs.
The combination of all of these factors, including non-cash asset impairments of $87.6 million for the twelve months ended December 31, 2015, resulted in an operating margin of 2.6%, which is a 40 basis-point decline, as compared to the same period in 2014. On an adjusted basis, operating margin remained flat for the twelve months ended December 31, 2015 as compared to the same period in 2014, at 3.4%.

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For the twelve months ended December 31, 2015, floorplan interest expense decreased 5.6%, as compared to the same period in 2014. This decline was primarily driven by Brazil, as a result of improvements in floorplan and cash management processes and the change in exchange rates between periods. Other interest expense, net increased 14.5% for the twelve months ended December 31, 2015, as compared to the same period in 2014, primarily attributable to interest incurred on our 5.00% Notes offering. The vast majority of the proceeds from the 5.00% Notes offering was used to extinguish our 2.25% Notes and our 3.00% Notes during the second and third quarters of 2014. In addition, other interest expense, net increased for the year ended December 31, 2015, as compared to 2014, due to additional mortgage borrowings associated with recent dealership acquisitions and purchases of existing leased properties. Further contributing to the increase in other interest expense, net, was the interest related to our 5.25% Note offering that was executed in December 2015 to fund the payoff of outstanding borrowings on the Company’s Acquisition Line, to payoff certain mortgages, to contribute to the Company’s floorplan offset accounts and for general corporate purposes.
Recent Accounting Pronouncements
Refer to Note 2 of our Consolidated Financial Statements, “Summary of Significant Accounting Polices and Estimates,” for a discussion of those most recent pronouncements that impact us.
Critical Accounting Policies and Accounting Estimates
The preparation of our financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. We analyze our estimates based on our historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, actual results could differ from such estimates. The following is a discussion of our critical accounting estimates and policies.
We have identified below what we believe to be the most pervasive accounting policies and estimates that are of particular importance to the portrayal of our financial position, results of operations and cash flows. See Note 2 to our Consolidated Financial Statements, “Summary of Significant Accounting Policies and Estimates,” for further discussion of all our significant accounting policies and estimates.
Revenue Recognition. Revenues from vehicle sales, parts sales, and vehicle service are recognized upon completion of the sale or service and delivery to the customer. Conditions to completing a sale include having an agreement with the customer, including pricing, and having a reasonable expectation that the sales price will be collected. We include revenues from our collision center operations in parts and services sales. Taxes collected from customers and remitted to governmental agencies are not included in total revenues.
We record the profit we receive for arranging vehicle fleet transactions net in other finance and insurance revenues. Since all sales of new vehicles must occur through franchised new vehicle dealerships, the dealerships effectively act as agents for the automobile manufacturers in completing sales of vehicles to fleet customers. As these customers typically order the vehicles, we have no significant general inventory risk. Additionally, fleet customers generally receive special purchase incentives from the automobile manufacturers and we receive only a nominal fee for facilitating the transactions.
We arrange financing for customers through various institutions and receive financing fees based on the difference between the loan rates charged to customers and wholesale financing rates set by the financing institution. In addition, we receive fees from the sale of insurance and vehicle service contracts to customers. Revenues from these fees are recorded at the time of the sale of the vehicles as finance and insurance revenue earned. We may be charged back for unearned financing, insurance contract or vehicle service contract fees in the event of early termination of the contracts by customers. A reserve for future amounts which might be charged back is established based on our historical chargeback results and the termination provisions of the applicable contracts. While chargeback results vary depending on the type of contract sold, a 10% increase in the historical chargeback results used in determining estimates of future amounts which might be charged back would have increased the reserve at December 31, 2016 by $3.8 million. Further, through agreements with certain vehicle service contract administrators, we earn volume incentive rebates and interest income on reserves, as well as participate in the underwriting profits of the products.
Inventories. New, used and demonstrator vehicle inventories are carried at the lower of specific cost or market and are removed from inventory using the specific identification method in the Consolidated Balance Sheets. Parts and accessories inventories are valued at lower of cost (determined on a first-in, first-out basis) or market in the Consolidated Balance Sheets. Vehicle inventory cost consists of the amount paid to acquire the inventory, plus the cost of reconditioning, cost of equipment added and transportation cost. Additionally, we receive interest assistance from some of our automobile manufacturers. This assistance is accounted for as a vehicle purchase price discount and is reflected as a reduction to the inventory cost on our Consolidated Balance Sheets and as a reduction to cost of sales in our Statements of Operations as the vehicles are sold. At December 31, 2016 and 2015, inventory cost had been reduced by $9.6 million and $10.3 million, respectively, for interest

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assistance received from manufacturers. New vehicle cost of sales was reduced by $49.2 million, $50.5 million, and $45.1 million for interest assistance received related to vehicles sold for the years ended December 31, 2016, 2015, and 2014, respectively. The interest assistance over the past three years has ranged from approximately 90% of our quarterly floorplan interest expense in the first quarter of 2014 to 139.9% for the third quarter of 2015.
Since the market value of inventory typically declines over time, we establish new and used vehicle reserves based on our historical loss experience and considerations of current market trends. These reserves are charged to cost of sales and reduce the carrying value of inventory on hand. Used vehicles are complex to value as there is no standardized source for determining exact values and each vehicle and each market in which we operate is unique. As a result, the value of each used vehicle taken at trade-in, or purchased at auction, is determined based on industry data, primarily accessed via our used vehicle management software and the industry expertise of the responsible used vehicle manager. Valuation risk is partially mitigated, by the speed at which we turn this inventory. At December 31, 2016, our used vehicle days’ supply was 35 days.
We incur shipping costs in connection with selling parts to customers. The cost of shipping these parts is included in cost of sales on the Consolidated Statements of Operations.
Goodwill. Each of our four regions represents a reporting unit for the purpose of assessing goodwill for impairment. Goodwill represents the excess, at the date of acquisition, of the purchase price of the business acquired over the fair value of the net tangible and intangible assets acquired. Annually in the fourth quarter, based on the carrying values of our regions as of October 31st, we perform a fair value and potential impairment assessment of goodwill. An impairment analysis is done more frequently if certain events or circumstances arise that would indicate a change in the fair value of the intangible asset has occurred (i.e., an impairment indicator).
In evaluating goodwill for impairment, we compare the carrying value of the net assets of each reporting unit to its respective fair value, which is calculated by using unobservable inputs based upon our internally developed assumptions. This represents the first step of the impairment test. If the fair value of a reporting unit is less than the carrying value of its net assets, we proceed to step two of the impairment test. Step two involves allocating the calculated fair value of the reporting unit to all of the tangible and identifiable intangible assets of the reporting unit, as if the calculated fair value was the purchase price in a business combination. Then we compare the value of the implied goodwill resulting from this second step to the carrying value of the goodwill in the reporting unit. To the extent the carrying value of the goodwill exceeds its implied fair value under step two of the impairment test, a non-cash impairment charge equal to the difference is recorded.
We use a combination of the discounted cash flow, or income, approach (80% weighted), and the market approach (20% weighted) to determine the fair value of our reporting units. Included in the discounted cash flow approach are assumptions regarding revenue growth rates, future gross margins, future SG&A expenses and an estimated weighted average cost of capital (“WACC”). We also must estimate residual values at the end of the forecast period and future capital expenditure requirements. Specifically, with regards to the valuation assumptions utilized in the income approach for the U.S. reporting units (which represents our largest two reporting units) as of October 31, 2016, we based our analysis on an estimate of industry sales of 17.3 million units in 2017, remaining flat for the remainder of the forecasted years. For the market approach, we utilize recent market multiples of guideline companies for both revenue and pretax net income. Each of these assumptions requires us to use our knowledge of (1) the industry, (2) recent transactions and (3) reasonable performance expectations for our operations. If any one of the above assumptions change or fails to materialize, the resulting decline in the estimated fair value could result in a material non-cash impairment charge to the goodwill associated with our reporting unit(s).
On June 23, 2016, the British Citizens voted on a referendum in favor of exiting the E.U. The majority vote in favor of Brexit has created uncertainty in the global markets and in the regulatory environment in the U.K., as well as the overall European Union. The impact on our financial results and operations may not be known for some time, but could be adverse. In addition, automotive dealers in the U.K. rely on the legislative doctrine of "Block Exemption" to govern market representation activities of competing dealers and dealer groups. To date, there has been no clear indication of how such legislation may be effected by Brexit, but a change to such legislation could be adverse. If, as a result of the clarification of any of these uncertainties, the estimates, assumptions and inputs utilized in our annual impairment test for goodwill and intangible franchise rights change or fail to materialize, the resulting decline in the estimated fair market value of such assets could result in a material non-cash impairment charge. While we are not aware of any changes in circumstances that has resulted in a decline in fair value of these assets at this time, we continue to closely monitor the situation.
Intangible Franchise Rights. Our only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers, which are recorded at an individual dealership level. We expect these franchise agreements to continue for an indefinite period and, for agreements that do not have indefinite terms, we believe that renewal of these agreements can be obtained without substantial cost, based on the history with the manufacturer. As such, we believe that our franchise agreements will contribute to cash flows for an indefinite period and, therefore, the carrying amounts of the franchise rights are not amortized. Franchise rights acquired in business acquisitions prior to July 1, 2001, were recorded and amortized as part of goodwill and remain as part of goodwill at December 31, 2016 and 2015 in the accompanying

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Consolidated Balance Sheets. Since July 1, 2001, intangible franchise rights acquired in business combinations have been recorded as distinctly separate intangible assets.
We evaluate these franchise rights for impairment annually in the fourth quarter, based on the carrying values of our individual dealerships as of October 31st, or more frequently if events or circumstances indicate possible impairment has occurred. In performing our impairment assessments, we test the carrying value of each individual franchise right that was recorded by using a direct value method discounted cash flow model, or income approach, specifically the excess earnings method. Included in this analysis are assumptions, at a dealership level, regarding the cash flows directly attributable to the franchise rights, revenue growth rates, future gross margins and future SG&A expenses. Using an estimated WACC, estimated residual values at the end of the forecast period and estimated future capital expenditure requirements, we calculate the fair value of each dealership’s franchise rights.
If any one of the above assumptions changes or fails to materialize, the resulting decline in the intangible franchise rights’ estimated fair value could result in a non-cash impairment charge to the intangible franchise right associated with the applicable dealership. See Note 15 to our Consolidated Financial Statements, “Asset Impairments,” and Note 16 to our Consolidated Financial Statements, “Intangible Franchise Rights and Goodwill,” for additional details regarding our intangible franchise rights.
Income Taxes. Currently, we operate in 14 different states in the U.S., in the U.K., and in Brazil, each of which has unique tax rates and payment calculations. As the amount of income generated in each jurisdiction varies from period to period, our estimated effective tax rate can vary based on the proportion of taxable income generated in each jurisdiction. We follow the liability method of accounting for income taxes in accordance with ASC 740, Income Taxes. Under this method, deferred income taxes are recorded based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are realized or liabilities are settled. A valuation allowance reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. Each tax position must satisfy a threshold of more-likely-than-not and a measurement attribute for some or all of the benefits of that position to be recognized in a company’s financial statements. See Note 7 to our Consolidated Financial Statements, “Income Taxes,” for additional information.
We have recognized deferred tax assets, net of valuation allowances, that we believe will be realized, based primarily on the assumption of future taxable income. As it relates to net operating losses, a corresponding valuation allowance has been established to the extent that we have determined that net income attributable to certain jurisdictions will not be sufficient to realize the benefit.
Fair Value of Assets Acquired and Liabilities Assumed. The fair values of assets acquired and liabilities assumed in business combinations are estimated using various assumptions. The most significant assumptions, and those requiring the most judgment, involve the estimated fair values of property and equipment and intangible franchise rights, with the remaining amounts attributable to goodwill, if any. We utilize third-party experts to determine the fair values of property and equipment purchased, including real estate and our fair value model as discussed under “Intangible Franchise Rights” above to determine the fair value of intangible franchise rights acquired.
Derivative Financial Instruments. One of our primary market risk exposures is increasing interest rates. Interest rate derivatives, designated as cash flow hedges, are used to adjust interest rate exposures when appropriate based on market conditions.
We follow the requirements of guidance primarily codified within ASC 815, Derivatives and Hedging (“ASC 815”) pertaining to the accounting for derivatives and hedging activities. ASC 815 requires us to recognize all cash flow hedges on our Consolidated Balance Sheet at fair value. 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 interest expense in the period in which the related items being hedged are recognized in interest 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 accompanying Consolidated Statements of Operations. All of our interest rate hedges were designated as cash flow hedges and were deemed to be effective at December 31, 2016, 2015, and 2014.
We measure the carrying value of our 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 our derivative instruments. In measuring fair value, we utilize the option-pricing Black-Scholes present value technique for all of our 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

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technique incorporate identical contractual notional amounts, fixed coupon rates, periodic terms for interest payments and contract maturity. Our fair value estimate of the interest rate derivative instruments also considers the credit risk of our instruments in a liability position or the counterparty for the 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 retail rate according to Standard and Poor’s. We have 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. Accordingly, we have classified the derivatives within Level 2 of the ASC 820, Fair Value Measurements and Disclosures, hierarchy framework in Note 13 to our Consolidated Financial Statements, “Fair Value Measurements.” We validate the outputs of our valuation technique by comparison to valuations from the respective counterparties.
Self-Insured Medical, Property and Casualty Reserves. We purchase insurance policies for worker’s compensation, liability, auto physical damage, property, pollution, employee medical benefits and other risks, consisting of large deductibles and/or self-insured retentions.
Our auto physical damage insurance coverage is composed of a $10.0 million per occurrence company deductible with an annual maximum aggregate deductible of $30.0 million with no maximum payout. 
For policy years ended prior to October 31, 2005, our workers’ compensation and general liability insurance coverage included aggregate retention (stop loss) limits in addition to a per claim deductible limit (“Stop Loss Plans”). Due to historical experience in both claims frequency and severity, the likelihood of breaching the aggregate retention limits described above was deemed remote, and as such, we elected not to purchase this stop loss coverage for the policy year beginning November 1, 2005 and for each subsequent year (“No Stop Loss Plans”). Our exposure per claim under the No Stop Loss Plans is limited to $1.0 million per occurrence, with unlimited exposure on the number of claims up to $1.0 million that may be incurred. As of December 31, 2016, we have accrued $0.4 million and $20.4 million for our Stop Loss and No Stop Loss plans, respectively. Our maximum potential exposure under worker’s compensation and general liability insurance Stop Loss Plans totaled $34.9 million at December 31, 2016, before consideration of amounts previously paid or accruals recorded related to our loss projections. After consideration of the amounts paid or accrued, the remaining potential loss exposure under the Stop Loss Plans totaled $13.6 million at December 31, 2016.
At least annually, we engage a third-party actuary to conduct a study of the exposures under the self-insured portion of our worker’s compensation and general liability insurance programs for all open policy years. In the interim, we review the estimates within the study and monitor actual experience for unusual variances. The appropriate adjustments are made to the accrual, based upon these procedures. Actuarial estimates for the portion of claims not covered by insurance are based on historical claims experience adjusted for loss trending and loss development factors. Changes in the frequency or severity of claims from historical levels could influence our reserve for claims and our financial position, results of operations and cash flows. A 10% increase in the actuarially determined estimate of aggregate future losses would have increased the reserve for these losses at December 31, 2016, by $2.1 million.
Variable Interest Entity. On December 22, 2016, we acquired the remaining equity shares of an entity that was previously reported as a variable interest entity. Prior to our acquisition of the remaining equity shares, we qualified as the primary beneficiary and consolidated 100% of the assets and liabilities, as well as 100% of the results of operations. As a result of the acquisition of the remaining equity shares, the entity no longer meets the definition of a variable interest entity. However, we continued to consolidate 100% of the assets and liabilities, as well as 100% of the results of operations, of the entity subsequent to acquisition of the remaining equity shares, as a wholly-owned subsidiary.

49




Results of Operations
The “Same Store” amounts presented below include the results of dealerships for the identical months in each period presented in the comparison, commencing with the first full month in which the dealership was owned by us and, in the case of dispositions, ending with the last full month it was owned by us. For example, for a dealership acquired in June 2015, the results from this dealership will appear in our Same Store comparison beginning in 2016 for the period July 2016 through December 2016, when comparing to July 2015 through December 2015 results. Depending on the periods being compared, the dealerships included in Same Store will vary. For this reason, the 2015 Same Store results that are compared to 2016 differ from those used in the comparison to 2014. Same Store results also include the activities of our corporate headquarters.
The following table summarizes our combined Same Store results for the year ended December 31, 2016 as compared to 2015 and for the year ended December 31, 2015 compared to 2014.

50




Total Same Store Data
(dollars in thousands, except per unit amounts)
 
 
For The Year Ended December 31,
 
 
2016
 
% Increase/ (Decrease)
 
Constant Currency % Increase/(Decrease)
 
2015
 
 
2015
 
% Increase/ (Decrease)
 
Constant Currency % Increase/(Decrease)
 
2014
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle retail
 
$
5,619,881

 
(4.1)%
 
(2.5)%
 
$
5,860,855

 
 
$
5,616,700

 
1.6%
 
5.0%
 
$
5,530,067

Used vehicle retail
 
2,612,304

 
1.2%
 
2.9%
 
2,582,437

 
 
2,453,406

 
8.9%
 
11.4%
 
2,253,681

Used vehicle wholesale
 
364,271

 
(5.4)%
 
(2.3)%
 
384,969

 
 
351,649

 
(3.0)%
 
(0.7)%
 
362,498

Parts and service
 
1,197,195

 
3.8%
 
5.1%
 
1,153,365

 
 
1,118,994

 
3.7%
 
6.2%
 
1,078,936

Finance, insurance and other
 
403,685

 
0.3%
 
1.2%
 
402,288

 
 
387,230

 
7.8%
 
9.0%
 
359,356

Total revenues
 
$
10,197,336

 
(1.8)%
 
(0.1)%
 
$
10,383,914

 
 
$
9,927,979

 
3.6%
 
6.6%
 
$
9,584,538

Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle retail
 
$
5,326,504

 
(4.2)%
 
(2.6)%
 
$
5,561,430

 
 
$
5,334,257

 
2.0%
 
5.4%
 
$
5,230,371

Used vehicle retail
 
2,437,114

 
1.3%
 
3.1%
 
2,406,135

 
 
2,285,372

 
9.7%
 
12.3%
 
2,083,660

Used vehicle wholesale
 
367,299

 
(5.0)%
 
(1.9)%
 
386,496

 
 
352,800

 
(2.0)%
 
0.3%
 
360,005

Parts and service
 
552,559

 
4.6%
 
5.9%
 
528,393

 
 
514,346

 
1.3%
 
4.2%
 
507,689

Total cost of sales
 
8,683,476

 
(2.2)%
 
(0.5)%
 
8,882,454

 
 
8,486,775

 
3.7%
 
6.8%
 
8,181,725

Gross profit
 
$
1,513,860

 
0.8%
 
2.1%
 
$
1,501,460

 
 
$
1,441,204

 
2.7%
 
5.0%
 
$
1,402,813

Selling, general and administrative expenses
 
$
1,102,541

 
0.9%
 
 
 
$
1,092,982

 
 
$
1,058,157

 
3.1%
 
 
 
$
1,026,125

Adjusted selling, general and administrative expenses(1)
 
$
1,103,384

 
1.3%
 
 
 
$
1,089,467