10-Q 1 a20171stquarterform10-q.htm 1Q2017 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 FORM 10-Q
 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 1-13461
 
 
 
Group 1 Automotive, Inc.
 
 
 
(Exact name of registrant as specified in its charter) 
 
Delaware
 
76-0506313
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
 
 
800 Gessner, Suite 500
Houston, Texas 77024
(Address of principal executive offices) (Zip code)
 
 
 
 
(713) 647-5700
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
 
 
 
 
 
 
 
 
¨

Emerging growth company
If an emerging growth company, indicate by check mark if that registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨    No  þ
As of April 28, 2017, the registrant had 21,472,471 shares of common stock, par value $0.01, outstanding.



TABLE OF CONTENTS
 

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
 
 
March 31, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
 
(In thousands, except per share amounts)
ASSETS
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
33,770

 
$
20,992

Contracts-in-transit and vehicle receivables, net
 
213,772

 
269,508

Accounts and notes receivable, net
 
152,794

 
173,364

Inventories, net
 
1,729,525

 
1,651,815

Prepaid expenses and other current assets
 
23,216

 
34,908

Total current assets
 
2,153,077

 
2,150,587

PROPERTY AND EQUIPMENT, net
 
1,152,395

 
1,125,883

GOODWILL
 
877,040

 
876,763

INTANGIBLE FRANCHISE RIGHTS
 
285,311

 
284,876

OTHER ASSETS
 
21,540

 
23,794

Total assets
 
$
4,489,363

 
$
4,461,903

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
 
 
 
 
Floorplan notes payable - credit facility and other
 
$
1,170,383

 
$
1,136,654

Offset account related to floorplan notes payable - credit facility
 
(97,149
)
 
(59,626
)
Floorplan notes payable - manufacturer affiliates
 
392,388

 
392,661

Offset account related to floorplan notes payable - manufacturer affiliates
 
(26,750
)
 
(25,500
)
Current maturities of long-term debt and short-term financing
 
46,340

 
72,419

Current liabilities from interest rate risk management activities

 
2,597

 
3,941

Accounts payable
 
347,746

 
356,099

Accrued expenses
 
185,720

 
176,469

Total current liabilities
 
2,021,275

 
2,053,117

LONG-TERM DEBT, net of current maturities
 
1,224,718

 
1,212,809

DEFERRED INCOME TAXES
 
168,772

 
161,502

LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES
 
17,762

 
20,470

OTHER LIABILITIES
 
87,876

 
83,805

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

 

Common stock, $0.01 par value, 50,000 shares authorized; 25,577 and 25,663 issued, respectively
 
256

 
257

Additional paid-in capital
 
285,455

 
290,899

Retained earnings
 
1,082,101

 
1,053,301

Accumulated other comprehensive loss
 
(140,149
)
 
(146,944
)
Treasury stock, at cost; 4,105 and 4,258 shares, respectively
 
(258,703
)
 
(267,313
)
Total stockholders’ equity
 
968,960

 
930,200

Total liabilities and stockholders’ equity
 
$
4,489,363

 
$
4,461,903


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


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Unaudited, in thousands, except per share amounts)
REVENUES:
 
 
 
 
New vehicle retail sales
 
$
1,337,213

 
$
1,409,851

Used vehicle retail sales
 
660,927

 
688,171

Used vehicle wholesale sales
 
104,157

 
101,592

Parts and service sales
 
319,698

 
308,592

Finance, insurance and other, net
 
96,834

 
100,149

Total revenues
 
2,518,829

 
2,608,355

COST OF SALES:
 
 
 
 
New vehicle retail sales
 
1,267,986

 
1,338,124

Used vehicle retail sales
 
615,922

 
638,971

Used vehicle wholesale sales
 
104,057

 
100,143

Parts and service sales
 
147,342

 
142,016

Total cost of sales
 
2,135,307

 
2,219,254

GROSS PROFIT
 
383,522

 
389,101

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
289,779

 
293,664

DEPRECIATION AND AMORTIZATION EXPENSE
 
13,606

 
12,464

ASSET IMPAIRMENTS
 

 
932

INCOME FROM OPERATIONS
 
80,137

 
82,041

OTHER EXPENSE:
 
 
 
 
Floorplan interest expense
 
(11,942
)
 
(11,010
)
Other interest expense, net
 
(16,999
)
 
(16,929
)
INCOME BEFORE INCOME TAXES
 
51,196

 
54,102

PROVISION FOR INCOME TAXES
 
(17,257
)
 
(19,811
)
NET INCOME
 
$
33,939

 
$
34,291

BASIC EARNINGS PER SHARE
 
$
1.58

 
$
1.47

Weighted average common shares outstanding
 
20,692

 
22,448

DILUTED EARNINGS PER SHARE
 
$
1.58

 
$
1.47

Weighted average common shares outstanding
 
20,698

 
22,453

CASH DIVIDENDS PER COMMON SHARE
 
$
0.24

 
$
0.22



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


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Unaudited, in thousands)
NET INCOME
 
$
33,939

 
$
34,291

Other comprehensive income (loss), net of taxes:
 
 
 
 
Foreign currency translation adjustment
 
4,137

 
2,155

Net unrealized gain (loss) on interest rate risk management activities:
 
 
 
 
Unrealized gain (loss) arising during the period, net of tax (provision) benefit of $(234) and $6,685, respectively
 
390

 
(11,141
)
Reclassification adjustment for loss included in interest expense, net of tax provision of $1,361 and $1,269, respectively
 
2,268

 
2,114

Unrealized gain (loss) on interest rate risk management activities, net of tax
 
2,658

 
(9,027
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
 
6,795

 
(6,872
)
COMPREHENSIVE INCOME
 
$
40,734

 
$
27,419



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


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
 
 
(Unaudited, in thousands)
BALANCE, December 31, 2016
 
25,663

 
$
257

 
$
290,899

 
$
1,053,301

 
$
(146,944
)
 
$
(267,313
)
 
$
930,200

Net income
 

 

 

 
33,939

 

 

 
33,939

Other comprehensive income, net
 

 

 

 

 
6,795

 

 
6,795

Net issuance of treasury shares to employee stock compensation plans
 
(86
)
 
(1
)
 
(11,507
)
 

 

 
8,610

 
(2,898
)
Stock-based compensation
 

 

 
6,063

 

 

 

 
6,063

Cash dividends, net of estimated forfeitures relative to participating securities
 

 

 

 
(5,139
)
 

 

 
(5,139
)
BALANCE, March 31, 2017
 
25,577

 
$
256

 
$
285,455

 
$
1,082,101

 
$
(140,149
)
 
$
(258,703
)
 
$
968,960



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


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Unaudited, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
33,939

 
$
34,291

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
13,606

 
12,464

Deferred income taxes
 
5,503

 
5,000

Asset impairments
 

 
932

Stock-based compensation
 
6,074

 
5,511

Amortization of debt discount and issue costs
 
912

 
484

Gain on disposition of assets
 
(280
)
 
(590
)
Other
 
(871
)
 
719

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Accounts payable and accrued expenses
 
9,164

 
32,180

Accounts and notes receivable
 
21,508

 
10,804

Inventories
 
(74,254
)
 
(55,737
)
Contracts-in-transit and vehicle receivables
 
56,140

 
50,262

Prepaid expenses and other assets
 
3,410

 
4,476

Floorplan notes payable - manufacturer affiliates
 
(3,126
)
 
15,410

Deferred revenues
 
(164
)
 
(131
)
Net cash provided by operating activities
 
71,561

 
116,075

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Cash paid in acquisitions, net of cash received
 
(95
)
 
(51,110
)
Proceeds from disposition of franchises, property and equipment
 
2,207

 
13,871

Purchases of property and equipment, including real estate
 
(46,451
)
 
(33,702
)
Other
 
2,459

 
(106
)
Net cash used in investing activities
 
(41,880
)
 
(71,047
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings on credit facility - floorplan line and other
 
1,594,371

 
1,655,942

Repayments on credit facility - floorplan line and other
 
(1,598,291
)
 
(1,675,613
)
Borrowings on credit facility - acquisition line
 
15,000

 
40,000

Repayments on credit facility - acquisition line
 
(15,000
)
 
(40,000
)
Principal payments on other debt
 
(232
)
 
(3,258
)
Borrowings on debt related to real estate, net of debt issue costs
 

 
30,331

Principal payments on debt related to real estate
 
(6,831
)
 
(5,538
)
Employee stock purchase plan purchases, net of employee tax withholdings
 
(1,030
)
 
(1,243
)
Repurchases of common stock, amounts based on settlement date
 

 
(31,945
)
Tax effect from stock-based compensation
 

 
(53
)
Dividends paid
 
(5,150
)
 
(5,148
)
Net cash used in financing activities
 
(17,163
)
 
(36,525
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
260

 
841

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
12,778

 
9,344

CASH AND CASH EQUIVALENTS, beginning of period
 
20,992

 
13,037

CASH AND CASH EQUIVALENTS, end of period
 
$
33,770

 
$
22,381

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Purchases of property and equipment, including real estate, accrued in accounts payable
 
$
7,287

 
$
22,274


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

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


1. INTERIM FINANCIAL INFORMATION
Business and Organization
Group 1 Automotive, Inc., a Delaware corporation, is a leading operator in the automotive retailing industry with business activities in 14 states in the United States of America ("U.S."), 21 towns in the United Kingdom ("U.K.") and four states in Brazil. Group 1 Automotive, Inc. and its subsidiaries are collectively referred to as the "Company" in these Notes to Consolidated Financial Statements.
The Company, through its regions, sells new and used cars and light trucks; arranges related vehicle financing; sells service and insurance contracts; provides automotive maintenance and repair services; and sells vehicle parts. As of March 31, 2017, the Company’s 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). The U.S. regional vice presidents report directly to the Company's 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. 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, the Company aggregates the East and West Regions of the U.S. into one reportable segment. In addition, as of March 31, 2017, the Company had two international regions: (a) the U.K. region, which consisted of 31 dealerships in the U.K. and (b) the Brazil region, which consisted of 16 dealerships in Brazil. 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 Company's operating results are generally subject to seasonal variations, as well as changes in the economic environment. 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, 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 quarters tend to be stronger, driven by the vehicle license plate change months of March and September. For Brazil, the Company expects 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 conditions, manufacturer incentive programs and changes in current exchange rates may exaggerate seasonal or cause counter-seasonal fluctuations in the Company's revenues and operating income.
Basis of Presentation
The accompanying unaudited condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying unaudited condensed Consolidated Financial Statements. Due to seasonality and other factors, the results of operations for the interim period are not necessarily indicative of the results that will be realized for any other interim period or for the entire fiscal year. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”).
All business acquisitions completed during the periods presented have been accounted for using the purchase method of accounting, and their results of operations are included from the effective dates of the closings of the acquisitions. The allocations of purchase price to the assets acquired and liabilities assumed are assigned and recorded based on estimates of fair value and are subject to change within the purchase price allocation period (generally one year from the respective acquisition date). All intercompany balances and transactions have been eliminated in consolidation.
Business Segment Information
The Company has three reportable segments: the U.S., which includes the activities of the Company's corporate office, the U.K. and Brazil. The reportable segments are the business activities of the Company for which discrete financial information is available and for which operating results are regularly reviewed by its chief operating decision maker to allocate resources and assess performance. The Company's chief operating decision maker is its Chief Executive Officer. See Note 14, "Segment Information," for additional details regarding the Company's reportable segments.

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



Recently Adopted Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in the accounting standard replace the lower of cost or market test with a lower of cost and net realizable value test. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2016. The Company adopted ASU 2015-11 during the first quarter of 2017. The adoption of this ASU did not materially impact its consolidated financial statements or results of operations.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendment addresses several aspects of the accounting for share-based payment award transactions, including: income tax consequences; classification of awards as either equity or liabilities; and classification on the statement of cash flows. The amendments in this ASU should be applied prospectively and are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company adopted ASU 2016-09 during the first quarter of 2017. The adoption of this ASU did not materially impact its consolidated financial statements or results of operations.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) that amends the accounting guidance on revenue recognition. The amendments in this ASU are intended to provide a framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. The amendments in this accounting standard update are effective for interim and annual reporting periods beginning after December 15, 2017. The standard can be adopted either retrospectively to each reporting period presented or as a cumulative effect adjustment as of the date of adoption. To assess the impact of the ASU, the Company established an internal implementation team to review its current accounting policies and practices, identify all material revenue streams, assess the impact of the ASU on its material revenue streams and identify potential differences with current policies and practices. The Company’s internal implementation team has substantially completed its initial review of the likely impacts that the application of the amendments in this ASU will have on its consolidated financial statements. The team has initially identified the Company’s material revenue streams to be the sale of new and used vehicles; arrangement of associated vehicle financing; the sale of service and insurance contracts; the performance of vehicle maintenance and repair services; and the sale of vehicle parts. The team has begun its review of a sample of associated contracts and other related documents, but currently, has not quantified an estimated impact of changes, if any, to its current revenue recognition policies and practices. The Company’s implementation team is in the preliminary stages of evaluating the additional disclosure requirements of the ASU, as well as the change, if any, to the Company’s underlying accounting and financial reporting systems and processes necessary to support the recognition and disclosure requirements. The Company expects to identify and implement the necessary changes, if any, during 2017. At this time, based on this review, the Company does not expect the adoption to materially impact its consolidated financial statements. The Company currently expects to adopt the amendments of this ASU during the first fiscal quarter of 2018, as a cumulative effect adjustment as of the date of adoption, but will not make a final decision on the adoption method until later in 2017.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this ASU relate to the accounting for leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact that adoption will have on its consolidated balance sheet and statement of income. However, the Company expects that the adoption of the provisions of the ASU will have a significant impact on its consolidated balance sheet, as currently approximately half of its real estate is rented, not owned, via operating leases. Adoption of this ASU is required to be done using a modified retrospective approach.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendment replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. The standard will be effective for fiscal

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

years beginning after December 15, 2019, with early adoption permitted for periods after December 15, 2018. The Company is currently evaluating the impact that the adoption of the provisions of the ASU will have on its consolidated financial statements or results of operations.     
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendment addresses several specific cash flow issues with the objective of reducing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of the provisions of the ASU will have on its consolidated financial statements.     
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Issues Task Force ("EITF"). The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The standard will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of the provisions of the ASU will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU should be applied prospectively and are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact on its consolidated financial statements as it will depend on the facts and circumstances of any specific future transactions.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. The amendments in this update require the disclosure of the impact that a recently issued ASU will have on the financial statements of a registrant when such standards are to be adopted in a future period. The SEC staff view that a registrant should evaluate ASU's that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASU's on the financial statements when adopted. The Company does not expect the amendments in this ASU to materially impact its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendment eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The amendments in this update should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact that the adoption of the provisions of the ASU will have on its consolidated financial statements.
2. ACQUISITIONS AND DISPOSITIONS
During the three months ended March 31, 2017, the Company opened one dealership for one awarded franchise in the U.K. and added motorcycles to an existing BMW dealership in Brazil. In addition, during the three months ended March 31, 2017, the Company disposed of two dealerships in Brazil representing two franchises.
During the three months ended March 31, 2016, the Company acquired 12 U.K. dealerships, inclusive of 15 franchises. The purchase price for these dealerships totaled $56.1 million, including the associated real estate and goodwill. Also, included in the purchase price of $56.1 million was $3.9 million of cash received in the acquisition of the dealerships and a payable to the seller as of March 31, 2016 of $1.1 million. The purchase price was allocated based upon the consideration paid and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. In addition, during the three months ended March 31, 2016, the Company disposed of two U.S. dealerships and two dealerships in Brazil. As a result of these U.S. and Brazil dispositions, a net pretax gain of $0.9 million and a net pretax loss of $1.0 million, respectively, including related asset impairments, were recognized for the three months ended March 31, 2016.

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

3. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The periodic interest rates of the Revolving Credit Facility (as defined in Note 8, “Credit Facilities”) and certain variable-rate real estate related borrowings in the U.S. are indexed to the one-month London Inter Bank Offered Rate (“LIBOR”), plus an associated company credit risk rate. In order to minimize the earnings variability related to fluctuations in these periodic interest rates, the Company employs an interest rate hedging strategy, whereby it enters into arrangements with various financial institutional counterparties with investment grade credit ratings, swapping its variable interest rate exposure for a fixed interest rate over terms not to exceed the related variable-rate debt.
The Company presents the fair value of all interest rate derivative instruments on its Consolidated Balance Sheets. The Company measures the fair value of its interest rate derivative instruments utilizing an income approach valuation technique, converting future amounts of cash flows to a single present value in order to obtain a transfer exit price within the bid and ask spread that is most representative of the fair value of its derivative instruments. In measuring fair value, the Company utilizes the option-pricing Black-Scholes present value technique for all of its derivative instruments. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service provider, matched to the identical maturity term of the instrument being measured. Observable inputs utilized in the income approach valuation technique incorporate identical contractual notional amounts, fixed coupon rates, periodic terms for interest payments and contract maturity. The fair value estimate of the interest rate derivative instruments also considers the credit risk of the Company for instruments in a liability position or the counterparty for instruments in an asset position. The credit risk is calculated by using the spread between the one-month LIBOR yield curve and the relevant average 10 and 20-year rate according to Standard and Poor’s. The Company has determined the valuation measurement inputs of these derivative instruments to maximize the use of observable inputs that market participants would use in pricing similar or identical instruments and market data obtained from independent sources, which is readily observable or can be corroborated by observable market data for substantially the full term of the derivative instrument. Further, the valuation measurement inputs minimize the use of unobservable inputs. Accordingly, the Company has classified the derivatives within Level 2 of the hierarchy framework as described by Accounting Standards Codification ("ASC") 820, Fair Value Measurement.
The related gains or losses on these interest rate derivative instruments are deferred in stockholders’ equity as a component of accumulated other comprehensive loss. These deferred gains and losses are recognized in income in the period in which the related items being hedged are recognized in expense. However, to the extent that the change in value of a derivative contract does not perfectly offset the change in the value of the items being hedged, that ineffective portion is immediately recognized in other income or expense. Monthly contractual settlements of these swap positions are recognized as floorplan or other interest expense in the Company’s accompanying Consolidated Statements of Operations. All of the Company’s interest rate derivative instruments are designated as cash flow hedges. As of March 31, 2017, all of the Company’s derivative instruments that were in effect were determined to be effective. The Company had no gains or losses related to ineffectiveness or amounts excluded from effectiveness testing recognized in the Consolidated Statements of Operations for the three months ended March 31, 2017 or 2016, respectively.
The Company held interest rate derivative instruments in effect as of March 31, 2017 of $819.3 million in notional value that fixed its underlying one-month LIBOR at a weighted average rate of 2.5%. The Company records the majority of the impact of the periodic settlements of these swaps as a component of floorplan interest expense. For the three months ended March 31, 2017 and 2016, the impact of the Company’s interest rate hedges in effect increased floorplan interest expense by $2.9 million and $2.8 million, respectively. Total floorplan interest expense, inclusive of the aforementioned impact of the Company's interest rate hedges, was $11.9 million and $11.0 million for the three months ended March 31, 2017 and 2016, respectively. For the three months ended March 31, 2017, the Company entered into one interest rate derivative instrument with a notional value of $4.8 million that was immediately effective.
In addition to the $819.3 million of swaps in effect as of March 31, 2017, the Company held 12 additional interest rate derivative instruments with forward start dates between December 2017 and December 2020 and expiration dates between December 2020 and December 2030. The aggregate notional value of these 12 forward-starting swaps was $625.0 million, and the weighted average interest rate is 2.2%. The combination of the interest rate derivative instruments currently in effect and these forward-starting derivative instruments is structured such that the notional value in effect at any given time through December 2030 does not exceed $912.7 million, which is less than the Company's expectation for variable-rate debt outstanding during such period.
As of March 31, 2017 and December 31, 2016, the Company reflected liabilities from interest rate risk management activities of $20.4 million and $24.4 million, respectively, in its Consolidated Balance Sheets. In addition, as of March 31, 2017 and December 31, 2016, the Company reflected $9.7 million and $9.5 million, respectively, of assets from interest rate risk management activities, in Other Assets in the Consolidated Balance Sheets. Included in Accumulated Other Comprehensive

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Loss at March 31, 2017 and 2016 were accumulated unrealized losses, net of income taxes, totaling $6.7 million and $28.5 million, respectively, related to these interest rate derivative instruments.
The following table presents the impact during the current and comparative prior year periods for the Company's interest rate derivative instruments on its Consolidated Statements of Operations and Consolidated Balance Sheets.
 
 
Amount of Unrealized Income (Loss), Net of Tax, Recognized in Other Comprehensive Income (Loss)

 
 
Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationship
 
2017
 
2016
 
 
(In thousands)
Interest rate derivative instruments
 
$
390

 
$
(11,141
)
 
 
 
 
 
 
 
Amount of Loss Reclassified from Other Comprehensive Income (Loss) into Statements of Operations

Location of Loss Reclassified from Other Comprehensive Income (Loss) into Statements of Operations
 
Three Months Ended March 31,
 
2017
 
2016
 
 
(In thousands)
Floorplan interest expense
 
$
(2,948
)
 
$
(2,758
)
Other interest expense
 
(681
)
 
(625
)
The amount expected to be reclassified out of other comprehensive income (loss) into earnings as additional floorplan interest expense or other interest expense in the next twelve months is $10.8 million.
4. STOCK-BASED COMPENSATION PLANS
The Company provides stock-based compensation benefits to employees and non-employee directors pursuant to its 2014 Long Term Incentive Plan (the "Incentive Plan"), as well as to employees pursuant to its Employee Stock Purchase Plan, as amended (the "Purchase Plan", formerly named the 1998 Employee Stock Purchase Plan).
Long Term Incentive Plan
The Incentive Plan provides for the grant of options (including options qualified as incentive stock options under the Internal Revenue Code of 1986 and options that are non-qualified), restricted stock, performance awards, bonus stock, and phantom stock to the Company's employees, consultants, non-employee directors and officers. The Incentive Plan expires on May 21, 2024. The terms of the awards (including vesting schedules) are established by the Compensation Committee of the Company’s Board of Directors. As of March 31, 2017, there were 1,088,585 shares available for issuance under the Incentive Plan.
Restricted Stock Awards
Under the Incentive Plan, the Company grants to non-employee directors and certain employees restricted stock awards or, at their election, restricted stock units at no cost to the recipient. Restricted stock awards qualify as participating securities as each award contains non-forfeitable rights to dividends. As such, the two-class method is required for the computation of earnings per share. See Note 5, “Earnings Per Share,” for further details. Restricted stock awards are considered outstanding at the date of grant but are subject to vesting periods upon issuance of up to five years. Restricted stock units are considered vested at the time of issuance. However, since they convey no voting rights, they are not considered outstanding when issued. Restricted stock units settle in cash upon the termination of the grantees’ employment or directorship. In the event an employee or non-employee director terminates his or her employment or directorship with the Company prior to the lapse of the restrictions, the shares, in most cases, will be forfeited to the Company. The Company issues new shares or treasury shares, if available, when restricted stock vests. Compensation expense for restricted stock awards is calculated based on the market price of the Company’s common stock at the date of grant and recognized over the requisite service period. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted annually based on the extent to which actual or expected forfeitures differ from the previous estimate.

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A summary of the restricted stock awards as of March 31, 2017, along with the changes during the three months then ended, is as follows:
 
 
Awards
 
Weighted Average
Grant Date
Fair Value
Nonvested at December 31, 2016
 
850,422

 
$
67.25

Granted
 
166,339

 
78.57

Vested
 
(183,164
)
 
68.38

Forfeited
 
(68,678
)
 
68.34

Nonvested at March 31, 2017
 
764,919

 
$
69.36

Employee Stock Purchase Plan
The Purchase Plan authorizes the issuance of up to 4.5 million shares of common stock and provides that no options to purchase shares may be granted under the Purchase Plan after May 19, 2025. The Purchase Plan is available to all employees of the Company and its participating subsidiaries and is a qualified plan as defined by Section 423 of the Internal Revenue Code. At the end of each fiscal quarter (the “Option Period”) during the term of the Purchase Plan, employees can acquire shares of common stock from the Company at 85% of the fair market value of the common stock on the first or the last day of the Option Period, whichever is lower. As of March 31, 2017, there were 1,232,389 shares available for issuance under the Purchase Plan. During the three months ended March 31, 2017 and 2016, the Company issued 30,154 and 40,877 shares, respectively, of common stock to employees participating in the Purchase Plan. With respect to shares issued under the Purchase Plan, the Company's Board of Directors has authorized specific share repurchases to fund the shares issuable under the Purchase Plan.
The weighted average per share fair value of employee stock purchase rights issued pursuant to the Purchase Plan was $18.66 and $15.61 for the three months ended March 31, 2017 and 2016, respectively. The fair value of stock purchase rights is calculated using the grant date stock price, the value of the embedded call option and the value of the embedded put option.
Stock-Based Compensation
Total stock-based compensation cost was $6.1 million and $5.5 million for the three months ended March 31, 2017 and 2016, respectively. Cash received from Purchase Plan purchases was $1.9 million and $2.0 million for the three months ended March 31, 2017 and 2016, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. EARNINGS PER SHARE
The two-class method is utilized for the computation of the Company's earnings per share (“EPS”). The two-class method requires a portion of net income to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents. The Company’s restricted stock awards are participating securities. Income allocated to these participating securities is excluded from net earnings available to common shares, as shown in the table below. Basic EPS is computed by dividing net income available to basic common shares by the weighted average number of basic common shares outstanding during the period. Diluted EPS is computed by dividing net income available to diluted common shares by the weighted average number of dilutive common shares outstanding during the period.
The following table sets forth the calculation of EPS for the three months ended March 31, 2017 and 2016.
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(In thousands, except per share amounts)
Weighted average basic common shares outstanding
 
20,692

 
22,448

Dilutive effect of employee stock purchases, net of assumed repurchase of treasury stock
 
6

 
5

Weighted average dilutive common shares outstanding
 
20,698

 
22,453

Basic:
 
 
 
 
Net Income
 
$
33,939

 
$
34,291

Less: Earnings allocated to participating securities
 
1,250

 
1,348

 Earnings available to basic common shares
 
$
32,689

 
$
32,943

 Basic earnings per common share
 
$
1.58

 
$
1.47

Diluted:
 
 
 
 
Net Income
 
$
33,939

 
$
34,291

Less: Earnings allocated to participating securities
 
1,250

 
1,348

 Earnings available to diluted common shares
 
$
32,689

 
$
32,943

 Diluted earnings per common share
 
$
1.58

 
$
1.47

6. INCOME TAXES
The Company is subject to U.S. federal income taxes and income taxes in numerous U.S. states. In addition, the Company is subject to income tax in the U.K. and Brazil relative to its foreign subsidiaries. The Company's effective income tax rate of 33.7% for the three months ended March 31, 2017 was less than the U.S. federal statutory rate of 35.0%, due primarily to a portion of the Company's pretax income being generated in the U.K. region, which is taxed at a lower statutory rate, and excess tax deductions for vested restricted stock resulting from the adoption of ASU 2016-09 during the three months ended March 31, 2017. This was partially offset by taxes provided for in U.S. state jurisdictions and valuation allowances provided for net operating losses and other deferred tax assets in certain U.S states and in Brazil.
For the three months ended March 31, 2017, the Company's effective tax rate decreased to 33.7% as compared to 36.6% for the same period in 2016. This decrease was primarily due to the mix effect resulting from proportionately more pretax income generated in the Company's U.K. region, as well as changes to valuation allowances provided for net operating losses and other deferred tax assets in certain U.S. states and in Brazil, the tax impact of dealership dispositions in Brazil and excess tax deductions for vested restricted stock resulting from the adoption of ASU 2016-09 during the three months ended March 31, 2017.
As of March 31, 2017 and December 31, 2016, the Company had no unrecognized tax benefits with respect to uncertain tax positions and did not incur any interest and penalties nor did it accrue any interest for the three months ended March 31, 2017. When applicable, consistent with prior practice, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company's taxable years 2015 and subsequent remain open in the U.K., and taxable years 2011 and subsequent remain open in Brazil.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts and notes receivable consisted of the following: 
 
 
March 31, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
 
 
(In thousands)
Amounts due from manufacturers
 
$
85,274

 
$
95,754

Parts and service receivables
 
34,881

 
35,318

Finance and insurance receivables
 
19,467

 
24,866

Other
 
15,538

 
20,322

Total accounts and notes receivable
 
155,160

 
176,260

Less allowance for doubtful accounts
 
2,366

 
2,896

Accounts and notes receivable, net
 
$
152,794

 
$
173,364

Inventories consisted of the following: 
 
 
March 31, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
 
 
(In thousands)
New vehicles
 
$
1,239,905

 
$
1,156,383

Used vehicles
 
293,647

 
294,812

Rental vehicles
 
127,109

 
131,080

Parts, accessories and other
 
77,265

 
77,762

Total inventories
 
1,737,926

 
1,660,037

Less lower of cost or net realizable value
 
8,401

 
8,222

Inventories, net
 
$
1,729,525

 
$
1,651,815

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Property and equipment consisted of the following:
 
 
Estimated Useful Lives in Years
 
March 31, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
 
 
(dollars in thousands)
Land
 
 
$
409,022

 
$
400,163

Buildings
 
25 to 50
 
559,733

 
553,961

Leasehold improvements
 
varies
 
168,101

 
170,060

Machinery and equipment
 
7 to 20
 
104,156

 
100,164

Furniture and fixtures
 
3 to 10
 
90,503

 
87,691

Company vehicles
 
3 to 5
 
11,904

 
11,632

Construction in progress
 
 
86,190

 
66,658

Total
 
 
 
1,429,609

 
1,390,329

Less accumulated depreciation
 
 
 
277,214

 
264,446

Property and equipment, net
 
 
 
$
1,152,395

 
$
1,125,883

During the three months ended March 31, 2017, the Company incurred $27.6 million of capital expenditures for the construction of new or expanded facilities and the purchase of equipment and other fixed assets in the maintenance of the Company’s dealerships and facilities, excluding $15.9 million of capital expenditures accrued as of December 31, 2016. As of March 31, 2017, the Company had accrued $7.3 million of capital expenditures. In addition, the Company purchased real estate (including land and buildings) during the three months ended March 31, 2017 associated with existing dealership operations totaling $10.3 million.
8. CREDIT FACILITIES
In the U.S., the Company has a $1.8 billion revolving syndicated credit arrangement that matures on June 17, 2021 and is comprised of 24 financial institutions, including six manufacturer-affiliated finance companies (“Revolving Credit Facility”). The Company also has a $300.0 million floorplan financing arrangement (“FMCC Facility”) with Ford Motor Credit Company (“FMCC”) for financing of new Ford vehicles in the U.S. and other floorplan financing arrangements with several other automobile manufacturers for financing of a portion of its U.S. rental vehicle inventory. In the U.K., the Company has financing arrangements with BMW Financial Services NA, LLC ("BMWFS"), Volkswagen Finance, FMCC and a third-party financial institution for financing of its new, used and rental vehicles. In Brazil, the Company has financing arrangements for new, used, and rental vehicles with several financial institutions, most of which are manufacturer affiliated. Within the Company's Consolidated Balance Sheets, Floorplan notes payable - credit facility and other primarily reflects amounts payable for the purchase of specific new, used and rental vehicle inventory (with the exception of new and rental vehicle purchases financed through lenders affiliated with the respective manufacturer) whereby financing is provided by the Revolving Credit Facility. Floorplan notes payable - manufacturer affiliates reflects amounts related to the purchase of vehicles whereby financing is provided by the FMCC Facility, the financing of a portion of the Company's rental vehicles in the U.S., as well as the financing of new, used, and rental vehicles with manufacturer affiliates in both the U.K. and Brazil. Payments on the floorplan notes payable are generally due as the vehicles are sold. As a result, these obligations are reflected in the accompanying Consolidated Balance Sheets as current liabilities.
Revolving Credit Facility
The Company's Revolving Credit Facility provides a total borrowing capacity of $1.8 billion and expires on June 17, 2021. The Revolving Credit Facility consists of two tranches, providing a maximum of $1.75 billion for U.S. vehicle inventory floorplan 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”). The capacity under these two tranches can be re-designated within the overall $1.8 billion commitment, subject to the aforementioned limits. Up to $125.0 million of the Acquisition Line can be borrowed in either euros or British pound sterling. The Revolving Credit Facility can be expanded to a maximum commitment of $2.1 billion, subject to participating lender approval. The Floorplan Line bears interest at rates equal to the LIBOR plus 125 basis points for new vehicle inventory and the LIBOR plus 150 basis points for used vehicle inventory. The Acquisition Line bears interest at the LIBOR plus 150 basis points plus a margin that ranges from zero to 100 basis points, depending on the Company's total adjusted leverage ratio, for borrowings in U.S. dollars and a LIBOR equivalent plus 125 to 250 basis points, depending on the Company's total adjusted leverage ratio, on borrowings in euros or British pound sterling. The Floorplan Line requires a commitment fee of 0.15% per annum on the unused portion. Amounts borrowed by the Company under the Floorplan Line for specific vehicle inventory are to be repaid upon the sale of the vehicle financed, and in no case is a borrowing for a vehicle to remain outstanding for greater than one year. The Acquisition Line also requires a commitment fee ranging from 0.20% to 0.45% per annum, depending on the Company’s total adjusted leverage ratio, based on a minimum commitment of $50.0 million less outstanding borrowings. In conjunction with the Revolving Credit Facility, the Company has $5.1 million of related unamortized costs as of March 31, 2017, which are included in Prepaid expenses and other current assets and Other Assets on the accompanying Consolidated Balance Sheets and amortized over the term of the facility.
After considering the outstanding balance of $1,066.6 million at March 31, 2017, the Company had $373.4 million of available floorplan borrowing capacity under the Floorplan Line. Included in the $373.4 million available borrowings under the Floorplan Line was $97.1 million of immediately available funds. The weighted average interest rate on the Floorplan Line was 2.2% and 2.0% as of March 31, 2017 and December 31, 2016, respectively, excluding the impact of the Company’s interest rate derivative instruments. With regards to the Acquisition Line, there were no borrowings outstanding as of March 31, 2017 and December 31, 2016. After considering $29.3 million of outstanding letters of credit and other factors included in the Company’s available borrowing base calculation, there was $330.7 million of available borrowing capacity under the Acquisition Line as of March 31, 2017. The amount of available borrowing capacity under the Acquisition Line is limited from time to time based upon certain debt covenants.
All of the U.S. dealership-owning subsidiaries are co-borrowers under the Revolving Credit Facility. The Company’s obligations under the Revolving Credit Facility are secured by essentially all of the Company's U.S. personal property (other than equity interests in dealership-owning subsidiaries), including all motor vehicle inventory and proceeds from the disposition of dealership-owning subsidiaries, excluding inventory financed directly with manufacturer-affiliates and other third-party financing institutions. The Revolving Credit Facility contains a number of significant covenants that, among other things,

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restrict the Company’s ability to make disbursements outside of the ordinary course of business, dispose of assets, incur additional indebtedness, create liens on assets, make investments and engage in mergers or consolidations. The Company is also required to comply with specified financial tests and ratios defined in the Revolving Credit Facility, such as the fixed charge coverage and total adjusted leverage ratios. Further, the Revolving Credit Facility restricts the Company’s ability to make certain payments, such as dividends or other distributions of assets, properties, cash, rights, obligations or securities (“Restricted Payments”). The Restricted Payments cannot exceed the sum of $208.5 million plus (or minus if negative) (a) one-half of the aggregate consolidated net income for the period beginning on April 1, 2014 and ending on the date of determination and (b) the amount of net cash proceeds received from the sale of capital stock after June 2, 2014 and ending on the date of determination less (c) cash dividends and share repurchases after June 2, 2014 (“Credit Facility Restricted Payment Basket”). For purposes of the calculation of the Credit Facility Restricted Payment Basket, net income represents such amounts per the consolidated financial statements adjusted to exclude the Company’s foreign operations, non-cash interest expense, non-cash asset impairment charges, and non-cash stock-based compensation. As of March 31, 2017, the Credit Facility Restricted Payment Basket totaled $142.7 million. The Company was in compliance with all applicable covenants and ratios under the Revolving Credit Facility as of March 31, 2017.
Ford Motor Credit Company Facility
The FMCC Facility provides for the financing of, and is collateralized by, the Company’s Ford new vehicle inventory in the U.S., including affiliated brands. This arrangement provides for $300.0 million of floorplan financing and is an evergreen arrangement that may be canceled with 30 days' notice by either party. As of March 31, 2017, the Company had an outstanding balance of $162.3 million under the FMCC Facility with an available floorplan borrowing capacity of $137.7 million. Included in the $137.7 million available borrowings under the FMCC Facility was $26.8 million of immediately available funds. This facility bears interest at a rate of Prime plus 150 basis points minus certain incentives. The interest rate on the FMCC Facility was 5.50% before considering the applicable incentives as of March 31, 2017.
Other Credit Facilities
The Company has credit facilities with BMWFS, Volkswagen Finance, FMCC and a third-party financial institution for the financing of new, used and rental vehicle inventories related to its U.K. operations. These facilities are denominated in British pound sterling and are evergreen arrangements that may be canceled with notice by either party and bear interest at a base rate, plus a surcharge that varies based upon the type of vehicle being financed. As of March 31, 2017, borrowings outstanding under these facilities totaled $91.5 million, with annual interest rates ranging from 1.25% to 3.95%.
The Company has credit facilities with financial institutions in Brazil, most of which are affiliated with the manufacturers, for the financing of new, used and rental vehicle inventories related to its Brazilian operations. These facilities are denominated in Brazilian real and have renewal terms ranging from one month to twelve months. They may be canceled with notice by either party and bear interest at a benchmark rate, plus a surcharge that varies based upon the type of vehicle being financed. As of March 31, 2017, borrowings outstanding under these facilities totaled $15.4 million, with annual interest rates charged on borrowings outstanding under these facilities, after the grace period of zero to 90 days, ranging from 16.66% to 23.14%.
Excluding rental vehicles financed through the Revolving Credit Facility, financing for U.S. rental vehicles is typically obtained directly from the automobile manufacturers. These financing arrangements generally require small monthly payments and mature in varying amounts over a period of two years. Rental vehicles are typically transferred to used vehicle inventory when they are removed from service and repayment of the borrowing is required at that time. As of March 31, 2017, borrowings outstanding under these rental vehicle facilities totaled $103.0 million, with interest rates that vary up to 5.50%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. LONG-TERM DEBT
The Company carries its long-term debt at face value, net of applicable discounts and capitalized debt issuance costs. Long-term debt consisted of the following:
 
 
March 31, 2017
 
December 31, 2016
 
 
(dollars in thousands)
5.00% Senior Notes (aggregate principal of $550,000 at March 31, 2017 and December 31, 2016)
 
$
540,858

 
$
540,465

5.25% Senior Notes (aggregate principal of $300,000 at March 31, 2017 and December 31, 2016)
 
295,729

 
295,591

Real Estate Related and Other Long-Term Debt
 
380,393

 
385,358

Capital lease obligations related to real estate, maturing in varying amounts through June 2034 with a weighted average interest rate of 9.8% and 9.9%, respectively
 
46,629

 
47,613

 
 
1,263,609

 
1,269,027

Less current maturities of long-term debt
 
38,891

 
56,218

 
 
$
1,224,718

 
$
1,212,809

Included in current maturities of long-term debt and short-term financing in the Company's Consolidated Balance Sheets as of March 31, 2017, and December 31, 2016, was $7.4 million and $16.2 million, respectively, of short-term financing that was due within one year.
5.00% Senior Notes
On June 2, 2014, the Company issued $350.0 million aggregate principal amount of its 5.00% senior notes due 2022("5.00% Notes"). Subsequently, on September 9, 2014, the Company issued an additional $200.0 million of 5.00% Notes at a discount of 1.5% from face value. The 5.00% Notes will mature on June 1, 2022 and pay interest semiannually, in arrears, in cash on each June 1 and December 1, beginning December 1, 2014. Using proceeds of certain equity offerings, the Company may redeem up to 35% of the 5.00% Notes prior to June 1, 2017, subject to certain conditions, at a redemption price equal to 105% of principal amount of the 5.00% Notes plus accrued and unpaid interest. Otherwise, the Company may redeem some or all of the 5.00% Notes prior to June 1, 2017 at a redemption price equal to 100% of the principal amount of the 5.00% Notes redeemed, plus an applicable premium, and plus accrued and unpaid interest. On or after June 1, 2017, the Company may redeem some or all of the 5.00% Notes at specified prices, plus accrued and unpaid interest. The Company may be required to purchase the 5.00% Notes if it sells certain assets or triggers the change in control provisions defined in the 5.00% Notes indenture. The 5.00% Notes are senior unsecured obligations and rank equal in right of payment to all of the Company's existing and future senior unsecured debt and senior in right of payment to all of its future subordinated debt. The 5.00% Notes are guaranteed by substantially all of the Company's U.S. subsidiaries. The U.S. subsidiary guarantees rank equally in the right of payment to all of the Company's U.S. subsidiary guarantor’s existing and future subordinated debt. In addition, the 5.00% Notes are structurally subordinated to the liabilities of its non-guarantor subsidiaries and are subject to customary covenants, including a restricted payment basket and debt limitations. The restricted payment basket calculation under the terms of the 5.00% Notes is the same as under the Credit Facility Restricted Payment Basket. The 5.00% Notes were registered with the Securities and Exchange Commission in June 2015. The 5.00% Notes are presented net of unamortized underwriters' fees, discount and debt issuance costs, which are being amortized over a period of eight years in conjunction with the term of the 5.00% Notes, of $9.1 million as of March 31, 2017.
5.25% Senior Notes
On December 8, 2015, the Company issued 5.25% senior unsecured notes with a face amount of $300.0 million due to mature on December 15, 2023 (“5.25% Notes”). The 5.25% Notes pay interest semiannually, in arrears, in cash on each June 15 and December 15, beginning June 15, 2016. Using proceeds of certain equity offerings, the Company may redeem up to 35% of the 5.25% Notes prior to December 15, 2018, subject to certain conditions, at a redemption price equal to 105% of principal amount of the 5.25% Notes plus accrued and unpaid interest. Otherwise, the Company may redeem some or all of the 5.25% Notes prior to December 15, 2018 at a redemption price equal to 100% of the principal amount of the 5.25% Notes redeemed, plus an applicable make-whole premium, and plus accrued and unpaid interest. On or after December 15, 2018, the Company may redeem some or all of the 5.25% Notes at specified prices, plus accrued and unpaid interest. The Company may be required to purchase the 5.25% Notes if it sells certain assets or triggers the change in control provisions defined in the 5.25% Notes indenture. The 5.25% Notes are senior unsecured obligations and rank equal in right of payment to all of the Company’s existing and future senior unsecured debt and senior in right of payment to all of its future subordinated debt. The 5.25% Notes are guaranteed by substantially all of the Company’s U.S. subsidiaries. The U.S. subsidiary guarantees rank equally in the right of payment to all of the Company’s U.S. subsidiary guarantor’s existing and future subordinated debt. In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

addition, the 5.25% Notes are structurally subordinated to the liabilities of its non-guarantor subsidiaries and are subject to customary covenants, including a restricted payment basket and debt limitations. The restricted payment basket calculation under the terms of the 5.25% Notes is the same as under the Credit Facility Restricted Payment Basket. The 5.25% Notes are presented net of unamortized underwriters' fees and debt issuance costs, which are being amortized over a period of eight years in conjunction with the term of the 5.25% Notes, of $4.3 million as of March 31, 2017.
Acquisition Line
See Note 8, "Credit Facilities," for further discussion on the Company's Revolving Credit Facility and Acquisition Line.
Real Estate Related and Other Long-Term Debt
The Company, as well as certain of its wholly-owned subsidiaries, has entered into separate term mortgage loans in the U.S. with three of its manufacturer-affiliated finance partners, Toyota Motor Credit Corporation (“TMCC”), BMWFS and FMCC, as well as several third-party financial institutions. These mortgage loans may be expanded for borrowings related to specific buildings and/or properties and are guaranteed by the Company. Each mortgage loan was made in connection with, and is secured by mortgage liens on, the real property owned by the Company that is mortgaged under the loans. The mortgage loans bear interest at fixed rates between 3.00% and 4.69%, and at variable indexed rates plus a spread between 1.50% and 2.50% per annum. The Company capitalized $2.8 million of related debt issuance costs related to the mortgage loans that are included as a direct reduction to the mortgage loans on the accompanying Consolidated Balance Sheets and are being amortized over the terms of the mortgage loans. As of March 31, 2017, $0.7 million remained unamortized. The mortgage loans consist of 55 term loans for an aggregate principal amount of $363.7 million. As of March 31, 2017, borrowings outstanding under these notes totaled $317.4 million, with $29.1 million classified as a current maturity of long-term debt. For the three months ended March 31, 2017, the Company made no additional net borrowings and made principal payments of $4.6 million. The agreements provide for monthly payments based on 15 or 20-year amortization schedules and mature between November 2017 and December 2024. These mortgage loans are cross-collateralized and cross-defaulted with the mortgages of each respective financial institution.
The Company has entered into 13 separate term mortgage loans in the U.K. with other third-party financial institutions which are secured by the Company’s U.K. properties. These mortgage loans (collectively, “U.K. Notes”) are denominated in British pound sterling and are being repaid in monthly installments that will mature by September 2034. As of March 31, 2017, borrowings under the U.K. Notes totaled $49.9 million, with $4.3 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. For the three months ended March 31, 2017, the Company made no additional borrowings and made principal payments of $1.1 million associated with the U.K. Notes.
The Company also has a revolving working capital loan agreement with a third-party financial institution in the U.K. As of March 31, 2017, short-term borrowings under the U.K. third-party loan totaled $7.4 million and are included in current maturities of long-term debt and short-term financing in the Company's Consolidated Balance Sheets. For the three months ended March 31, 2017, the Company made no additional borrowings or principal payments.
The Company has a separate term mortgage loan in Brazil with a third-party financial institution (the "Brazil Note"). The Brazil Note is denominated in Brazilian real and is secured by one of the Company’s Brazilian properties, as well as a guarantee from the Company. The Brazil Note is being repaid in monthly installments that will mature by April 2025. As of March 31, 2017, borrowings under the Brazil Note totaled $3.8 million, with $0.4 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. For the three months ended March 31, 2017, the Company made no additional borrowings and made principal payments of $0.1 million associated with the Brazil Note.
The Company also has a working capital loan agreement with a third-party financial institution in Brazil. The principal balance on this loan is due by February 2020 with interest only payments being made quarterly until the due date. As of March 31, 2017, borrowings outstanding under the Brazilian third-party loan totaled $7.0 million, which are classified as long-term debt in the accompanying Consolidated Balance Sheets. For the three months ended March 31, 2017, the Company made no additional borrowings.
Fair Value of Long-Term Debt
The Company's outstanding 5.00% Notes had a fair value of $559.5 million and $548.4 million as of March 31, 2017 and December 31, 2016, respectively. The Company's outstanding 5.25% Notes had a fair value of $303.8 million and $297.8 million as of March 31, 2017 and December 31, 2016, respectively. The Company's fixed interest rate borrowings included in real estate related and other long-term debt totaled $92.1 million and $93.9 million as of March 31, 2017 and December 31, 2016, respectively. The fair value of such fixed interest rate borrowings was $92.5 million and $94.5 million as of March 31, 2017 and December 31, 2016, respectively. The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of March 31, 2017 and December 31, 2016. The Company determined the estimated fair value of its long-term debt using available market information and commonly accepted valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

amounts that the Company, or holders of the instruments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on estimated fair values. The carrying value of the Company’s variable rate debt approximates fair value due to the short-term nature of the interest rates.
10. FAIR VALUE MEASUREMENTS
ASC 820 defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; requires disclosure of the extent to which fair value is used to measure financial and non-financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date; and establishes a three-level valuation hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the measurement date:
Level 1 — unadjusted, quoted prices for identical assets or liabilities in active markets;
Level 2 — quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation; and
Level 3 — unobservable inputs based upon the reporting entity’s internally developed assumptions that market participants would use in pricing the asset or liability.
The Company’s financial instruments consist primarily of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, investments in debt and equity securities, accounts payable, credit facilities, long-term debt and interest rate derivative instruments. The fair values of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, accounts payable, and credit facilities approximate their carrying values due to the short-term nature of these instruments and/or the existence of variable interest rates. The Company evaluated its assets and liabilities for those that met the criteria of the disclosure requirements and fair value framework of ASC 820 and identified demand obligations, interest rate derivative instruments, and investment balances in certain financial institutions as having met such criteria.
The Company periodically invests in unsecured, corporate demand obligations with manufacturer-affiliated finance companies, which bear interest at a variable rate and are redeemable on demand by the Company. Therefore, the Company has classified these demand obligations as cash and cash equivalents in the accompanying Consolidated Balance Sheets. The Company determined that the valuation measurement inputs of these instruments include inputs other than quoted market prices, that are observable or that can be corroborated by observable data by correlation. Accordingly, the Company has classified these instruments within Level 2 of the hierarchy framework.
In addition, the Company maintains an investment balance with certain of the financial institutions in Brazil that provide credit facilities for the financing of new, used and rental vehicle inventories. The investment balances bear interest at a variable rate and are redeemable by the Company in the future under certain conditions. The Company has classified these investment balances as long-term assets in the accompanying Consolidated Balance Sheets. The Company determined that the valuation measurement inputs of these instruments include inputs other than quoted market prices, that are observable or that can be corroborated by observable data by correlation. Accordingly, the Company has classified these instruments within Level 2 of the hierarchy framework.
The Company's derivative financial instruments are recorded at fair market value. See Note 3, "Derivative Instruments and Risk Management Activities" for further details regarding the Company's derivative financial instruments. See Note 9, "Long-term Debt" for details regarding the fair value of the Company's long-term debt.
Assets and liabilities recorded at fair value, within Level 2 of the hierarchy framework, in the accompanying balance sheets as of March 31, 2017 and December 31, 2016, respectively, were as follows:
 
 
As of March 31, 2017
 
As of December 31, 2016
 
 
(In thousands)
Assets:
 
 
 
 
Investments
 
$
910

 
$
3,254

Demand obligations
 
13

 
12

Interest rate derivative financial instruments
 
$
9,684

 
$
9,484

Total
 
$
10,607

 
$
12,750

Liabilities:
 
 
 
 
Interest rate derivative financial instruments
 
$
20,360

 
$
24,411

Total
 
$
20,360

 
$
24,411


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company’s dealerships are named in various types of litigation involving customer claims, employment matters, class action claims, purported class action claims, as well as claims involving the manufacturer of automobiles, contractual disputes and other matters arising in the ordinary course of business. Due to the nature of the automotive retailing business, the Company may be involved in legal proceedings or suffer losses that could have a material adverse effect on the Company’s business. In the normal course of business, the Company is required to respond to customer, employee and other third-party complaints. Amounts that have been accrued or paid related to the settlement of litigation are included in Selling, general and administrative expenses in the Company’s Consolidated Statements of Operations. In addition, the manufacturers of the vehicles that the Company sells and services have audit rights allowing them to review the validity of amounts claimed for incentive, rebate or warranty-related items and charge the Company back for amounts determined to be invalid payments under the manufacturers’ programs, subject to the Company’s right to appeal any such decision. Amounts that have been accrued or paid related to the settlement of manufacturer chargebacks of recognized incentives and rebates are included in Cost of sales in the Company’s Consolidated Statements of Operations, while such amounts for manufacturer chargebacks of recognized warranty-related items are included as a reduction of Revenues in the Company’s Consolidated Statements of Operations.
Legal Proceedings
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, including claims from customers and automotive dealers. In October 2016, the Company received notification from Volkswagen that it is entitled to receive, in the aggregate, approximately $13.2 million in connection with the Company's current and prior ownership of seven Volkswagen dealerships in the U.S. The Company accepted and executed the offer in the fourth quarter of 2016 and received half of the compensation in a lump sum amount in January 2017. The Company had received two of the remaining 18 monthly installments as of March 31, 2017. The Company recognized the entire settlement as an offset to Selling, General and Administrative Expenses ("SG&A") in the Consolidated Statements of Operations for the year ended December 31, 2016. Also, in conjunction with the Volkswagen diesel emissions scandal, Volkswagen agreed in March 2017 to settle allegations of damages by the Company relative to its three Audi branded dealerships. The Company recognized the settlement as an offset to SG&A in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2017.
Currently, the Company is not party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company's results of operations, financial condition, or cash flows, including class action lawsuits. However, the results of current, or future, matters cannot be predicted with certainty, and an unfavorable resolution of one or more of such matters could have a material adverse effect on the Company's results of operations, financial condition, or cash flows.
Other Matters
The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by the Company’s subsidiaries of their respective dealership premises. Pursuant to these leases, the Company’s subsidiaries generally agree to indemnify the lessor and other parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements in connection with the sale of assets or businesses in which it agrees to indemnify the purchaser, or other parties, from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability would be limited by the terms of the applicable agreement.
From time to time, primarily in connection with dealership dispositions, the Company’s subsidiaries sublet to the dealership purchaser the subsidiaries’ interests in any real property leases associated with such dealerships and continue to be primarily obligated on the lease. In these situations, the Company’s subsidiaries retain primary responsibility for the performance of certain obligations under such leases. To the extent that the Company remains primarily responsible under such leases, a quantification of such lease obligations is included in the Company's disclosure of future minimum lease payments for non-cancelable operating leases in Note 18, Operating Leases to "Item 8. Financial Statements and Supplementary Data" of the 2016 Form 10-K.
In certain instances, also in connection with dealership dispositions, the Company’s subsidiaries assign to the dealership purchaser the subsidiaries’ interests in any real property leases associated with such dealerships. The Company’s subsidiaries may retain secondary responsibility for the performance of certain obligations under such leases to the extent that the assignee does not perform, if such performance is required following the assignment of the lease. Additionally, the Company and its

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

subsidiaries may remain subject to the terms of a guaranty made by the Company and its subsidiaries in connection with such leases. In these circumstances, the Company generally has indemnification rights against the assignee in the event of non-performance under these leases, as well as certain defenses. The Company and its subsidiaries also may be called on to perform other obligations under these leases, such as environmental remediation of the leased premises or repair of the leased premises upon termination of the lease. However, potential environmental liabilities are generally known at the time of the sale of the dealership if not previously remediated. The Company does not have any known material environmental commitments or contingencies and presently has no reason to believe that it or its subsidiaries will be called on to so perform. Although not estimated to be material, the Company’s exposure under these leases is difficult to estimate and there can be no assurance that any performance of the Company or its subsidiaries required under these leases would not have a material adverse effect on the Company’s business, financial condition, or cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

12. INTANGIBLE FRANCHISE RIGHTS AND GOODWILL
The following is a roll-forward of the Company’s intangible franchise rights and goodwill accounts by reportable segment:
 
Intangible Franchise Rights
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
(In thousands)
 
BALANCE, December 31, 2016
$
260,534

 
$
17,337

 
$
7,005

 
$
284,876

 
Currency translation

 
200

 
235

 
435

 
BALANCE, March 31, 2017
$
260,534

 
$
17,537

 
$
7,240

 
$
285,311

 
 
Goodwill
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
(In thousands)
 
BALANCE, December 31, 2016
$
805,935

 
$
57,054

 
$
13,774

 
$
876,763

(1) 
Additions through acquisitions

 

 
95

 
95

 
Disposals

 

 
(933
)
 
(933
)
 
Currency translation

 
659

 
462

 
1,121

 
Tax adjustments
(6
)
 

 

 
(6
)
 
BALANCE, March 31, 2017
$
805,929

 
$
57,713

 
$
13,398

 
$
877,040

(1) 
(1) Net of accumulated impairment of $97.8 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in the balances of each component of accumulated other comprehensive loss for the three months ended March 31, 2017 and 2016 were as follows: 
 
 
Three Months Ended March 31, 2017
 
 
Accumulated foreign currency translation loss
 
Accumulated loss on interest rate swaps
 
Total
 
 
(In thousands)
Balance, December 31, 2016
 
$
(137,613
)
 
$
(9,331
)
 
$
(146,944
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 

Pre-tax
 
4,137

 
624

 
4,761

Tax effect
 

 
(234
)
 
(234
)
Amounts reclassified from accumulated other comprehensive income to:
 
 
 
 
 


Floorplan interest expense
 

 
2,948

 
2,948

Other interest expense
 

 
681

 
681

Tax effect
 

 
(1,361
)
 
(1,361
)
Net current period other comprehensive income
 
4,137

 
2,658

 
6,795

Balance, March 31, 2017
 
$
(133,476
)
 
$
(6,673
)
 
$
(140,149
)
 
 
Three Months Ended March 31, 2016
 
 
Accumulated foreign currency translation loss
 
Accumulated loss on interest rate swaps
 
Total
 
 
(In thousands)
Balance, December 31, 2015
 
$
(118,532
)
 
$
(19,452
)
 
$
(137,984
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Pre-tax
 
2,155

 
(17,826
)
 
(15,671
)
Tax effect
 

 
6,685

 
6,685

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

 
2,758

 
2,758

Other interest expense
 

 
625

 
625

Tax effect
 

 
(1,269
)
 
(1,269
)
Net current period other comprehensive income (loss)
 
2,155

 
(9,027
)
 
(6,872
)
Balance, March 31, 2016
 
$
(116,377
)
 
$
(28,479
)
 
$
(144,856
)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

14. SEGMENT INFORMATION
As of March 31, 2017, the Company had three reportable segments: (1) the U.S., (2) the U.K., and (3) Brazil. Each of the reportable segments is comprised of retail automotive franchises, which sell new and used cars and light trucks; arranges related vehicle financing; sells service and insurance contracts; provides automotive maintenance and repair services; and sells vehicle parts. The vast majority of the Company's corporate activities are associated with the operations of the U.S. operating segments and therefore the corporate financial results are included within the U.S. reportable segment.
Reportable segment revenue, income (loss) before income taxes, (provision) benefit for income taxes and net income (loss) were as follows for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31, 2017
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Total revenues
$
1,967,719

 
$
450,327

 
$
100,783

 
$
2,518,829

Income before income taxes
45,606

 
5,381

 
209

 
51,196

Provision for income taxes
(16,347
)
 
(870
)
 
(40
)
 
(17,257
)
Net income (1)
29,259

 
4,511

 
169

 
33,939

(1) Includes the following, after tax: gain on legal settlement with an OEM of $1.1 million in the U.S.
 
Three Months Ended March 31, 2016
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Total revenues
$
2,081,632

 
$
431,896

 
$
94,827

 
$
2,608,355

Income (loss) before income taxes
50,204

 
5,520

 
(1,622
)
 
54,102

(Provision) benefit for income taxes
(18,830
)
 
(1,170
)
 
189

 
(19,811
)
Net income (loss) (1)
31,374

 
4,350

 
(1,433
)
 
34,291

(1) Includes the following, after tax: loss due to catastrophic events of $1.7 million in the U.S.
Reportable segment total assets as of March 31, 2017 and December 31, 2016, were as follows:
 
As of March 31, 2017
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Total assets
$
3,867,151

 
$
496,158

 
$
126,054

 
$
4,489,363

 
As of December 31, 2016
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Total assets
$
3,855,701

 
$
482,937

 
$
123,265

 
$
4,461,903




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

15. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables include condensed consolidating financial information as of March 31, 2017 and December 31, 2016, and for the three months ended March 31, 2017 and 2016, for Group 1 Automotive, Inc.’s (as issuer of the 5.00% Notes), guarantor subsidiaries and non-guarantor subsidiaries (representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, statement of operations and cash flows items that are not necessarily indicative of the financial position, results of operations or cash flows of these entities had they operated on a stand-alone basis. In accordance with Rule 3-10 of Regulation S-X, condensed consolidated financial statements of non-guarantors are not required. The Company has no assets or operations independent of its subsidiaries. Obligations under the 5.00% Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by the Company’s current 100%-owned domestic subsidiaries and certain of the Company’s future domestic subsidiaries, with the exception of the Company’s “minor” subsidiaries (as defined by Rule 3-10 of Regulation S-X). There are no significant restrictions on the ability of the Company or subsidiary guarantors for the Company to obtain funds from its subsidiary guarantors by dividend or loan. None of the subsidiary guarantors’ assets represent restricted assets pursuant to SEC Rule 4-08(e)(3) of Regulation S-X.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2017
 
Group 1 Automotive, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elimination
 
Total Company
 
(In thousands)
ASSETS
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
5,676

 
$
28,094

 
$

 
$
33,770

Contracts-in-transit and vehicle receivables, net

 
159,067

 
54,705

 

 
213,772

Accounts and notes receivable, net

 
116,180

 
36,614

 

 
152,794

Intercompany accounts receivable

 
10,696

 

 
(10,696
)
 

Inventories, net

 
1,487,326

 
242,199

 

 
1,729,525

Prepaid expenses and other current assets
422

 
6,541

 
16,253

 

 
23,216

Total current assets
422

 
1,785,486

 
377,865

 
(10,696
)
 
2,153,077

PROPERTY AND EQUIPMENT, net

 
1,013,927

 
138,468

 

 
1,152,395

GOODWILL

 
805,930

 
71,110

 

 
877,040

INTANGIBLE FRANCHISE RIGHTS

 
260,534

 
24,777

 

 
285,311

INVESTMENT IN SUBSIDIARIES
2,744,837

 

 

 
(2,744,837
)
 

OTHER ASSETS

 
16,481

 
5,059

 

 
21,540

Total assets
$
2,745,259

 
$
3,882,358

 
$
617,279

 
$
(2,755,533
)
 
$
4,489,363

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Floorplan notes payable — credit facility and other
$

 
$
1,163,756

 
$
6,627

 
$

 
$
1,170,383

Offset account related to floorplan notes payable - credit facility

 
(97,149
)
 

 

 
(97,149
)
Floorplan notes payable — manufacturer affiliates

 
292,075

 
100,313

 

 
392,388

Offset account related to floorplan notes payable - manufacturer affiliates

 
(26,750
)
 

 

 
(26,750
)
Current maturities of long-term debt and short-term financing

 
34,021

 
12,319

 

 
46,340

Current liabilities from interest rate risk management activities

 
2,597

 

 

 
2,597

Accounts payable

 
182,035

 
165,711

 

 
347,746

Intercompany accounts payable
800,296

 

 
10,696

 
(810,992
)
 

Accrued expenses

 
161,280

 
24,440

 

 
185,720

Total current liabilities
800,296

 
1,711,865

 
320,106

 
(810,992
)
 
2,021,275

LONG-TERM DEBT, net of current maturities
836,587

 
329,494

 
58,637

 

 
1,224,718

LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES

 
17,762

 

 

 
17,762

DEFERRED INCOME TAXES AND OTHER LIABILITIES
(735
)
 
251,719

 
5,664

 

 
256,648

STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 

Group 1 stockholders’ equity
1,109,111

 
2,371,814

 
232,872

 
(2,744,837
)
 
968,960

Intercompany note receivable

 
(800,296
)
 

 
800,296

 

Total stockholders’ equity
1,109,111

 
1,571,518

 
232,872

 
(1,944,541
)
 
968,960

Total liabilities and stockholders’ equity
$
2,745,259

 
$
3,882,358

 
$
617,279

 
$
(2,755,533
)
 
$
4,489,363


26

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


CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2016
 
Group 1 Automotive, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elimination
 
Total Company
 
(In thousands)
ASSETS
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
8,039

 
$
12,953

 
$

 
$
20,992

Contracts-in-transit and vehicle receivables, net

 
241,097

 
28,411

 

 
269,508

Accounts and notes receivable, net

 
140,985

 
32,379

 

 
173,364

Intercompany accounts receivable

 
8,929

 

 
(8,929
)
 

Inventories, net

 
1,386,871

 
264,944

 

 
1,651,815

Prepaid expenses and other current assets
516

 
7,188

 
27,204

 

 
34,908

Total current assets
516

 
1,793,109

 
365,891

 
(8,929
)
 
2,150,587

PROPERTY AND EQUIPMENT, net

 
990,084

 
135,799

 

 
1,125,883

GOODWILL

 
805,935

 
70,828

 

 
876,763

INTANGIBLE FRANCHISE RIGHTS

 
260,534

 
24,342

 

 
284,876

INVESTMENT IN SUBSIDIARIES
2,787,328

 

 

 
(2,787,328
)
 

OTHER ASSETS

 
19,313

 
4,481

 

 
23,794

Total assets
$
2,787,844

 
$
3,868,975

 
$
601,341

 
$
(2,796,257
)
 
$
4,461,903

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
Floorplan notes payable — credit facility and other
$

 
$
1,131,718

 
$
4,936

 
$

 
$
1,136,654

Offset account related to floorplan notes payable - credit facility

 
(59,626
)
 

 

 
(59,626
)
Floorplan notes payable — manufacturer affiliates

 
281,747

 
110,914

 

 
392,661

Offset account related to floorplan notes payable - manufacturer affiliates

 
(25,500
)
 

 

 
(25,500
)
Current maturities of long-term debt and short-term financing

 
44,659

 
27,760

 

 
72,419

Current liabilities from interest rate risk management activities


 
3,941

 

 

 
3,941

Accounts payable

 
211,050

 
145,049

 

 
356,099

Intercompany accounts payable
875,662

 

 
8,929

 
(884,591
)
 

Accrued expenses

 
156,648

 
19,821

 

 
176,469

Total current liabilities
875,662

 
1,744,637

 
317,409

 
(884,591
)
 
2,053,117

LONG-TERM DEBT, net of current maturities
836,056

 
324,540

 
52,213

 

 
1,212,809

LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES

 
20,470

 

 

 
20,470

DEFERRED INCOME TAXES AND OTHER LIABILITIES
(1,020
)
 
240,348

 
5,979

 

 
245,307

STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
Group 1 stockholders’ equity
1,077,146

 
2,414,642

 
225,740

 
(2,787,328
)
 
930,200

Intercompany note receivable

 
(875,662
)
 

 
875,662

 

Total stockholders’ equity
1,077,146

 
1,538,980

 
225,740

 
(1,911,666
)
 
930,200

Total liabilities and stockholders’ equity
$
2,787,844

 
$
3,868,975

 
$
601,341

 
$
(2,796,257
)
 
$
4,461,903


27

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


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2017
 
Group 1 Automotive, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elimination
 
Total Company
 
(In thousands)
REVENUES:
$

 
$
1,967,718

 
$
551,111

 
$

 
$
2,518,829

COST OF SALES:

 
1,647,123

 
488,184

 

 
2,135,307

GROSS PROFIT

 
320,595

 
62,927

 

 
383,522

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1,966

 
232,611

 
55,202

 

 
289,779

DEPRECIATION AND AMORTIZATION EXPENSE

 
11,567

 
2,039

 

 
13,606

INCOME (LOSS) FROM OPERATIONS
(1,966
)
 
76,417

 
5,686

 

 
80,137

OTHER EXPENSE:
 
 
 
 
 
 
 
 


Floorplan interest expense

 
(10,878
)
 
(1,064
)
 

 
(11,942
)
Other interest expense, net

 
(16,274
)
 
(725
)
 

 
(16,999
)
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES
(1,966
)
 
49,265

 
3,897

 

 
51,196

BENEFIT (PROVISION) FOR INCOME TAXES
737

 
(17,084
)
 
(910
)
 

 
(17,257
)
EQUITY IN EARNINGS OF SUBSIDIARIES
35,167

 

 

 
(35,167
)
 

NET INCOME (LOSS)
$
33,938

 
$
32,181

 
$
2,987

 
$
(35,167
)
 
$
33,939

COMPREHENSIVE INCOME

 
2,658

 
4,137

 

 
6,795

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO PARENT
$
33,938

 
$
34,839

 
$
7,124

 
$
(35,167
)
 
$
40,734






28

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


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2016
 
Group 1 Automotive, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elimination
 
Total Company
 
(In thousands)
REVENUES:
$

 
$
2,081,633

 
$
526,722

 
$

 
$
2,608,355

COST OF SALES:

 
1,748,923

 
470,331

 

 
2,219,254

GROSS PROFIT

 
332,710

 
56,391