10-Q 1 a20182ndquarterform10-q.htm 2Q2018 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 June 30, 2018
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 July 31, 2018, the registrant had 19,911,000 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 
 
 
June 30, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
 
(In thousands, except per share amounts)
ASSETS
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
41,575

 
$
28,787

Contracts-in-transit and vehicle receivables, net
 
249,706

 
306,433

Accounts and notes receivable, net
 
178,339

 
188,611

Inventories, net
 
1,721,249

 
1,763,293

Prepaid expenses and other current assets
 
80,957

 
42,062

Total current assets
 
2,271,826

 
2,329,186

PROPERTY AND EQUIPMENT, net
 
1,348,521

 
1,318,959

GOODWILL
 
945,835

 
913,034

INTANGIBLE FRANCHISE RIGHTS
 
287,366

 
285,632

OTHER ASSETS
 
33,194

 
24,254

Total assets
 
$
4,886,742

 
$
4,871,065

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
 
 
 
 
Floorplan notes payable - credit facility and other
 
$
1,147,892

 
$
1,240,695

Offset account related to floorplan notes payable - credit facility
 
(119,562
)
 
(86,547
)
Floorplan notes payable - manufacturer affiliates
 
404,233

 
397,183

Offset account related to floorplan notes payable - manufacturer affiliates
 
(24,500
)
 
(22,500
)
Current maturities of long-term debt and short-term financing
 
76,412

 
77,609

Current liabilities from interest rate risk management activities
 
682

 
1,996

Accounts payable
 
442,577

 
412,981

Accrued expenses
 
189,027

 
177,070

Total current liabilities
 
2,116,761

 
2,198,487

LONG-TERM DEBT, net of current maturities
 
1,357,998

 
1,318,184

DEFERRED INCOME TAXES
 
138,478

 
124,404

LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES
 
1,597

 
8,583

OTHER LIABILITIES
 
99,296

 
97,125

STOCKHOLDERS’ EQUITY:
 
 
 
 
Common stock, $0.01 par value, 50,000 shares authorized; 25,511 and 25,515 issued, respectively
 
255

 
255

Additional paid-in capital
 
288,492

 
291,461

Retained earnings
 
1,339,185

 
1,246,323

Accumulated other comprehensive loss
 
(126,358
)
 
(123,226
)
Treasury stock, at cost; 5,150 and 4,617 shares, respectively
 
(328,962
)
 
(290,531
)
Total stockholders’ equity
 
1,172,612

 
1,124,282

Total liabilities and stockholders’ equity
 
$
4,886,742

 
$
4,871,065


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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited, in thousands, except per share amounts)
REVENUES:
 
 
 
 
 
 
 
 
New vehicle retail sales
 
$
1,555,570

 
$
1,448,768

 
$
3,069,160

 
$
2,785,981

Used vehicle retail sales
 
821,853

 
685,949

 
1,602,423

 
1,346,876

Used vehicle wholesale sales
 
92,854

 
99,377

 
196,883

 
203,534

Parts and service sales
 
358,129

 
331,631

 
707,644

 
651,329

Finance, insurance and other, net
 
115,056

 
106,470

 
227,378

 
203,304

Total revenues
 
2,943,462

 
2,672,195

 
5,803,488

 
5,191,024

COST OF SALES:
 
 
 
 
 
 
 
 
New vehicle retail sales
 
1,478,988

 
1,373,857

 
2,917,151

 
2,641,843

Used vehicle retail sales
 
770,639

 
641,036

 
1,507,714

 
1,256,958

Used vehicle wholesale sales
 
92,613

 
99,644

 
194,987

 
203,701

Parts and service sales
 
163,059

 
152,766

 
325,710

 
300,108

Total cost of sales
 
2,505,299

 
2,267,303

 
4,945,562

 
4,402,610

GROSS PROFIT
 
438,163

 
404,892

 
857,926

 
788,414

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
308,092

 
298,568

 
632,439

 
588,347

DEPRECIATION AND AMORTIZATION EXPENSE
 
16,638

 
14,093

 
32,980

 
27,699

ASSET IMPAIRMENTS
 
4,268

 

 
4,268

 

INCOME FROM OPERATIONS
 
109,165

 
92,231

 
188,239

 
172,368

OTHER EXPENSE:
 
 
 
 
 
 
 
 
Floorplan interest expense
 
(14,563
)
 
(13,226
)
 
(28,650
)
 
(25,168
)
Other interest expense, net
 
(19,414
)
 
(17,315
)
 
(38,234
)
 
(34,314
)
INCOME BEFORE INCOME TAXES
 
75,188

 
61,690

 
121,355

 
112,886

PROVISION FOR INCOME TAXES
 
(18,725
)
 
(22,557
)
 
(29,078
)
 
(39,814
)
NET INCOME
 
$
56,463

 
$
39,133

 
$
92,277

 
$
73,072

BASIC EARNINGS PER SHARE
 
$
2.72

 
$
1.84

 
$
4.42

 
$
3.42

Weighted average common shares outstanding
 
20,036

 
20,516

 
20,167

 
20,604

DILUTED EARNINGS PER SHARE
 
$
2.72

 
$
1.84

 
$
4.42

 
$
3.42

Weighted average common shares outstanding
 
20,046

 
20,522

 
20,176

 
20,609

CASH DIVIDENDS PER COMMON SHARE
 
$
0.26

 
$
0.24

 
$
0.52

 
$
0.48



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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited, in thousands)
NET INCOME
 
$
56,463

 
$
39,133

 
$
92,277

 
$
73,072

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(24,186
)
 
4,462

 
(16,315
)
 
8,600

Net unrealized gain (loss) on interest rate risk management activities:
 
 
 
 
 
 
 
 
Unrealized gain (loss) arising during the period, net of tax benefit (provision) of ($1,078), $1,542, ($3,570), and $1,308, respectively
 
3,414

 
(2,570
)
 
11,305

 
(2,180
)
Reclassification adjustment for realized gain on interest rate swap termination included in SG&A, net of tax provision of $220, $0, $220, and $0, respectively
 
(698
)
 

 
(698
)
 

Reclassification adjustment for loss included in interest expense, net of tax benefit of $336, $1,193, $813, and $2,554, respectively
 
1,062

 
1,989

 
2,576

 
4,256

Unrealized gain (loss) on interest rate risk management activities, net of tax
 
3,778

 
(581
)
 
13,183

 
2,076

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
 
(20,408
)
 
3,881

 
(3,132
)
 
10,676

COMPREHENSIVE INCOME
 
$
36,055

 
$
43,014

 
$
89,145

 
$
83,748



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, 2017
 
25,515

 
$
255

 
$
291,461

 
$
1,246,323

 
$
(123,226
)
 
$
(290,531
)
 
$
1,124,282

Net income
 

 

 

 
92,277

 

 

 
92,277

Other comprehensive income, net
 

 

 

 

 
(3,132
)
 

 
(3,132
)
Purchases of treasury stock
 

 

 

 

 

 
(51,276
)
 
(51,276
)
Net issuance of treasury shares to employee stock compensation plans
 
(3
)
 

 
(12,833
)
 

 

 
12,845

 
12

Stock-based compensation
 

 

 
9,864

 

 

 

 
9,864

Cash dividends, net of estimated forfeitures relative to participating securities
 

 

 

 
(10,812
)
 

 

 
(10,812
)
Impact of ASC 606 cumulative adjustment
 

 

 

 
11,397

 

 

 
11,397

BALANCE, June 30, 2018
 
25,512

 
$
255

 
$
288,492

 
$
1,339,185

 
$
(126,358
)
 
$
(328,962
)
 
$
1,172,612



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


GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
 
(Unaudited, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
92,277

 
$
73,072

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
32,980

 
27,699

Deferred income taxes
 
5,591

 
11,095

Asset impairments
 
4,268

 

Stock-based compensation
 
9,891

 
10,459

Amortization of debt discount and issue costs
 
1,526

 
1,849

Gain on disposition of assets
 
(20,686
)
 
(314
)
Other
 
65

 
(676
)
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Accounts payable and accrued expenses
 
26,121

 
(28,480
)
Accounts and notes receivable
 
21,185

 
13,582

Inventories
 
47,272

 
(142,165
)
Contracts-in-transit and vehicle receivables
 
56,725

 
53,405

Prepaid expenses and other assets
 
(9,842
)
 
(4,900
)
Floorplan notes payable - manufacturer affiliates
 
(3,535
)
 
37,779

Deferred revenues
 
(732
)
 
(243
)
Net cash provided by operating activities
 
263,106

 
52,162

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Cash paid in acquisitions, net of cash received
 
(74,865
)
 
(95
)
Proceeds from disposition of franchises, property and equipment
 
75,923

 
2,582

Purchases of property and equipment, including real estate
 
(88,230
)
 
(67,266
)
Deposits for real estate and dealership acquisitions
 
(655
)
 
(57,099
)
Other
 

 
2,074

Net cash used in investing activities
 
(87,827
)
 
(119,804
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings on credit facility - floorplan line and other
 
3,323,798

 
3,369,580

Repayments on credit facility - floorplan line and other
 
(3,461,494
)
 
(3,288,367
)
Borrowings on credit facility - acquisition line
 
98,596

 
47,509

Repayments on credit facility - acquisition line
 
(84,884
)
 
(15,000
)
Borrowings on other debt
 
111,142

 
5,137

Principal payments on other debt
 
(75,784
)
 
(542
)
Borrowings on debt related to real estate, net of debt issue costs
 
54,711

 
12,901

Principal payments on debt related to real estate
 
(63,368
)
 
(13,897
)
Employee stock purchase plan purchases, net of employee tax withholdings
 
11

 
2,487

Proceeds from termination of mortgage swap
 
918

 

Repurchases of common stock, amounts based on settlement date
 
(51,276
)
 
(39,025
)
Dividends paid
 
(10,836
)
 
(10,200
)
Net cash provided by (used in) financing activities
 
(158,466
)
 
70,583

EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
(2,812
)
 
117

NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
14,001

 
3,058

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period
 
29,631

 
24,246

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period
 
$
43,632

 
$
27,304

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Purchases of property and equipment, including real estate, accrued in accounts payable
 
$
8,630

 
$
11,105


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

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


1INTERIM 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 15 states in the United States of America (“U.S.”), 32 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 June 30, 2018, the Company’s U.S. retail network consisted of 116 dealerships within the following states: Alabama, California, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, Oklahoma, South Carolina, and Texas. The President of U.S. Operations reports directly to the Company's Chief Executive Officer and is responsible for the overall performance of the U.S. region, as well as for overseeing the market directors and dealership general managers. In addition, as of June 30, 2018, the Company had two international regions: (a) the U.K., which consisted of 47 dealerships and (b) Brazil, which consisted of 17 dealerships. The operations of the Company's international regions are structured similar to the U.S. region.
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 in Brazil is generally the weakest, driven by more consumer vacations and activities associated with Carnival. Other factors unrelated to seasonality, such as changes in economic conditions, manufacturer incentive programs, seasonal weather events and changes in currency exchange rates may exaggerate seasonal or cause counter-seasonal fluctuations in the Company's revenues and operating income. 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.
Basis of Presentation
The accompanying unaudited condensed Consolidated Financial Statements and footnotes thereto that include financial information as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 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 and are unaudited. 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. All business acquisitions completed during the periods presented have been accounted for by applying the acquisition 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.
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, 2017 (“2017 Form 10-K”).
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 15, “Segment Information”, for additional details regarding the Company's reportable segments.

8

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

Statements of Cash Flows
With respect to all new vehicle floorplan borrowings, the manufacturers of the vehicles draft the Company’s credit facilities directly with no cash flow to or from the Company. With respect to borrowings for used vehicle financing in the U.S., the Company finances up to 85% of the value of the used vehicle inventory and the funds flow directly to the Company from the lender. In the U.K. and Brazil, the Company chooses which used vehicles to finance and the borrowings flow directly to the Company from the lender. All borrowings from, and repayments to, lenders affiliated with the vehicle manufacturers (excluding the cash flows from or to manufacturer affiliated lenders participating in the Company’s syndicated lending group under the Revolving Credit Facility) are presented within Cash Flows from Operating Activities on the Consolidated Statements of Cash Flows. All borrowings from, and repayments to, the syndicated lending group under the Revolving Credit Facility (as defined in Note 9, “Credit Facilities”) (including the cash flows from or to manufacturer affiliated lenders participating in the facility), as well as borrowing from, and repayments to, the Company’s other credit facilities, are presented within Cash Flows from Financing Activities.
Cash paid for interest, including the monthly settlement of the Company’s interest rate derivatives, was $62.9 million and $57.1 million for the six months ended June 30, 2018 and 2017, respectively. Cash paid for taxes, net of refunds, was $12.8 million for the six months ended June 30, 2018. Cash paid for taxes, net of refunds, was $28.6 million for the six months ended June 30, 2017.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets to the total of the same amounts shown in the Consolidated Statements of Cash Flows. See Note 11, “Fair Value Measurements”, for additional details regarding the Company's restricted cash balances.
 
 
June 30, 2018
 
December 31, 2017
 
 
(In thousands)
 
 
 
 
 
Cash and cash equivalents
 
$
41,575

 
$
28,787

Restricted cash, included in other assets
 
2,057

 
844

Total cash, cash equivalents, and restricted cash
 
$
43,632

 
$
29,631


Recently Adopted Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted ASU 2016-15 during the first quarter of 2018. The adoption of this ASU did not materially impact its net income, retained earnings, consolidated financial statements, results of operations or cash flows.     
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 Company adopted ASU 2016-18 during the first quarter of 2018. The adoption of this ASU did not materially impact its consolidated financial statements, results of operations or cash flows.
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. The Company adopted ASU 2017-01 during the first quarter of 2018. The adoption of this ASU did not materially impact its consolidated financial statements or results of operations.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this update provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance of Topic 718 to a change to the terms or conditions of a share-based payment award. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: 1) the award's fair value (or calculated value or intrinsic value, if those measurement methods are used), 2) the award's vesting conditions, and 3) the award's classification as an equity or liability instrument. The Company adopted ASU 2017-09 during the first quarter of 2018. The adoption of this ASU did not impact its consolidated financial statements or results of operations.

9

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


Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606)(“Topic 606”), and all subsequent amendments issued thereafter, that amends the accounting guidance on revenue recognition. The Company adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018, with a cumulative-effect adjustment to retained earnings recognized as of the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies under Topic 605.
The Company identified its material revenue streams to be the sale of new and used vehicles; arrangement of associated vehicle financing and the sale of service and other insurance contracts; the performance of vehicle maintenance and repair services; and the sale of vehicle parts. The Company concluded that no changes to the timing of revenue recognition for the sale of new and used vehicles, as well as vehicle parts are necessary. As it relates to the performance of vehicle maintenance and repair services recognized as a part of Parts and service sales in the accompanying Consolidated Statements of Operations, the Company identified a change in its accounting policies and procedures. Through December 31, 2017, the Company recognized revenue once the maintenance or repair services were completed and the vehicle was delivered to the customer. Under Topic 606, the Company determined that it has an enforceable right to payment during the course of the work being performed in certain jurisdictions and, thus, the Company changed its policy under Topic 606 for those jurisdictions to recognize revenue over time as the maintenance and repair services are performed. With regards to the revenue generated from the arrangement of vehicle financing and the sale of service and other insurance contracts recognized as a part of Finance, insurance and other, net in the accompanying Consolidated Statements of Operations, the Company also identified a change in the Company’s accounting policies and procedures. Generally, the Company receives an upfront commission for these transactions from the finance or insurance provider and recognizes the associated revenue when the contract is executed. In some cases, the Company also earns retrospective commission income by participating in the future profitability of the portfolio of contracts sold by the Company. Through December 31, 2017, the Company’s accounting policy was to recognize upfront commission income earned when the contract was executed and the amount was determinable, and to recognize retrospective commission income as the amounts were determined and realized. The Company concluded that this retrospective commission income represents variable consideration for which the Company’s performance obligation is satisfied when the finance or insurance product contract is executed with the end user. Under the new standard, an estimate of variable consideration, subject to a constraint, is to be included in the transaction price and recognized when or as the performance obligation is satisfied. Therefore, the Company’s accounting policy changed under Topic 606 such that the Company will estimate the amount of future earnings that it will realize from the ultimate profitability of the portfolio of contracts subject to a retrospective commission and recognize such estimate, subject to any constraint in the estimate, upfront when the contract is executed with the end user. The Company's estimates of the amount of variable consideration to be ultimately realized will be reassessed at the end of each reporting period and changes in those estimates will be adjusted through revenue.
As a result of adopting Topic 606 and implementing the changes aforementioned, the Company recognized net, after-tax cumulative effect adjustments to increase retained earnings as of the date of adoption for maintenance and repair services of $4.8 million and for the arrangement of associated vehicle financing and the sale of service and other insurance contracts of $6.6 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as of January 1, 2018 for the adoption of Topic 606 were as follows:
 
 
January 1, 2018
 
 
Balance at
December 31, 2017
 
Adjustment due to
Topic
606
 

Balance at
January 1, 2018
Balance Sheet
 
(In thousands)
Assets
 
 
 
 
 
 
Accounts and notes receivable, net
 
$
188,611

 
$
11,623

 
$
200,234

Inventories, net
 
1,763,293

 
(3,660
)
 
1,759,633

Prepaid expense and other current assets
 
42,062

 
8,683

 
50,745

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Accounts payable
 
$
412,981

 
$
1,756

 
$
414,737

Deferred income taxes
 
124,404

 
3,493

 
127,897

 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
 
Retained earnings
 
$
1,246,323

 
$
11,397

 
$
1,257,720



The impact of applying Topic 606 for the three and six months ended June 30, 2018 was as follows:
 
 
Three Months Ended June 30, 2018
 
 
Six Months Ended June 30, 2018
 
 
As
Reported
 
Balances Without Adoption of Topic
606
 
Effect of Change
Higher / (Lower)
 
 
As
Reported
 
Balances Without Adoption of Topic
606
 
Effect of Change
Higher / (Lower)
Income Statement
 
(In thousands)
 
 
(In thousands)
Revenues
 
 
 
 
 
Parts and service sales
 
$
358,129

 
$
356,580

 
$
1,549

 
 
$
707,644

 
$
707,572

 
$
72

Finance, insurance and other, net
 
115,056

 
116,074

 
(1,018
)
 
 
227,378

 
228,196

 
(818
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
 
 
Parts and service sales
 
$
163,059

 
$
162,695

 
$
364

 
 
$
325,710

 
$
325,811

 
$
(101
)
Selling, general and administrative expenses
 
308,092

 
307,808

 
284

 
 
632,439

 
632,351

 
88

Provision for income taxes
 
18,725

 
18,776

 
(51
)
 
 
29,078

 
29,280

 
(202
)
Net income
 
$
56,463

 
$
56,529

 
$
(66
)
 
 
$
92,277

 
$
92,808

 
$
(531
)



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

The impact of applying Topic 606 at June 30, 2018 was as follows:
 
 
June 30, 2018
 
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher / (Lower)
Balance Sheet
 
(In thousands)
Assets
 
 
 
 
 
 
Accounts and notes receivable, net
 
$
178,339

 
$
166,795

 
$
11,544

Inventories, net
 
1,721,249

 
1,724,761

 
(3,512
)
Prepaid expense and other current assets
 
80,957

 
73,091

 
7,866

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Accounts payable
 
$
442,577

 
$
440,763

 
$
1,814

Deferred income taxes
 
138,478

 
135,199

 
3,279

 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
 
Retained earnings and accumulated other comprehensive income
 
$
1,339,185

 
$
1,328,380

 
$
10,805


Refer to Note 2, “Revenue” for further discussion of the Company’s significant revenue streams.

Recently Issued Accounting Pronouncements
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 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, but does not expect the impact of the amendments in this ASU to be significant.     
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 does not expect the impact of the adoption of the ASU to have a material impact on its consolidated financial statements, results of operations or cash flows.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 715): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases the administrative burden of hedge documentation requirements and assessing hedge effectiveness. The amendments to cash flow and net investment hedge relationships should be

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

applied using a modified retrospective approach while the presentation and disclosure requirements are applied prospectively, effective for fiscal years beginning after December 15, 2018, with early adoption permitted. 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, but does not expect the impact of the amendments in this ASU to be significant.     
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update will permit entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax legislation enacted by the U.S. government on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), to retained earnings. The FASB gave entities the option to reclassify these amounts rather than require reclassification and the option to apply the guidance retrospectively or in the period of adoption. The amendments in this update are effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. 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, but does not expect the impact of the amendments in this ASU to be significant.

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

2. REVENUE
As discussed in Note 1, “Interim Financial Information”, the Company’s material revenue streams are the sale of new and used vehicles; arrangement of associated vehicle financing and the sale of service and other insurance contracts; the performance of vehicle maintenance and repair services (including collision restoration); and the sale of vehicle parts. The following table presents the Company’s revenues disaggregated by revenue source (in thousands):



 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017 (1)
 
2018
 
2017 (1)
 
 
(In thousands)
REVENUES:
 
 
 
 
 
 
 
 
New vehicle retail sales
 
$
1,555,570

 
$
1,448,768

 
$
3,069,160

 
$
2,785,981

Used vehicle retail sales
 
821,853

 
685,949

 
1,602,423

 
1,346,876

Used vehicle wholesale sales
 
92,854

 
99,377

 
196,883

 
203,534

Total new and used vehicle sales
 
2,470,277

 
2,234,094

 
4,868,466

 
4,336,391

 
 
 
 
 
 
 
 
 
Vehicle parts sales
 
85,356

 
78,430

 
170,552

 
153,095

Maintenance and repair sales
 
272,773

 
253,201

 
537,092

 
498,234

Total parts and service sales
 
358,129

 
331,631

 
707,644

 
651,329

 
 
 
 
 
 
 
 
 
Finance, insurance and other, net
 
115,056

 
106,470

 
227,378

 
203,304

Total revenues
 
$
2,943,462

 
$
2,672,195

 
$
5,803,488

 
$
5,191,024

(1) As described in Note 1, “Interim Financial Information”, prior period amounts have not been adjusted under the modified retrospective approach.

The following table presents the Company's revenues disaggregated by its geographical segments:
 
 
Three Months Ended June 30, 2018
 
 
Six Months Ended June 30, 2018
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
(In thousands)
 
 
(In thousands)
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle retail sales
 
$
1,146,882

 
$
338,635

 
$
70,053

 
$
1,555,570

 
 
$
2,236,835

 
$
693,039

 
$
139,286

 
$
3,069,160

Used vehicle retail sales
 
592,007

 
208,108

 
21,738

 
821,853

 
 
1,155,837

 
400,657

 
45,929

 
1,602,423

Used vehicle wholesale sales
 
42,781

 
46,527

 
3,546

 
92,854

 
 
96,783

 
92,712

 
7,388

 
196,883

Total new and used vehicle sales
 
1,781,670

 
593,270

 
95,337

 
2,470,277

 
 
3,489,455

 
1,186,408

 
192,603

 
4,868,466

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle parts sales
 
73,673

 
10,476

 
1,207

 
85,356

 
 
148,028

 
19,991

 
2,533

 
170,552

Maintenance and repair sales
 
215,216

 
47,520

 
10,037

 
272,773

 
 
425,375

 
91,146

 
20,571

 
537,092

Total parts and service sales
 
288,889

 
57,996

 
11,244

 
358,129

 
 
573,403

 
111,137

 
23,104

 
707,644

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and other, net
 
97,442

 
15,617

 
1,997

 
115,056

 
 
193,629

 
29,880

 
3,869

 
227,378

Total revenues
 
$
2,168,001

 
$
666,883

 
$
108,578

 
$
2,943,462

 
 
$
4,256,487

 
$
1,327,425

 
$
219,576

 
$
5,803,488



14

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

 
 
Three Months Ended June 30, 2017 (1)
 
 
Six Months Ended June 30, 2017 (1)
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
(In thousands)
 
 
(In thousands)
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle retail sales
 
$
1,143,771

 
$
231,415

 
$
73,582

 
$
1,448,768

 
 
$
2,162,020

 
$
490,055

 
$
133,906

 
$
2,785,981

Used vehicle retail sales
 
536,193

 
128,406

 
21,350

 
685,949

 
 
1,058,140

 
243,775

 
44,961

 
1,346,876

Used vehicle wholesale sales
 
66,476

 
30,448

 
2,453

 
99,377

 
 
137,021

 
60,957

 
5,556

 
203,534

Total new and used vehicle sales
 
1,746,440

 
390,269

 
97,385

 
2,234,094

 
 
3,357,181

 
794,787

 
184,423

 
4,336,391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle parts sales
 
70,853

 
6,178

 
1,399

 
78,430

 
 
137,608

 
12,458

 
3,029

 
153,095

Maintenance and repair sales
 
211,845

 
30,872

 
10,484

 
253,201

 
 
416,249

 
61,373

 
20,612

 
498,234

Total parts and service sales
 
282,698

 
37,050

 
11,883

 
331,631

 
 
553,857

 
73,831

 
23,641

 
651,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and other, net
 
94,552

 
9,784

 
2,134

 
106,470

 
 
180,371

 
18,812

 
4,121

 
203,304

Total revenues
 
$
2,123,690

 
$
437,103

 
$
111,402

 
$
2,672,195

 
 
$
4,091,409

 
$
887,430

 
$
212,185

 
$
5,191,024

(1) As described in Note 1, “Interim Financial Information”, prior period amounts have not been adjusted under the modified retrospective approach.
New and Used Vehicle Sales
Specific to the sale of new and used vehicles, the Company has a single performance obligation associated with these contracts - the delivery of the vehicle to the customer, which is the point at which transfer of control occurs. Revenue from the sale of new and used vehicles is recognized upon satisfaction of the performance obligation (i.e., delivery of the vehicle to the customer). In some cases, the Company uses a third-party auction as an agent to facilitate delivery of used vehicles to the customer. Incidental items that are immaterial in the context of the contract are accrued at the time of sale. The transaction price for new and used vehicle sales (i.e., the amount that the Company has the right to under the terms of the sales contract with the customer) is the stand-alone sales price of each individual vehicle and is generally settled within 30 days of the satisfaction of the performance obligation. In many new and used vehicle sales transactions, a portion of the consideration applied by the customer to the satisfaction of the total transaction price is a used vehicle trade-in (i.e., noncash consideration). The Company measures such noncash consideration at fair value. Revenue recognized from the sale of new and used vehicles is reflected in New vehicle retail sales, Used vehicle retail sales, and Used vehicle wholesale sales in the accompanying Consolidated Statements of Operations. With respect to the cost of freight and shipping from its dealerships to its customers, the Company’s policy is to recognize such cost in the corresponding cost of sales category. With respect to taxes assessed by governmental authorities that are imposed upon new and used vehicle sales transactions and collected by the Company from its customers, the Company’s policy is to exclude such amounts from revenues.
Vehicle Parts Sales
Related to the sale of vehicle parts, the Company has a single performance obligation associated with these contracts - the delivery of the parts to the customer, which is the point at which transfer of control occurs. Revenue from the sale of vehicle parts is recognized upon satisfaction of the performance obligation (i.e., delivery of the parts to the customer). The transaction price for vehicle parts sales (i.e., the amount that the Company has the right to under the terms of the sales contract with the customer) is the stand-alone sales price of each individual part and is generally settled within 30 days of the satisfaction of the performance obligation. Revenue recognized from the sale of vehicle parts is reflected in Parts and service sales in the accompanying Consolidated Statements of Operations. With respect to the cost of freight and shipping to its customers, the Company’s policy is to recognize such fulfillment cost in the corresponding cost of sales category. With respect to taxes assessed by governmental authorities that are imposed upon vehicle parts sales transactions and collected by the Company from its customers, the Company’s policy is to exclude such amounts from revenues.
Maintenance and Repair Services

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

As it relates to vehicle maintenance and repair services (including collision restoration), the Company has a single performance obligation associated with these contracts - the completion of the services. The Company has an enforceable right to payment in certain jurisdictions and, as such, transfers control of vehicle maintenance and repair services to its customer over time. Therefore, satisfaction of the performance obligation associated with the vehicle maintenance and repair services occurs, and the associated revenue is recognized, over time. The Company uses the input method for the measurement of progress and recognition of revenue, utilizing labor hours and parts applied to the customer vehicle to estimate the services performed for which the Company has an enforceable right to payment. The transaction price for vehicle maintenance and repair services (i.e., the amount that the Company has the right to under the terms of the service contract with the customer) is the sum total of the labor and, if applicable, vehicle parts used in the performance of the service, as well as the margin above cost charged to the customer. The transaction price is typically settled within 30 days of the satisfaction of the performance obligation, which generally occurs within a short period of time from contract inception. Revenue recognized from vehicle maintenance and repair services is reflected in Parts and service sales in the accompanying Consolidated Statements of Operations. With respect to taxes assessed by governmental authorities that are imposed upon vehicle maintenance and repair service transactions and collected by the Company from its customer, the Company’s policy is to exclude such amounts from revenues.
Arrangement of Vehicle Financing and the Sale of Service and Other Insurance Contracts
The Company receives commissions from finance and insurance providers, under the terms of its contracts with such providers, for the arrangement of vehicle financing and the sale of service and other insurance products. Within the context of the Company's contracts with the finance or insurance provider, the Company has determined that it is an agent for the finance or insurance provider and the finance or insurance provider is the Company's customer. The Company has a single performance obligation associated with these contracts for all commissions earned - the facilitation of the financing of the vehicle or sale of the insurance product. Revenue from these contracts is recognized upon satisfaction of the performance obligation, which is when the finance or insurance product contract is executed with the purchaser. The transaction price (i.e., the amount that the Company has the right to under the terms of the contract with the customer) consists of both fixed and variable consideration. With regards to the upfront commission for these contracts, the transaction price is the amount earned for each individual contract executed and is generally collected within 30 days of the satisfaction of the performance obligation. The Company may be charged back for unearned financing, insurance contract or vehicle service contract fees in the event of early termination of the contracts by customers. A reserve for future amounts estimated to be charged back is recorded, as a reduction of Finance, insurance and other revenue, net in the accompanying Consolidated Statement of Operations, based on the Company’s historical chargeback results and the termination provisions of the applicable contracts. In some cases, the Company also earns retrospective commission income by participating in the future profitability of the portfolio of product contracts sold by the Company. This consideration is variable (i.e., contingent upon the performance of the portfolio of contracts) and is generally settled over 5-7 years from the satisfaction of the performance obligation. The Company utilizes the “expected value” method to predict the amount of consideration to which the Company will be entitled, subject to constraint in the estimate. Therefore, the Company estimates the amount of future earnings that it will realize from the ultimate profitability of the portfolio and recognizes such estimate, subject to any constraint in the estimate, upfront when the product contract is executed with the end user, which is when the performance obligation is satisfied. Changes in the Company’s estimates of the amount of variable consideration to be ultimately realized are adjusted through revenue. Revenue recognized from the arrangement of vehicle financing and the sale of service and other insurance contracts is reflected in Finance, insurance and other, net in the accompanying Consolidated Statements of Operations and as a contract asset (reflected in Prepaid expenses and other current assets) in the Consolidated Balance Sheet until the right to such consideration becomes unconditional, at which time amounts due are reclassified to accounts receivable.
3ACQUISITIONS AND DISPOSITIONS
During the six months ended June 30, 2018, the Company acquired 5 dealerships in the U.K., inclusive of 8 franchises, and added one franchise. The Company also acquired one dealership in Brazil, representing one franchise. Additionally, the Company acquired 2 dealerships in the U.S., inclusive of 2 franchises. Aggregate consideration paid for these dealerships totaled $80.0 million, including the associated real estate and goodwill. Also included in the consideration paid was $5.1 million of cash received in the acquisition of the dealerships. The purchase prices have been allocated based upon the consideration paid and the estimated fair values of the assets acquired and liabilities assumed at the acquisition dates. The allocation of the purchase prices is preliminary and based on estimates and assumptions that are subject to change within the purchase price allocation periods (generally one year from the respective acquisition date). In addition, during the six months ended June 30, 2018, the Company disposed of one dealership in the U.S., representing two franchises, as well as one franchise in the U.K.
During the six months ended June 30, 2017, the Company opened one dealership for one awarded franchise in the U.K., opened one dealership for one awarded franchise in the U.S., and added motorcycles to an existing BMW dealership in Brazil.

16

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

In addition, during the six months ended June 30, 2017, the Company disposed of two dealerships in Brazil representing two franchises.
4. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The periodic interest rates of the Revolving Credit Facility (as defined in Note 9, “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.
All of the Company’s interest rate derivative instruments are designated as cash flow hedges. 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 or losses are recognized in income in the period in which the related items being hedged are recognized in expense. Monthly contractual settlements of these swap positions are recognized as Floorplan interest expense or Other interest expense, net in the Company’s accompanying Consolidated Statements of Operations. 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. As of June 30, 2018, 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 and six months ended June 30, 2018 or 2017, respectively.
The Company held 24 interest rate derivative instruments in effect as of June 30, 2018 of $804.6 million in notional value that fixed its underlying one-month LIBOR at a weighted average rate of 2.6%. For the three months ended June 30, 2018 and 2017, the impact of the Company’s interest rate hedges in effect increased floorplan interest expense by $1.3 million and $2.7 million, respectively. For the six months ended June 30, 2018 and 2017, the impact of the Company's interest rate hedges in effect increased floorplan expense by $3.0 million and $5.7 million, respectively. Total floorplan interest expense, inclusive of the aforementioned impact of the Company's interest rate hedges, was $14.6 million and $13.2 million for the three months ended June 30, 2018 and 2017, respectively, and $28.7 million and $25.2 million for the six months ended June 30, 2018 and 2017, respectively.
In addition to the $804.6 million of swaps in effect as of June 30, 2018, the Company held seven additional interest rate derivative instruments with forward start dates between December 2018 and December 2020 and expiration dates between December 2021 and December 2030. The aggregate notional value of these seven forward-starting swaps was $375.0 million, and the weighted average interest rate was 1.8%. 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 $902.4 million, which is less than the Company's expectation for variable-rate debt outstanding during such period.
Assets and liabilities associated with interest rate derivative instruments as reflected in the accompanying balance sheets were as follows:

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As of June 30, 2018
 
As of December 31, 2017
 
 
(In thousands)
Assets from interest rate risk management activities:
 
 
 
 
Other long-term assets
 
$
18,548

 
$
9,501

Total
 
$
18,548

 
$
9,501

 
 
 
 
 
Liabilities from interest rate risk management activities:
 
 
 
 
Current
 
$
682

 
$
1,996

Long-term
 
1,597

 
8,583

Total
 
$
2,279

 
$
10,579

Included in Accumulated Other Comprehensive Loss at June 30, 2018 and 2017 were accumulated unrealized gains, net of income taxes, totaling $12.5 million and unrealized losses, net of income taxes, totaling $7.3 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)
 
 
Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationship
 
2018
 
2017
 
 
(In thousands)
Interest rate derivative instruments
 
$
11,305

 
$
(2,180
)
 
 
 
 
 
 
 
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
 
Six Months Ended June 30,
 
2018
 
2017
 
 
(In thousands)
Floorplan interest expense
 
$
(2,999
)
 
$
(5,656
)
Other interest expense
 
(390
)
 
(1,154
)
The net amount of loss 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 $0.2 million.

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5. 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 and restated (the “Purchase Plan”, formerly named the Group 1 Automotive, Inc. 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, as amended (the “Code”) 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 June 30, 2018, there were 870,739 shares available for issuance under the Incentive Plan.
Restricted Stock and Restricted Stock Unit 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 (to non-employee directors only) at no cost to the recipient. Restricted stock awards qualify as participating securities because 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 6, “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. Since they convey no voting rights, restricted stock units are not considered outstanding when issued. 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 awards, in most cases, will be forfeited to the Company. When restricted stock vests, the Company settles utilizing new shares or treasury shares, if available. Restricted stock units settle in cash upon the termination of the grantees’ employment or directorship. 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.
A summary of the restricted stock awards as of June 30, 2018, along with the changes during the six months then ended, is as follows:
 
 
Awards
 
Weighted Average
Grant Date
Fair Value
Nonvested at December 31, 2017
 
702,778

 
$
68.23

Granted
 
210,971

 
75.28

Vested
 
(191,794
)
 
62.67

Forfeited
 
(23,015
)
 
70.22

Nonvested at June 30, 2018
 
698,940

 
$
71.80

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 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 June 30, 2018, there were 1,063,449 shares available for issuance under the Purchase Plan. During the six months ended June 30, 2018 and 2017, the Company issued 75,663 and 65,042 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 $15.47 and $17.38 for the six months ended June 30, 2018 and 2017, 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.

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Stock-Based Compensation
Total stock-based compensation cost was $4.3 million and $4.4 million for the three months ended June 30, 2018 and 2017, respectively, and $9.9 million and $10.5 million for the six months ended June 30, 2018 and 2017, respectively. Cash received from Purchase Plan purchases was $4.0 million and $3.8 million for the six months ended June 30, 2018 and 2017, respectively.

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6EARNINGS 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 and six months ended June 30, 2018 and 2017.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands, except per share amounts)
Weighted average basic common shares outstanding
 
20,036

 
20,516

 
20,167

 
20,604

Dilutive effect of employee stock purchases, net of assumed repurchase of treasury stock
 
10

 
6

 
9

 
5

Weighted average dilutive common shares outstanding
 
20,046

 
20,522

 
20,176

 
20,609

Basic:
 
 
 
 
 
 
 
 
Net Income
 
$
56,463

 
$
39,133

 
$
92,277

 
$
73,072

Less: Earnings allocated to participating securities
 
1,916

 
1,389

 
3,123

 
2,645

 Net income available to basic common shares
 
$
54,547

 
$
37,744

 
$
89,154

 
$
70,427

 Basic earnings per common share
 
$
2.72

 
$
1.84

 
$
4.42

 
$
3.42

Diluted:
 
 
 
 
 
 
 
 
Net Income
 
$
56,463

 
$
39,133

 
$
92,277

 
$
73,072

Less: Earnings allocated to participating securities
 
1,916

 
1,389

 
3,123

 
2,645

 Net income available to diluted common shares
 
$
54,547

 
$
37,744

 
$
89,154

 
$
70,427

 Diluted earnings per common share
 
$
2.72

 
$
1.84

 
$
4.42

 
$
3.42

7INCOME TAXES
For the three and six months ended June 30, 2018, the Company's effective tax rate decreased to 24.9% and 24.0%, respectively, as compared to 36.6% and 35.3% for the three and six months ended June 30, 2017, respectively. This decrease was primarily due to the impact of the Tax Act that made broad and complex changes to the Code. Those changes include, but are not limited to, reducing the U.S. federal corporate tax rate from 35.0% to 21.0%, creating a territorial tax system that generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, requiring companies to pay a one-time transition tax on unrepatriated earnings of their foreign subsidiaries, creating a “minimum tax” on certain foreign earnings (i.e. global intangible low-taxed income, or “GILTI”), limiting the deduction for net interest expense incurred by U.S. corporations, and eliminating certain deductions, including deductions for certain compensation arrangements and certain other business expenses. The Company recognizes the tax on GILTI as a period expense in the period the tax is incurred. Under this policy, the Company has not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. As of June 30, 2018, the Company estimated that the 2018 GILTI tax will not be material.
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 24.9% and 24.0% for the three and six months ended June 30, 2018, respectively, was more than the U.S. federal statutory rate of 21.0%, due primarily to: (1) the taxes provided for in U.S. state jurisdictions; (2) valuation allowances provided for net operating losses and other deferred tax assets in certain U.S. states and in Brazil; (3) unrecognized tax benefits with respect to uncertain tax positions; and (4) the deferred tax impact of certain goodwill amortization in Brazil, partially offset by: (1) income generated in the U.K., which is taxed at a 19.0% statutory rate; and (2) excess tax deductions for restricted stock awards.
In accordance with SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Job Act (“SAB 118”), the Company made a reasonable estimate of the Tax Act’s impact and provisionally recorded this estimate in its results for the period ended December 31, 2017. As of June 30, 2018, the Company has not completed its accounting for the aspects of the Tax Act recorded provisionally: the re-measurement of deferred taxes based on the reduced tax rate, and the

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Company's provisional determination that the Company does not have a transition tax liability for previously untaxed accumulated and current earnings and profits of foreign subsidiaries. The Company will continue to gather data and evaluate the impact of the Tax Act after the Company has considered additional guidance issued by the U.S. Treasury Department, the IRS, state tax authorities and other standard-setting bodies. This analysis may result in adjustments to the provisional amounts, which would impact the Company's provision for income taxes and effective tax rate for the period in which the adjustments are made. The Company expects to complete its accounting for the Tax Act in 2018.
As of June 30, 2018, the Company's unrecognized tax benefits totaled $1.3 million, including related interest and penalty. To the extent that any such tax benefits are recognized in the future, such recognition would reduce the tax liability in that period by approximately $1.1 million. Consistent with prior treatment of tax related assessments, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company's taxable years 2013 and subsequent remain open for examination in the U.S. The Company's taxable years 2016 and subsequent remain open in the U.K., and taxable years 2012 and subsequent remain open in Brazil.
8. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts and notes receivable consisted of the following: 
 
 
June 30, 2018
 
December 31, 2017
 
 
(In thousands)
Amounts due from manufacturers
 
$
94,629

 
$
109,599

Parts and service receivables (1)
 
53,884

 
39,343

Finance and insurance receivables
 
21,939

 
25,293

Other
 
10,818

 
17,514

Total accounts and notes receivable
 
181,270

 
191,749

Less allowance for doubtful accounts
 
2,931

 
3,138

Accounts and notes receivable, net (1)
 
$
178,339

 
$
188,611

Inventories consisted of the following: 
 
 
June 30, 2018
 
December 31, 2017
 
 
(In thousands)
New vehicles
 
$
1,169,356

 
$
1,194,632

Used vehicles
 
350,803

 
350,760

Rental vehicles
 
130,632

 
144,213

Parts, accessories and other (1)
 
80,392

 
82,755

Total inventories
 
1,731,183

 
1,772,360

Less lower of cost or net realizable value allowance
 
9,934

 
9,067

Inventories, net (1)
 
$
1,721,249

 
$
1,763,293

(1) December 31, 2017 balances have not been adjusted under the modified retrospective approach as a part of the implementation of Topic 606. See Note 1, “Interim Financial Information”, for further detail.

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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Property and equipment consisted of the following:
 
 
Estimated Useful Lives in Years
 
June 30, 2018
 
December 31, 2017
 
 
 
 
(In thousands)
Land
 
 
$
478,589

 
$
482,600

Buildings
 
25 to 50
 
724,451

 
700,257

Leasehold improvements
 
varies
 
185,528

 
172,071

Machinery and equipment
 
7 to 20
 
122,734

 
117,781

Furniture and fixtures
 
3 to 10
 
107,528

 
100,881

Company vehicles
 
3 to 5
 
12,236

 
11,933

Construction in progress
 
 
48,886

 
41,824

Total
 
 
 
1,679,952

 
1,627,347

Less accumulated depreciation
 
 
 
331,431

 
308,388

Property and equipment, net
 
 
 
$
1,348,521

 
$
1,318,959

During the six months ended June 30, 2018, the Company incurred $65.1 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 $8.8 million of capital expenditures accrued as of December 31, 2017. As of June 30, 2018, the Company had accrued $8.6 million of capital expenditures. Additionally, during the six months ended June 30, 2018, the Company purchased real estate (including land and buildings) associated with existing dealership operations totaling $23.0 million. In conjunction with the acquisition of dealerships and franchises in the six months ended June 30, 2018, the Company acquired $9.7 million of real estate and other property and equipment.
In conjunction with the one U.S. dealership disposition during the six months ended June 30, 2018 that is described in Note 3, “Acquisitions and Dispositions”, the Company disposed of land, building and other equipment that totaled $20.7 million. Further, the Company identified $17.4 million of property and equipment qualifying as held-for-sale assets as of June 30, 2018 and reclassified such assets to Prepaid expenses and other current assets.

9CREDIT 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”), consisting of two tranches. The borrowing capacity of the Revolving Credit Facility can be allocated between the two tranches, subject to certain limits. For U.S. vehicle inventory floorplan financing, the Revolving Credit Facility provides a maximum of $1.75 billion (“Floorplan Line”) and, for working capital and general corporate purposes (including acquisitions), the Revolving Credit Facility provides a maximum of $360.0 million and a minimum of $50.0 million (“Acquisition Line”). 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. 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. (through lenders affiliated with the respective manufacturer), 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
After considering the outstanding balance of $995.6 million at June 30, 2018, the Company had $444.4 million of available floorplan borrowing capacity under the Floorplan Line. Included in the $444.4 million available borrowings under the Floorplan Line was $119.6 million of immediately available funds. The weighted average interest rate on the Floorplan Line was 3.2% and 2.7% as of June 30, 2018 and December 31, 2017, respectively, excluding the impact of the Company’s interest rate derivative instruments. With regards to the Acquisition Line, there were $39.6 million of borrowings outstanding as of

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June 30, 2018 and $27.0 million of borrowings outstanding as of December 31, 2017, both of which consisted entirely of borrowings in British pound sterling. The interest rate on the Acquisition Line was 2.24% as of June 30, 2018, representing the applicable rate for borrowings in British pound sterling. After considering $25.0 million of outstanding letters of credit and other factors included in the Company’s available borrowing base calculation, there was $295.1 million of available borrowing capacity under the Acquisition Line as of June 30, 2018. The amount of available borrowing capacity under the Acquisition Line is limited from time to time based upon certain debt covenants.
The Revolving Credit Facility contains a number of significant covenants that, among other things, restrict the Company’s ability to make disbursements outside of the ordinary course of business, dispose of assets, incur additional indebtedness, create liens on assets, make investments, and engage in mergers or consolidations. The Company is also required to comply with specified financial tests and ratios defined in the Revolving Credit Facility, such as 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 June 30, 2018, the Credit Facility Restricted Payment Basket totaled $162.1 million. The Company was in compliance with all applicable covenants and ratios under the Revolving Credit Facility as of June 30, 2018. 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 financial institutions.
Ford Motor Credit Company Facility
As of June 30, 2018, the Company had an outstanding balance of $144.1 million under the FMCC Facility with an available floorplan borrowing capacity of $155.9 million. Included in the $155.9 million of available borrowings under the FMCC Facility was $24.5 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 6.50% before considering the applicable incentives as of June 30, 2018.
Other Credit Facilities
The Company has credit facilities with financial institutions in the U.K., most of which are affiliated with the manufacturers, for financing new, used, and rental vehicle inventories related to its U.K. operations. As of June 30, 2018, borrowings outstanding under these facilities totaled $139.5 million. Annual interest rates charged on borrowings outstanding under these facilities, after the grace period of zero to 30 days, ranged from 1.65% to 3.45%.
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. As of June 30, 2018, borrowings outstanding under these facilities totaled $20.1 million. Annual interest rates charged on borrowings outstanding under these facilities, after the grace period of zero to 90 days, ranged from 10.92% to 16.63%.
Excluding rental vehicles financed through the Revolving Credit Facility, financing for U.S. rental vehicles is typically obtained directly from the automobile manufacturers. As of June 30, 2018, borrowings outstanding under these rental vehicle facilities totaled $108.7 million, with interest rates that vary up to 6.50%.

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10LONG-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:
 
 
June 30, 2018
 
December 31, 2017
 
 
(In thousands)
5.00% senior notes (aggregate principal of $550,000 at June 30, 2018 and December 31, 2017)
 
$
542,888

 
$
542,063

5.25% senior notes (aggregate principal of $300,000 at June 30, 2018 and December 31, 2017)
 
296,440

 
296,151

Acquisition line
 
39,636

 
26,988

Real estate related and other long-term debt
 
476,178

 
440,845

Capital lease obligations related to real estate, maturing in varying amounts through December 2037 with a weighted average interest rate of 8.5% and 10.4%, respectively
 
64,523

 
51,665

 
 
1,419,665

 
1,357,712

Less current maturities of long-term debt
 
61,667

 
39,528

 
 
$
1,357,998

 
$
1,318,184

Included in current maturities of long-term debt and short-term financing in the Company's Consolidated Balance Sheets, as of June 30, 2018 and December 31, 2017, were two short-term revolving working capital loan agreements with third-party financial institutions in the U.K. that totaled $13.1 million and $13.4 million, respectively. During the six months ended June 30, 2018, the Company made borrowings of $26.4 million and principal payments of $26.6 million under these U.K. working capital loans. Also included in current maturities of long-term debt and short-term financing as of June 30, 2018 was a short-term financing arrangement in Brazil that totaled $1.7 million, which represented borrowings of $2.4 million and repayments of $0.3 million during the six months ended June 30, 2018. Included in current maturities of long-term debt and short-term financing as of December 30, 2017 was an unsecured loan agreement with a third-party financial institution in the U.S. that totaled $24.7 million. During the six months ended June 30, 2018, the Company repaid the entire balance outstanding under the U.S. unsecured loan.
Real Estate Related and Other Long-Term Debt
The mortgage loans in the U.S. consist of 61 term loans for an aggregate principal amount of $432.7 million. As of June 30, 2018, borrowings outstanding under these notes totaled $365.5 million, with $46.0 million classified as a current maturity of long-term debt. For the six months ended June 30, 2018, the Company made additional borrowings and principal payments, including repayment of the mortgage associated with the U.S. dealership disposition described in Note 3, “Acquisitions and Dispositions”, of $42.7 million and $27.2 million, respectively.
The Company has entered into 18 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 June 30, 2018, borrowings under the U.K. mortgage loans totaled $80.7 million, with $7.9 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. For the six months ended June 30, 2018, the Company made additional borrowings and principal payments of $12.1 million and $8.6 million, respectively, associated with the U.K. Notes. Additionally, during the six months ended June 30, 2018, the Company entered into an unsecured loan agreement in the U.K. with a third-party financial institution that matures in March 2028. As of June 30, 2018, borrowings under the agreement totaled $20.4 million, with $2.1 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.
The Company has a separate term mortgage loan in Brazil with a third-party financial institution, which 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 mortgage is being repaid in monthly installments through April 2025. As of June 30, 2018, borrowings under the Brazil mortgage totaled $2.6 million, with $0.3 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. For the six months ended June 30, 2018, the Company made no additional borrowings and made principal payments of $0.3 million associated with the Brazil mortgage.
The Company also has a working capital loan agreement with a third-party financial institution in Brazil. As of June 30, 2018, borrowings under the Brazilian third-party loan totaled $5.7 million. For the six months ended June 30, 2018, the Company made no additional borrowings or principal payments.
Fair Value of Long-Term Debt

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company's outstanding 5.00% Notes had a fair value of $548.3 million and $567.9 million as of June 30, 2018 and December 31, 2017, respectively. The Company's outstanding 5.25% Notes had a fair value of $291.2 million and $310.9 million as of June 30, 2018 and December 31, 2017, respectively. The carrying value of the Company's fixed interest rate borrowings included in real estate related and other long-term debt totaled $83.2 million and $86.8 million as of June 30, 2018 and December 31, 2017, respectively. The fair value of such fixed interest rate borrowings was $85.0 million and $92.9 million as of June 30, 2018 and December 31, 2017, respectively. The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of June 30, 2018 and December 31, 2017. The Company determined the estimated fair value of its long-term debt using available market information and commonly accepted valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on estimated fair values. The carrying value of the Company’s variable rate debt approximates fair value due to the short-term nature of the interest rates.
11FAIR 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. See Note 10, “Long-Term Debt”, for details regarding the fair value of the Company's long-term debt.
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 restricted cash within Other 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 4, “Derivative Instruments and Risk Management Activities”, for further details regarding the Company's derivative financial instruments.

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

Assets and liabilities recorded at fair value, within Level 2 of the hierarchy framework, in the accompanying balance sheets as of June 30, 2018 and December 31, 2017, respectively, were as follows:
 
 
As of June 30, 2018
 
As of December 31, 2017
 
 
(In thousands)
Assets:
 
 
 
 
Investments
 
$
2,057

 
$
844

Demand obligations
 
13

 
13

Interest rate derivative financial instruments
 
18,548

 
9,501

Total
 
$
20,618

 
$
10,358

Liabilities:
 
 
 
 
Interest rate derivative financial instruments
 
$
2,279

 
$
10,579

Total
 
$
2,279

 
$
10,579


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

12COMMITMENTS 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 manufacturers 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
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 2017 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 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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Table of Contents         GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. 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, 2017
$
255,981

 
$
29,483

 
$
168

 
$
285,632

 
Additions through acquisitions
1,301

 
7,454

 

 
8,755

 
Disposals and assets held for sale
(4,872
)
 

 

 
(4,872
)
 
Impairments
(1,169
)
 

 

 
(1,169
)
 
Currency translation

 
(955
)
 
(25
)
 
(980
)
 
BALANCE, June 30, 2018
$
251,241

 
$
35,982

 
$
143

 
$
287,366

 
 
Goodwill
 
 
U.S.
 
U.K.
 
Brazil