3rd Qtr 2014 Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 FORM 10-Q
 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 1-13461
 
 
 
Group 1 Automotive, Inc.
 
 
 
(Exact name of registrant as specified in its charter) 
 
Delaware
 
76-0506313
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
 
 
800 Gessner, Suite 500
Houston, Texas 77024
(Address of principal executive offices) (Zip code)
 
 
 
 
(713) 647-5700
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
 
¨
Accelerated filer
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
¨
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     
Yes  ¨    No  þ
As of October 30, 2014, the registrant had 24,304,373 shares of common stock, par value $0.01, outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 
 
 
September 30, 2014
 
December 31, 2013
 
 
         (Unaudited)
 
(In thousands, except per share amounts)
ASSETS
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
50,652

 
$
20,215

Contracts-in-transit and vehicle receivables, net
 
190,641

 
225,156

Accounts and notes receivable, net
 
138,735

 
135,058

Inventories, net
 
1,490,520

 
1,542,318

Deferred income taxes
 
17,137

 
21,150

Prepaid expenses and other current assets
 
41,570

 
24,041

Total current assets
 
1,929,255

 
1,967,938

PROPERTY AND EQUIPMENT, net
 
859,339

 
796,356

GOODWILL
 
824,996

 
737,303

INTANGIBLE FRANCHISE RIGHTS
 
335,670

 
301,505

OTHER ASSETS
 
13,249

 
16,376

Total assets
 
$
3,962,509

 
$
3,819,478

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
 
 
 
 
Floorplan notes payable - credit facility and other
 
$
1,077,097

 
$
1,143,104

Offset account related to floorplan notes payable - credit facility
 
(37,516
)
 
(56,198
)
Floorplan notes payable - manufacturer affiliates
 
293,846

 
346,572

Offset account related to floorplan notes payable - manufacturer affiliates
 
(25,000
)
 
—

Current maturities of long-term debt and short-term financing
 
41,021

 
36,225

Accounts payable
 
292,971

 
254,930

Accrued expenses
 
160,220

 
140,543

Total current liabilities
 
1,802,639

 
1,865,176

LONG-TERM DEBT, net of current maturities
 
938,499

 
663,689

DEFERRED INCOME TAXES
 
148,304

 
152,291

LIABILITIES FROM INTEREST RATE RISK MANAGEMENT ACTIVITIES
 
23,483

 
26,078

OTHER LIABILITIES
 
64,259

 
47,975

COMMITMENTS AND CONTINGENCIES (NOTE 11)
 

 

TEMPORARY EQUITY - Redeemable equity portion of the 3.00% Convertible Senior Notes
 
—

 
29,094

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

 
—

Common stock, $0.01 par value, 50,000 shares authorized; 25,761 and 25,746 issued, respectively
 
258

 
257

Additional paid-in capital
 
286,354

 
368,641

Retained earnings
 
838,174

 
776,101

Accumulated other comprehensive loss
 
(59,500
)
 
(51,677
)
Treasury stock, at cost; 1,427 and 1,432 shares, respectively
 
(79,961
)
 
(58,147
)
Total stockholders’ equity
 
985,325

 
1,035,175

Total liabilities and stockholders’ equity
 
$
3,962,509

 
$
3,819,478


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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Unaudited, in thousands, except per share amounts)
REVENUES:
 
 
 
 
 
 
 
 
New vehicle retail sales
 
$
1,521,246

 
$
1,386,667

 
$
4,256,146

 
$
3,873,121

Used vehicle retail sales
 
615,924

 
529,828

 
1,743,071

 
1,536,031

Used vehicle wholesale sales
 
100,347

 
85,800

 
284,491

 
243,667

Parts and service sales
 
291,816

 
255,316

 
844,340

 
753,776

Finance, insurance and other, net
 
97,115

 
82,536

 
270,901

 
232,494

Total revenues
 
2,626,448

 
2,340,147

 
7,398,949

 
6,639,089

COST OF SALES:
 
 
 
 
 
 
 
 
New vehicle retail sales
 
1,441,016

 
1,313,372

 
4,028,164

 
3,656,825

Used vehicle retail sales
 
571,613

 
488,346

 
1,610,293

 
1,410,768

Used vehicle wholesale sales
 
101,643

 
87,334

 
281,434

 
242,267

Parts and service sales
 
137,467

 
121,633

 
397,079

 
358,004

Total cost of sales
 
2,251,739

 
2,010,685

 
6,316,970

 
5,667,864

GROSS PROFIT
 
374,709

 
329,462

 
1,081,979

 
971,225

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
264,233

 
246,863

 
793,761

 
731,455

DEPRECIATION AND AMORTIZATION EXPENSE
 
10,746

 
9,093

 
31,424

 
26,390

ASSET IMPAIRMENTS
 
9,373

 
565

 
11,094

 
1,174

INCOME FROM OPERATIONS
 
90,357

 
72,941

 
245,700

 
212,206

OTHER EXPENSE:
 
 
 
 
 
 
 
 
Floorplan interest expense
 
(10,452
)
 
(10,690
)
 
(31,695
)
 
(30,927
)
Other interest expense, net
 
(13,246
)
 
(9,971
)
 
(36,326
)
 
(28,783
)
Other expense, net
 
—

 
—

 
—

 
(789
)
Loss on extinguishment of long-term debt
 
(22,790
)
 
—

 
(46,403
)
 
—

INCOME BEFORE INCOME TAXES
 
43,869

 
52,280

 
131,276

 
151,707

PROVISION FOR INCOME TAXES
 
(17,707
)
 
(19,515
)
 
(56,949
)
 
(59,436
)
NET INCOME
 
$
26,162

 
$
32,765

 
$
74,327

 
$
92,271

BASIC EARNINGS PER SHARE
 
$
1.07

 
$
1.34

 
$
3.06

 
$
3.83

Weighted average common shares outstanding
 
23,424

 
23,373

 
23,354

 
22,994

DILUTED EARNINGS PER SHARE
 
$
1.03

 
$
1.19

 
$
2.82

 
$
3.52

Weighted average common shares outstanding
 
24,432

 
26,342

 
25,363

 
25,153

CASH DIVIDENDS PER COMMON SHARE
 
$
0.17

 
$
0.17

 
$
0.51

 
$
0.48



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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(Unaudited, in thousands)
NET INCOME
 
$
26,162

 
$
32,765

 
$
74,327

 
$
92,271

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(21,938
)
 
3,237

 
(7,329
)
 
(23,487
)
Net unrealized gain (loss) on interest rate swaps:
 
 
 
 
 
 
 
 
Unrealized gain (loss) arising during the period, net of tax (provision) benefit of ($346), $1,615, $3,472 and ($2,999), respectively
 
577

 
(2,691
)
 
(5,787
)
 
4,999

Reclassification adjustment for loss included in interest expense, net of tax provision of $1,074, $1,075, $3,176 and $3,120, respectively
 
1,789

 
1,791

 
5,293

 
5,200

Net unrealized gain (loss) on interest rate swaps, net of tax
 
2,366

 
(900
)
 
(494
)
 
10,199

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES
 
(19,572
)
 
2,337

 
(7,823
)
 
(13,288
)
COMPREHENSIVE INCOME
 
$
6,590

 
$
35,102

 
$
66,504

 
$
78,983



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

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, 2013
 
25,746

 
$
257

 
$
368,641

 
$
776,101

 
$
(51,677
)
 
$
(58,147
)
 
$
1,035,175

Net income
 
—

 
—

 
—

 
74,327

 
—

 
—

 
74,327

Other comprehensive income, net
 
—

 
—

 
—

 
—

 
(7,823
)
 
—

 
(7,823
)
Purchases of treasury stock
 
—

 
—

 
—

 
—

 
—

 
(33,771
)
 
(33,771
)
Net temporary equity adjustment related to 3.00% and 2.25% Convertible Notes
 
—

 
—

 
(14,163
)
 
—

 
—

 
—

 
(14,163
)
Repurchase of equity component of 3.00% Convertible Notes
 
—

 
—

 
(118,003
)
 
—

 
—

 
—

 
(118,003
)
Call/Warrant equity settlement on 3.00% Convertible Notes repurchase
 
—

 
—

 
32,641

 
—

 
—

 
—

 
32,641

Conversion of equity component of 2.25% Convertible Notes
 
—

 
—

 
(20,789
)
 
—

 
—

 
36,860

 
16,071

Call/Warrant equity settlement on 2.25% Convertible Notes conversion
 
—

 
—

 
33,772

 
—

 
—

 
(33,772
)
 
—

Net issuance of treasury shares to employee stock compensation plans
 
15

 
1

 
(8,684
)
 
—

 
—

 
8,869

 
186

Stock-based compensation
 
—

 
—

 
11,836

 
—

 
—

 
—

 
11,836

Tax effect from stock-based compensation plans
 
—

 
—

 
1,103

 
—

 
—

 
—

 
1,103

Cash dividends, net of estimated forfeitures relative to participating securities
 
—

 
—

 
—

 
(12,254
)
 
—

 
—

 
(12,254
)
BALANCE, September 30, 2014
 
25,761

 
$
258

 
$
286,354

 
$
838,174

 
$
(59,500
)
 
$
(79,961
)
 
$
985,325



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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(Unaudited, in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
74,327

 
$
92,271

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
31,424

 
26,390

Deferred income taxes
 
6,494

 
16,601

Asset impairments
 
11,094

 
1,174

Stock-based compensation
 
11,871

 
10,473

Amortization of debt discount and issue costs
 
9,661

 
10,453

Loss on 3.00% Convertible Notes repurchase
 
29,478

 
—

Loss on 2.25% Convertible Notes conversion and redemption
 
16,925

 
—

Gain on disposition of assets
 
(17,363
)
 
(11,093
)
Tax effect from stock-based compensation
 
(1,145
)
 
(1,413
)
Other
 
2,047

 
2,301

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
Accounts payable and accrued expenses
 
54,911

 
(9,500
)
Accounts and notes receivable
 
(6,562
)
 
2,815

Inventories
 
79,265

 
(107,994
)
Contracts-in-transit and vehicle receivables
 
33,839

 
45,284

Prepaid expenses and other assets
 
12,923

 
1,046

Floorplan notes payable - manufacturer affiliates
 
(77,155
)
 
49,814

Deferred revenues
 
(198
)
 
344

Net cash provided by operating activities
 
271,836

 
128,966

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Cash paid in acquisitions, net of cash received
 
(309,257
)
 
(106,672
)
Proceeds from disposition of franchises, property and equipment
 
138,800

 
101,821

Purchases of property and equipment, including real estate
 
(91,345
)
 
(63,890
)
Other
 
(5,832
)
 
2,155

Net cash used in investing activities
 
(267,634
)
 
(66,586
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings on credit facility - floorplan line and other
 
6,047,392

 
4,707,989

Repayments on credit facility - floorplan line and other
 
(6,086,414
)
 
(4,652,495
)
Borrowings on credit facility - acquisition line
 
314,963

 
—

Repayment on credit facility - acquisition line
 
(374,989
)
 
—

Borrowings on real estate credit facility
 
200

 
—

Principal payments on real estate credit facility
 
(9,081
)
 
(7,919
)
Net borrowings on 5.00% Senior Unsecured Notes
 
539,600

 
—

Debt issue costs
 
(1,881
)
 
—

Repurchase of 3.00% Convertible Notes
 
(260,074
)
 
—

Proceeds from Call/Warrant Unwind related to 3.00% Convertible Notes
 
32,697

 
—

Conversion and redemption of 2.25% Convertible Notes
 
(182,756
)
 
—

Borrowings on other debt
 
78,710

 
828

Principal payments on other debt
 
(70,267
)
 
(65,446
)
Borrowings on debt related to real estate
 
65,628

 
21,105

Principal payments on debt related to real estate
 
(39,024
)
 
(32,792
)
Employee stock purchase plan purchases, net of employee tax withholdings
 
187

 
538

Repurchases of common stock, amounts based on settlement date
 
(16,947
)
 
—

Tax effect from stock-based compensation
 
1,145

 
1,413

Dividends paid
 
(12,291
)
 
(11,676
)
Net cash provided by (used in) financing activities
 
26,798

 
(38,455
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
(563
)
 
(2,297
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
30,437

 
21,628

CASH AND CASH EQUIVALENTS, beginning of period
 
20,215

 
4,650

CASH AND CASH EQUIVALENTS, end of period
 
$
50,652

 
$
26,278

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Purchases of property and equipment, including real estate, accrued in accounts payable
 
$
3,440

 
$
501

Purchases of common stock accrued in accounts payable
 
$
16,824

 
$
—


The accompanying notes are an integral part of these consolidated financial statements.
7
Table of Contents
GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. INTERIM FINANCIAL INFORMATION
Business and Organization
Group 1 Automotive, Inc., a Delaware corporation, is a leading operator in the automotive retailing industry with business activities in 14 states in the United States of America (“U.S.”), 13 towns in the United Kingdom (“U.K.”) and three states in Brazil. Group 1 Automotive, Inc. and its subsidiaries are collectively referred to as the “Company” in these Notes to Consolidated Financial Statements. The Company, through its regions, sells new and used cars and light trucks; arranges related vehicle financing; sells service and insurance contracts; provides automotive maintenance and repair services; and sells vehicle parts.
As of September 30, 2014, the Company’s U.S. retail network consisted of the following two regions (with the number of dealerships they comprised): (a) the East (41 dealerships in Alabama, Florida, Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, and South Carolina), and (b) the West (75 dealerships in California, Kansas, Louisiana, Oklahoma, and Texas). The U.S. regional vice presidents report directly to the Company's Chief Executive Officer and are responsible for the overall performance of their regions, as well as for overseeing the market directors and dealership general managers that report to them. In addition, as of September 30, 2014, the Company had two international regions: (a) the U.K. region, which consisted of 14 dealerships in the U.K. and (b) the Brazil region, which consisted of 20 dealerships in Brazil. The operations of the Company's international regions are structured similarly to the U.S. regions, each with a regional vice president reporting directly to the Company's Chief Executive Officer.
The Company's operating results are generally subject to changes in the economic environment as well as seasonal variations. Generally there are higher volumes of vehicles sales and service in the second and third calendar quarters of each year in the U.S., in the first and third quarters in the U.K. and during the third and fourth quarters in Brazil. This seasonality is generally attributable to consumer buying trends and the timing of manufacturer new vehicle model introductions. In addition, in some regions of the U.S., vehicle purchases decline during the winter months due to inclement weather. As a result, U.S. revenues and operating income are typically lower in the first and fourth quarters and higher in the second and third quarters. For the U.K., the first and third calendar quarters tend to be stronger, driven by plate change months of March and September. For Brazil, the Company expects higher volumes in the third and fourth calendar quarters. The first quarter is generally the weakest, driven by heavy consumer vacations and activities associated with Carnival. Other factors unrelated to seasonality, such as changes in economic condition, manufacturer incentive programs, or shifts in governmental taxes or regulations may exaggerate seasonal or cause counter-seasonal fluctuations in the Company's revenues and operating income.
Basis of Presentation
The accompanying unaudited condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying unaudited condensed Consolidated Financial Statements. Due to seasonality and other factors, the results of operations for the interim period are not necessarily indicative of the results that will be realized for any other interim period or for the entire fiscal year. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”).
All business acquisitions completed during the periods presented have been accounted for using the purchase method of accounting, and their results of operations are included from the effective dates of the closings of the acquisitions. The allocations of purchase price to the assets acquired and liabilities assumed subject to change within the purchase price allocation period (generally on year from the respective acquisition date) and are assigned and recorded based on estimates of fair value. All intercompany balances and transactions have been eliminated in consolidation.
Business Segment Information
The Company, through its regions, conducts business in the automotive retailing industry including selling new and used cars and light trucks, arranging related vehicle financing, selling service and insurance contracts, providing automotive maintenance and repair services and selling vehicle parts. The Company has three reportable segments: the U.S., which includes the activities of the Company's corporate office, the U.K. and Brazil. See Note 14, "Segment Information," for additional details regarding the Company's reportable segments.
Variable Interest Entity

8
Table of Contents GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In 2013, the Company entered into arrangements to provide a related-party entity that owns and operates retail automotive dealerships a fixed-interest-rate working capital loan and various administrative services for a variable fee, both of which constitute variable interests in the entity. The Company's exposure to loss as a result of its involvement in the entity includes the balance outstanding under the loan arrangement. The Company holds no equity ownership interest in the entity. The Company has determined that the entity meets the criteria of a variable interest entity (“VIE”). The terms of the loan and services agreements provide the Company with the right to control the activities of the VIE that most significantly impact the VIE's economic performance, the obligation to absorb potentially significant losses of the VIE and the right to receive potentially significant benefits from the VIE. Accordingly, the Company qualified as the VIE's primary beneficiary and consolidated the assets and liabilities of the VIE as of September 30, 2014 and December 31, 2013, as well as the results of operations of the VIE beginning on the effective date of the variable interests arrangements to September 30, 2014. The floorplan notes payable liability of the VIE is securitized by the new and used vehicle inventory of the VIE. The carrying amounts and classification of assets (which can only be used to settle the liabilities of the VIE) and liabilities (for which creditors do not have recourse to the general credit of the Company) are included in the Company's purchase price allocations set forth in Note 2, "Acquisitions and Dispositions." The final allocation of assets and liabilities included in the Company's consolidated statements of financial position for the consolidated VIE as of September 30, 2014, as well as a preliminary allocation as of December 31, 2013, are as follows (in thousands):
 
 
September 30, 2014
 
December 31, 2013
Current assets
 
$
24,536

 
$
24,170

Non-current assets
 
36,843

 
71,033

Total assets
 
$
61,379

 
$
95,203

Current liabilities
 
$
21,857

 
$
21,653

Non-current liabilities
 
22,179

 
25,374

Total liabilities
 
$
44,036

 
$
47,027

Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, that raises the threshold for disposals to qualify as discontinued operations to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The amendments in this accounting standard update should be applied prospectively and are effective for annual periods, and interim periods within those years, beginning on or after December 15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. The Company is currently evaluating the impact the provisions of the ASU will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that amends the accounting guidance on revenue recognition. The amendments in this ASU are intended to provide a framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact the provisions of the ASU will have on its consolidated financial statements.

9
Table of Contents GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. ACQUISITIONS AND DISPOSITIONS
During the nine months ended September 30, 2014, the Company acquired seven dealerships and was granted one franchise in the U.S. The Company also acquired one dealership and opened one dealership for an awarded franchise in Brazil (collectively, the "2014 Acquisitions"). Aggregate consideration paid for these acquisitions totaled $309.3 million, including associated real estate. During the third quarter and first nine months of 2014, the Company sold five and seven dealerships, respectively, in the U.S. As a result of these dispositions, a net gain of $16.6 million and $17.3 million was recognized for the three and nine months ended September 30, 2014, respectively. Aggregate consideration received for these dealerships totaled $138.8 million.
The purchase price for the 2014 Acquisitions was allocated as set forth below based upon the consideration paid and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The allocation of the purchase prices is preliminary and based on estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the respective acquisition date). Goodwill was assigned to the U.S. segment in the amount of $103.4 million.
 
 
As of Acquisition Date
 
 
(In thousands)
Inventory
 
$
107,034

Other current assets
 
281

Property and equipment
 
46,814

Goodwill and intangible franchise rights
 
166,036

Deferred tax asset
 
5,851

Total assets
 
$
326,016

Current liabilities
 
$
16,775

Total liabilities
 
$
16,775

The intangible franchise rights are expected to continue for an indefinite period, therefore these rights are not amortized. These intangible assets will be evaluated on an annual basis in accordance with Accounting Standards Codification ("ASC") 350. Goodwill represents the excess of consideration paid compared to the fair value of net assets received in the acquisitions. The goodwill is related to the U.S. reportable segment and is deductible for tax purposes at September 30, 2014.
Our supplemental pro forma revenue and net income had the acquisition date for each of the Company's 2014 acquisitions been January 1, 2013, are as follows:
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
Supplemental Pro forma:
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Revenue
 
$
2,656,029

 
2,494,038

 
$
7,647,756

 
$
7,088,606

Net income
 
$
26,436

 
35,958

 
$
77,687

 
$
101,799

The supplemental pro forma revenue and net income are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated these businesses as of January 1, 2013.
As of September 30, 2014, the Company determined that certain dealerships and the associated real estate qualified as held-for-sale. As a result, the Company classified the carrying value of all $16.9 million of the asset disposal group in prepaid and other current assets in its Consolidated Balance Sheet and recognized an asset impairment of $8.0 million for the three months ended September 30, 2014 as the carrying amount of the disposal group exceeded the fair value less costs to sell.
In February 2013, the Company purchased all of the outstanding stock of UAB Motors Particpações S.A. (“UAB Motors”). At the time of acquisition, UAB Motors consisted of 18 dealerships and 22 franchises in Brazil, as well as five collision centers. As discussed in Note 1, "Interim Financial Information," in connection with this acquisition, the Company entered into arrangements that are variable interests in a VIE. The Company qualifies as the primary beneficiary of the VIE. The consolidation of the VIE into the financial statements of the Company was accounted for as a business combination. In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

addition to the acquisition of UAB Motors, the Company acquired certain assets of nine dealerships in the U.S. and four dealerships in the U.K. (collectively with the acquisition of UAB Motors, the "2013 Acquisitions"). In conjunction with the 2013 Acquisitions, the Company incurred $6.5 million of costs, primarily related to professional services associated with the UAB Motors transaction. The Company included these costs in selling, general and administrative expenses ("SG&A") in the Consolidated Statement of Operations for 2013 Aggregate consideration paid for the 2013 Acquisitions totaled $350.2 million, including $269.9 million of cash and 1.39 million shares of the Company's common stock. The Company also assumed debt in conjunction with the 2013 Acquisitions, of which $65.1 million was contemporaneously extinguished. In conjunction with the extinguishment, the Company recognized a loss of $0.8 million that is included in Other Expense, net on the Consolidated Statement of Operations for the nine months ended September 30, 2013.
The purchase price for the 2013 Acquisitions was allocated as set forth below based upon the consideration paid and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. Goodwill was assigned to the U.S., U.K. and Brazil reportable segments in the amounts of $56.2 million, $1.5 million and $130.9 million, respectively.
 
 
As of Acquisition Date
 
 
(In thousands)
Inventory
 
$
164,743

Other current assets
 
26,892

Property and equipment
 
71,389

Goodwill and intangible franchise rights
 
308,081

Other assets
 
1,869

Total assets
 
$
572,974

Current liabilities
 
$
117,694

Deferred income taxes
 
29,669

Long-term debt
 
68,639

Total liabilities
 
$
216,002

The intangible franchise rights are expected to continue for an indefinite period, therefore these rights are not amortized. These intangible assets will be evaluated on an annual basis in accordance with ASC 350. Goodwill represents the excess of consideration paid compared to net assets received in the acquisition. As of September 30, 2014, the goodwill relative to the U.S and Brazil reportable segments is deductible for tax purposes.
During the nine months ended September 30, 2013, the Company sold six dealerships and one franchise in the U.S. As a result of the dispositions, a net gain of $10.4 million was recognized for the nine months ended September 30, 2013.
3. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES
The periodic interest rates of the Revolving Credit Facility (as defined in Note 8, “Credit Facilities”), the Real Estate Credit Facility (as defined in Note 9, “Long-term Debt”) and certain variable-rate real estate related borrowings are indexed to the one-month London Inter Bank Offered Rate (“LIBOR”) plus an associated company credit risk rate. In order to minimize the earnings variability related to fluctuations in these rates, the Company employs an interest rate hedging strategy, whereby it enters into arrangements with various financial institutional counterparties with investment grade credit ratings, swapping its variable interest rate exposure for a fixed interest rate over terms not to exceed the related variable-rate debt.
The Company presents the fair value of all derivatives on its Consolidated Balance Sheets. The Company measures the fair value of its interest rate derivative instruments utilizing an income approach valuation technique, converting future amounts of cash flows to a single present value in order to obtain a transfer exit price within the bid and ask spread that is most representative of the fair value of its derivative instruments. In measuring fair value, the Company utilizes the option-pricing Black-Scholes present value technique for all of its derivative instruments. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service provider, matched to the identical maturity term of the instrument being measured. Observable inputs utilized in the income approach valuation technique incorporate identical contractual notional amounts, fixed coupon rates, periodic terms for interest payments and contract maturity. The fair value estimate of the interest rate derivative instruments also considers the credit risk of the Company for instruments in a liability position or the counterparty for instruments in an asset position. The credit risk is calculated by using the spread between the one-month LIBOR yield curve and the relevant average 10 and 20-year rate according to Standard and Poor’s. The Company

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

has determined the valuation measurement inputs of these derivative instruments to maximize the use of observable inputs that market participants would use in pricing similar or identical instruments and market data obtained from independent sources, which is readily observable or can be corroborated by observable market data for substantially the full term of the derivative instrument. Further, the valuation measurement inputs minimize the use of unobservable inputs. Accordingly, the Company has classified the derivatives within Level 2 of the hierarchy framework as described by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification.
The related gains or losses on these interest rate derivatives are deferred in stockholders’ equity as a component of accumulated other comprehensive loss. These deferred gains and losses are recognized in income in the period in which the related items being hedged are recognized in expense. However, to the extent that the change in value of a derivative contract does not perfectly offset the change in the value of the items being hedged, that ineffective portion is immediately recognized in other income or expense. Monthly contractual settlements of these swap positions are recognized as floorplan or other interest expense in the Company’s accompanying Consolidated Statements of Operations. All of the Company’s interest rate hedges are designated as cash flow hedges.
The Company held interest rate swaps in effect as of September 30, 2014 of $463.0 million in notional value that fixed its underlying one-month LIBOR at a weighted average rate of 2.6%. Of the $463.0 million in notional value of swaps in effect, $13.0 million was added in the three months ended September 30, 2014. The Company records the majority of the impact of the periodic settlements of these swaps as a component of floorplan interest expense. For the three and nine months ended September 30, 2014, the impact of the Company’s interest rate hedges in effect increased floorplan interest expense by $2.4 million and $7.3 million, respectively; for the three and nine months ended September 30, 2013, the impact of the Company’s interest rate hedges in effect increased floorplan interest expense by $2.5 million and $7.4 million respectively. Total floorplan interest expense was $10.5 million and $10.7 million for the three months ended September 30, 2014 and 2013, respectively, and $31.7 million and $30.9 million for the nine months ended September 30, 2014 and 2013, respectively.
In addition to the $463.0 million of swaps in effect as of September 30, 2014, the Company held 13 additional interest rate swaps with forward start dates between December 2014 and January 2018 and expiration dates between December 2017 and December 2020. The aggregate notional value of these 13 forward-starting swaps was $675.0 million, and the weighted average interest rate was 2.7%. Of the $675.0 million in notional value of forward-starting swaps, $150.0 million was added in the three months ended September 30, 2014. The combination of the interest rate swaps currently in effect and these forward-starting swaps is structured such that the notional value in effect at any given time through August 2021 does not exceed $612.0 million, which is less than the Company's expectation for variable rate debt outstanding during such period.
Subsequent to September 30, 2014, the Company entered into three interest rate swaps with forward start dates between December 2016 and January 2018 and expiration dates between December 2019 and December 2020 with a weighted average interest rate of 2.6%. The aggregate notional value of these swaps is $150.0 million.
As of September 30, 2014 and December 31, 2013, the Company reflected liabilities from interest rate risk management activities of $23.5 million and $26.1 million, respectively, in its Consolidated Balance Sheets. In addition, as of September 30, 2014 and December 31, 2013, the Company reflected $0.5 million and $3.9 million of assets from interest rate risk management activities included in Other Assets in its Consolidated Balance Sheets. Included in Accumulated Other Comprehensive Loss at September 30, 2014 and 2013 were accumulated unrealized losses, net of income taxes, totaling $14.3 million and $16.7 million, respectively, related to these interest rate swaps.
At September 30, 2014, all of the Company’s derivative contracts that were in effect were determined to be effective. The Company had no gains or losses related to ineffectiveness or amounts excluded from effectiveness testing recognized in the Consolidated Statements of Operations for either the three or nine months ended September 30, 2014 or 2013, respectively. The following table presents the impact during the current and comparative prior year period for the Company's derivative financial instruments on its Consolidated Statements of Operations and Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 
 
Amount of Unrealized Gain (Loss), Net of Tax, Recognized in Other Comprehensive Income (Loss)
 
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationship
 
2014
 
2013
 
 
 
(In thousands)
Interest rate swap contracts
 
 
$
(5,787
)
 
$
4,999

 
 
 
 
 
 
 
 
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
 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
(In thousands)
Floorplan interest expense
 
 
$
(7,331
)
 
$
(7,390
)
Other interest expense
 
 
(1,138
)
 
(930
)
The amount expected to be reclassified out of other comprehensive income (loss) into earnings as additional floorplan interest expense or other interest expense in the next twelve months is $12.1 million.

4. STOCK-BASED COMPENSATION PLANS
The Company provides stock-based compensation benefits to employees and non-employee directors pursuant to its 2014 Long Term Incentive Plan (the "Incentive Plan"), as well as to employees pursuant to its 1998 Employee Stock Purchase Plan, as amended (the "Purchase Plan").
Long Term Incentive Plan
The 2007 Long Term Incentive Plan (the "Prior Plan") provided for the issuance of up to 7.5 million shares for grants to non-employee directors, officers and other employees of the Company and its subsidiaries. On May 20, 2014, the Company's shareholders approved the Incentive Plan, which replaced the Prior Plan. The maximum number of shares that may be issued under the Incentive Plan is limited to (i) 1.2 million shares, plus (ii) the number of shares available for future issuance under the Prior Plan as of May 20, 2014, plus (iii) the number of shares subject to awards that were outstanding as of May 20, 2014 to the extent any such award lapses or terminates without all shares subject to those awards being issued to the holder of such award or without such holder receiving a cash settlement of such award. The Incentive Plan provides for the grant of options (including options qualified as incentive stock options under the Internal Revenue Code of 1986 and options that are non-qualified), restricted stock, performance awards, bonus stock, and phantom stock to the Company's employees, consultants, non-employee directors and officers. The Incentive Plan expires on May 21, 2024. The terms of the awards (including vesting schedules) are established by the Compensation Committee of the Company’s Board of Directors. As of September 30, 2014, there were 1,750,584 shares available for issuance under the Incentive Plan.
Restricted Stock Awards
The Company has granted under the Prior Plan and plans to continue to make grants under the Incentive Plan to non-employee directors and certain employees, at no cost to the recipient, of restricted stock awards or, at their election, restricted stock units. Restricted stock awards qualify as participating securities as each award contains non-forfeitable rights to dividends. As such, the two-class method is required for the computation of earnings per share. See Note 5, “Earnings Per Share,” for further details. Restricted stock awards are considered outstanding at the date of grant but are subject to vesting periods from upon issuance up to five years. Restricted stock units are considered vested at the time of issuance, however, since they cannot vote, they are not considered outstanding when issued. Restricted stock units settle in shares of common stock upon the termination of the grantees’ employment or directorship. In the event an employee or non-employee director terminates his or her employment or directorship with the Company prior to the lapse of the restrictions, the shares, in most cases, will be forfeited to the Company. Compensation expense for these awards is calculated based on the market price of the Company’s common stock at the date of grant and recognized over the requisite service period. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted annually based on the extent to which actual or expected forfeitures differ from the previous estimate.
A summary of the restricted stock awards as of September 30, 2014, along with the changes during the nine months then ended, is as follows:
 
 
Awards
 
Weighted Average
Grant Date
Fair Value
Nonvested at December 31, 2013
 
933,740

 
$
49.87

Granted
 
274,040

 
67.18

Vested
 
(206,970
)
 
44.52

Forfeited
 
(52,010
)
 
53.50

Nonvested at September 30, 2014
 
948,800

 
$
55.83

Employee Stock Purchase Plan
The Purchase Plan authorizes the issuance of up to 3.5 million shares of common stock and provides that no options to purchase shares may be granted under the Purchase Plan after March 6, 2016. The Purchase Plan is available to all employees of the Company and its participating subsidiaries and is a qualified plan as defined by Section 423 of the Internal Revenue Code. At the end of each fiscal quarter (the “Option Period”) during the term of the Purchase Plan, employees can acquire shares of common stock from the Company at 85% of the fair market value of the common stock on the first or the last day of the Option Period, whichever is lower. As of September 30, 2014, there were 539,026 shares available for issuance under the Purchase Plan. During the nine months ended September 30, 2014 and 2013, the Company issued 80,938 and 83,698 shares, respectively, of common stock to employees participating in the Purchase Plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The weighted average fair value of employee stock purchase rights issued pursuant to the Purchase Plan was $15.07 and $13.65 during the nine months ended September 30, 2014 and 2013, respectively. The fair value of stock purchase rights is calculated using the grant date stock price, the value of the embedded call option and the value of the embedded put option.
Stock-Based Compensation
Total stock-based compensation cost was $4.0 million and $3.5 million for the three months ended September 30, 2014 and 2013, respectively, and $11.9 million and $10.5 million for the nine months ended September 30, 2014 and 2013, respectively. Cash received from Purchase Plan purchases was $4.7 million and $4.4 million for the nine months ended September 30, 2014 and 2013, respectively. The tax benefit realized for the tax deductions from the vesting of restricted shares, which increased additional paid in capital, totaled $1.1 million and $1.4 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company issues new shares or treasury shares, if available, when restricted stock vests. With respect to shares issued under the Purchase Plan, the Company’s Board of Directors has authorized specific share repurchases to fund the shares issuable under the Purchase Plan.
5. EARNINGS PER SHARE
The two-class method is utilized for the computation of 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, including the Company’s restricted stock awards. 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 nine months ended September 30, 2014 and 2013.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands, except per share amounts)
Weighted average basic common shares outstanding
 
23,424

 
23,373

 
23,354

 
22,994

Dilutive effect of contingently convertible notes and warrants
 
1,003

 
2,962

 
2,004

 
2,153

Dilutive effect of employee stock purchases, net of assumed repurchase of treasury stock
 
5

 
7

 
5

 
6

Weighted average dilutive common shares outstanding
 
24,432

 
26,342

 
25,363

 
25,153

Basic:
 
 
 
 
 
 
 
 
Net Income
 
$
26,162

 
$
32,765

 
$
74,327

 
$
92,271

Less: Earnings allocated to participating securities
 
1,035

 
1,460

 
2,958

 
4,144

Earnings available to basic common shares
 
$
25,127

 
$
31,305

 
$
71,369

 
$
88,127

Basic earnings per common share
 
$
1.07

 
$
1.34

 
$
3.06

 
$
3.83

Diluted:
 
 
 
 
 
 
 
 
Net Income
 
$
26,162

 
$
32,765

 
$
74,327

 
$
92,271

Less: Earnings allocated to participating securities
 
1,000

 
1,320

 
2,769

 
3,843

Earnings available to diluted common shares
 
$
25,162

 
$
31,445

 
$
71,558

 
$
88,428

Diluted earnings per common share
 
$
1.03

 
$
1.19

 
$
2.82

 
$
3.52

As discussed in Note 9, “Long-Term Debt”, the Company was required to include the dilutive effect, if applicable, of the net shares issuable under the 2.25% Notes (as defined in Note 9) and the warrants sold in connection with the 2.25% Notes (“2.25% Warrants”) in its diluted common shares outstanding for the diluted earnings calculation. The average adjusted closing price of the Company's common stock for the three months ended September 30, 2013 and for the period prior to the conversion and redemption of the 2.25% Notes during the three months ended September 30, 2014, was more than the conversion price then in effect at the end of those periods. Therefore, the respective dilutive effect of the 2.25% Notes was included in the computation of diluted EPS for the three and nine month periods ended September 30, 2014 and 2013. The 2.25% Notes and 2.25% Warrants were converted or redeemed and settled, respectively, during the three months ended

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

September 30, 2014. As a result, the dilution is calculated based on the weighted average length of time the 2.25% Notes and 2.25% Warrants were outstanding during the three and nine months ended September 30, 2014. Refer to Note 9, "Long-Term Debt" for a description of the conversion of the 2.25% Notes and 2.25% Warrants that occurred during the three months ended September 30, 2014.
In addition, the Company was required to include the dilutive effect, if applicable, of the net shares issuable under the 3.00% Notes (as defined in Note 9, "Long-Term Debt" ) and the warrants sold in connection with the 3.00% Notes (“3.00% Warrants”) in its diluted common shares outstanding for the diluted earnings calculation. The average adjusted closing price of the Company's common stock for the three months ended September 30, 2013 and for the period prior to the repurchase of the 3.00% Notes during the three months ended September 30, 2014, was more than the conversion price then in effect at the end of those periods. Therefore, the respective dilutive effect of the 3.00% Notes and 3.00% Warrants was included in the computation of diluted EPS for the three and nine months ended September 30, 2014 and 2013. On June 25, 2014, the Company repurchased $92.5 million of the $115.0 million principal. The remaining 3.00% Notes and 3.00% Warrants were repurchased and settled, respectively, during the three months ended September 30, 2014. As a result, the dilution is calculated based on the weighted average length of time the 3.00% Notes and 3.00% Warrants were outstanding during the three and nine months ended September 30, 2014. Refer to Note 9, "Long-Term Debt" for a description of the repurchase of the 3.00% Notes and 3.00% Warrants that occurred during the three months ended September 30, 2014.
6. INCOME TAXES
The Company is subject to U.S. federal income taxes and income taxes in numerous U.S. states. In addition, the Company is subject to income tax in the U.K. and Brazil relative to its foreign subsidiaries. The Company's effective income tax rates of 40.4% and 43.4% of pretax income for the three and nine months ended September 30, 2014, respectively, differed from the U.S. federal statutory rate of 35.0% due primarily to a portion of the U.S. GAAP loss on the purchase of the 2.25% Notes and the 3.00% Notes (as defined in Note 9, "Long-term Debt") that was not deductible for tax purposes, state and foreign taxes, net of federal benefit and additional valuation allowances recorded in respect of net operating losses of certain Brazil subsidiaries. The impact of these items was partially offset by a discrete, net deferred tax benefit of $3.4 million from tax deductible goodwill in Brazil, resulting from a restructuring during the three months ended September 30, 2014.
For the three and nine months ended September 30, 2014, the Company's effective tax rate increased compared to the same periods in 2013 to 40.4% and 43.4% from 37.3% and 39.2%, respectively. These increases were primarily due to a portion of the U.S. GAAP loss on the extinguishment of the 2.25% Notes and the 3.00% Notes that was not deductible for tax purposes and additional valuation allowances recorded in respect of net operating losses of certain Brazil subsidiaries, partially offset by the net deferred tax benefit from tax deductible goodwill in Brazil, resulting from a restructuring during the three months ended September 30, 2014. During the three and nine months ended September 30, 2013, the Company's effective tax rate was increased as a result of the tax effect of non-deductible acquisition costs, as well as the impact of goodwill allocated to the disposition of certain dealerships that was not deductible for tax purposes in 2013.
As of September 30, 2014 and December 31, 2013, the Company had no unrecognized tax benefits with respect to uncertain tax positions and did not incur any interest and penalties nor did it accrue any interest for the nine months ended September 30, 2014. When applicable, consistent with prior practice, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
Taxable years 2009 and subsequent remain open for examination by the Company’s major taxing jurisdictions.
7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts and notes receivable consisted of the following: 
 
 
September 30, 2014
 
December 31, 2013
 
 
(unaudited)
 
 
 
 
(In thousands)
Amounts due from manufacturers
 
$
77,374

 
$
78,131

Parts and service receivables
 
34,769

 
31,950

Finance and insurance receivables
 
18,208

 
19,283

Other
 
11,183

 
8,099

Total accounts and notes receivable
 
141,534

 
137,463

Less allowance for doubtful accounts
 
2,799

 
2,405

Accounts and notes receivable, net
 
$
138,735

 
$
135,058

Inventories consisted of the following: 
 
 
September 30, 2014
 
December 31, 2013
 
 
(unaudited)
 
 
 
 
(In thousands)
New vehicles
 
$
1,085,469

 
$
1,165,335

Used vehicles
 
250,338

 
231,960

Rental vehicles
 
97,602

 
88,523

Parts, accessories and other
 
64,136

 
64,156

Total inventories
 
1,497,545

 
1,549,974

Less lower of cost or market reserves
 
7,025

 
7,656

Inventories, net
 
$
1,490,520

 
$
1,542,318


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

New and used vehicles are valued at the lower of specific cost or market and are removed from inventory using the specific identification method. Parts and accessories are valued at lower of cost or market determined on either a first-in, first-out basis or on an average cost basis.
Property and equipment consisted of the following:
 
 
Estimated
Useful Lives
in Years
 
September 30, 2014
 
December 31, 2013
 
 
(unaudited)
 
 
 
 
(dollars in thousands)
Land
 
—
 
$
294,475

 
$
269,778

Buildings
 
30 to 40
 
428,784

 
405,918

Leasehold improvements
 
varies
 
128,887

 
120,531

Machinery and equipment
 
7 to 20
 
85,420

 
79,209

Furniture and fixtures
 
3 to 10
 
76,162

 
70,918

Company vehicles
 
3 to 5
 
10,517

 
8,508

Construction in progress
 
—
 
31,803

 
19,224

Total
 
 
 
1,056,048

 
974,086

Less accumulated depreciation
 
 
 
196,709

 
177,730

Property and equipment, net
 
 
 
$
859,339

 
$
796,356

During the nine months ended September 30, 2014, the Company incurred $59.7 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, including $2.8 million relative to facilities that were subsequently disposed during 2014. In addition, the Company purchased real estate (including land and buildings) during the nine months ended September 30, 2014 associated with existing dealership operations totaling $23.8 million. And, in conjunction with the acquisition of dealerships and franchises in the nine months ended September 30, 2014, the Company acquired $47.0 million of real estate and other property and equipment.
As of September 30, 2014, the Company determined that certain dealerships and the associated real estate qualified as held-for-sale. As a result, the Company classified the carrying value of the asset disposal group real estate and other fixed assets totaling $8.1 million in prepaid and other current assets in its Consolidated Balance Sheet. In addition, during the three months ended September 30, 2014, the Company sold three of its dealership facilities that qualified as a held-for-sale assets as of June 30, 2014 for $129.0 million. The Company realized a $16.7 million pre-tax gain from the sale of these held-for-sale assets.
8. CREDIT FACILITIES
In the U.S., the Company has a $1.7 billion revolving syndicated credit arrangement with 25 financial institutions including six manufacturer-affiliated finance companies (“Revolving Credit Facility”). The Company also has a $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 floor plan financing arrangements with several other automobile manufacturers for financing of a portion of its U.S. rental vehicle inventory. In the U.K., the Company has financing arrangements with BMW Financial Services, Volkswagen Finance and FMCC for financing of its new and used vehicles. In Brazil, the Company has financing arrangements for new, used, and rental vehicles with several financial institutions, most of which are manufacturer affiliated. Within the Company's Consolidated Balance Sheets, Floorplan notes payable - credit facility and other primarily reflects amounts payable for the purchase of specific new, used and rental vehicle inventory (with the exception of new and rental vehicle purchases financed through lenders affiliated with the respective manufacturer) whereby financing is provided by the Revolving Credit Facility. Floorplan notes payable - manufacturer affiliates reflects amounts related to the purchase of vehicles whereby financing is provided by the FMCC Facility, the financing of rental vehicles in the U.S., as well as the financing of new, used, and rental vehicles in both the U.K. and Brazil. Payments on the floorplan notes payable are generally due as the vehicles are sold. As a result, these obligations are reflected in the accompanying Consolidated Balance Sheets as current liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Revolving Credit Facility
On June 20, 2013, the Company amended its Revolving Credit Facility principally to increase the total borrowing capacity from $1.35 billion to $1.7 billion and to extend the term from an expiration date of June 1, 2016 to June 20, 2018. The Revolving Credit Facility consists of two tranches, providing a maximum of $1.6 billion for U.S. vehicle inventory floorplan financing (“Floorplan Line”), as well as a maximum of $320.0 million and a minimum of $100.0 million for working capital and general corporate purposes, including acquisitions (“Acquisition Line”). The capacity under these two tranches can be re-designated within the overall $1.7 billion commitment, subject to the aforementioned limits. Up to $125.0 million of the Acquisition Line can be borrowed in either euros or pound sterling. The Revolving Credit Facility can be expanded to a maximum commitment of $1.95 billion, subject to participating lender approval. The Floorplan Line bears interest at rates equal to the one-month LIBOR plus 125 basis points for new vehicle inventory and the one-month LIBOR plus 150 basis points for used vehicle inventory. The Acquisition Line bears interest at the one-month LIBOR plus 150 basis points plus a margin that ranges from zero to 100 basis points for borrowings in U.S. dollars and 150 to 250 basis points on borrowings in euros or pound sterling, depending on the Company’s total adjusted leverage ratio. The Floorplan Line requires a commitment fee of 0.20% per annum on the unused portion. The Acquisition Line also requires a commitment fee ranging from 0.25% to 0.45% per annum, depending on the Company’s total adjusted leverage ratio, based on a minimum commitment of $100.0 million less outstanding borrowings. In conjunction with the Revolving Credit Facility, the Company has $5.6 million of related unamortized costs as of September 30, 2014 that are being amortized over the term of the facility.
After considering the outstanding balance of $1,029.8 million as of September 30, 2014, the Company had $350.2 million of available floorplan borrowing capacity under the Floorplan Line. Included in the $350.2 million available borrowings under the Floorplan Line was $37.5 million of immediately available funds. The weighted average interest rate on the Floorplan Line was 1.4% as of September 30, 2014 and December 31, 2013, excluding the impact of the Company’s interest rate swaps. Amounts borrowed by the Company under the Floorplan Line for specific vehicle inventory are to be repaid upon the sale of the vehicle financed, and in no case is a borrowing for a vehicle to remain outstanding for greater than one year. With regards to the Acquisition Line, there were no borrowings outstanding as of September 30, 2014 and $60.0 million outstanding as of December 31, 2013, respectively. After considering $43.2 million of outstanding letters of credit and other factors included in the Company’s available borrowing base calculation, there was $252.3 million of available borrowing capacity under the Acquisition Line as of September 30, 2014. The amount of available borrowing capacity under the Acquisition Line is limited from time to time based upon certain debt covenants.
All of the U.S. dealership-owning subsidiaries are co-borrowers under the Revolving Credit Facility. The Company’s obligations under the Revolving Credit Facility are secured by essentially all of the Company's U.S. personal property (other than equity interests in dealership-owning subsidiaries), including all motor vehicle inventory and proceeds from the disposition of dealership-owning subsidiaries, excluding inventory financed directly with manufacturer-affiliates and other third party financing institutions. The Revolving Credit Facility contains a number of significant covenants that, among other things, 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, total adjusted leverage, and senior secured 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 $125.0 million plus (or minus if negative) (a) one-half of the aggregate consolidated net income for the period beginning on January 1, 2013 and ending on the date of determination and (b) the amount of net cash proceeds received from the sale of capital stock on or after January 1, 2013 and ending on the date of determination less (c) cash dividends and share repurchases (“Restricted Payment Basket”). For purposes of the calculation of the Restricted Payment Basket, net income represents such amounts per the consolidated financial statements adjusted to exclude the Company’s foreign operations, non-cash interest expense, non-cash asset impairment charges, and non-cash stock-based compensation. As of September 30, 2014, the Restricted Payment Basket totaled $176.0 million. As of September 30, 2014, the Company was in compliance with all applicable covenants and ratios under the Revolving Credit Facility.
Ford Motor Credit Company Facility
The FMCC Facility provides for the financing of, and is collateralized by, the Company’s Ford new vehicle inventory in the U.S., including affiliated brands. This arrangement provides for $300.0 million of floorplan financing and is an evergreen arrangement that may be canceled with 30 days notice by either party. As of September 30, 2014, the Company had an outstanding balance of $146.1 million under the FMCC Facility with an available floorplan borrowing capacity of $153.9 million. Included in the $153.9 million available borrowings under the FMCC Facility was $25.0 million of immediately

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

available funds. This facility bears interest at a rate of Prime plus 150 basis points minus certain incentives. As of September 30, 2014, the interest rate on the FMCC Facility was 4.75% before considering the applicable incentives.
Other Credit Facilities
The Company has credit facilities with BMW Financial Services, Volkswagen Finance and FMCC for the financing of new, used and rental vehicle inventories related to its U.K. operations. These facilities are denominated in pound sterling and are evergreen arrangements that may be canceled with notice by either party and bear interest at a base rate, plus a surcharge that varies based upon the type of vehicle being financed. The interest rates charged on borrowings outstanding under these facilities ranged from 1.40% to 3.95% as of September 30, 2014.
The Company has credit facilities with financial institutions in Brazil, most of which are affiliated with the manufacturers, for the financing of new, used and rental vehicle inventories related to its Brazil operations. These facilities are denominated in Brazilian real and have renewal terms ranging from one month to twelve months. They may be canceled with notice by either party and bear interest at a benchmark rate, plus a surcharge that varies based upon the type of vehicle being financed. As of September 30, 2014, the interest rates charged on borrowings outstanding under these facilities ranged from 15.11% to 19.56%.
Excluding rental vehicles financed through the Revolving Credit Facility, financing for U.S. rental vehicles is typically obtained directly from the automobile manufacturers. These financing arrangements generally require small monthly payments and mature in varying amounts over a period of two years. As of September 30, 2014, the interest rate charged on borrowings related to the Company’s rental vehicle fleet varied up to 4.75%. Rental vehicles are typically transferred to used vehicle inventory when they are removed from rental service and repayment of the borrowing is required at that time.
9. LONG-TERM DEBT
The Company carries its long-term debt at face value, net of applicable discounts. Long-term debt consisted of the following:
 
 
September 30, 2014
 
December 31, 2013
 
 
(dollars in thousands)
5.00% Senior Notes
 
$
539,822

 
$
—

2.25% Convertible Senior Notes
 
—

 
160,334

3.00% Convertible Senior Notes
 
—

 
84,305

Acquisition Line
 
—

 
60,000

Real Estate Credit Facility
 
58,838

 
67,719

Other Real Estate Related and Long-Term Debt
 
316,703

 
279,167

Capital lease obligations related to real estate, maturing in varying amounts through June 2034 with a weighted average interest rate of 10.3%
 
57,655

 
47,553

 
 
973,018

 
699,078

Less current maturities of real estate credit facility and other long-term debt
 
34,519

 
35,389

 
 
$
938,499

 
$
663,689

Included in the current maturities of long-term debt and short term financing in the Company's Consolidated Balance Sheet as of September 30, 2014 and December 31, 2013 was $6.5 million and $0.8 million, respectively, of short-term financing that is due within one year of the respective balance sheet date.
2.25% Convertible Senior Notes
On September 2, 2014, holders of $182.5 million in aggregate amount of the Company's then outstanding 2.25% Convertible Senior Notes due 2036 ("2.25% Notes") elected to convert their 2.25% Notes. The Company redeemed the remaining outstanding 2.25% Notes. The settlement for the conversion and the redemption of the 2.25% Notes occurred on September 4, 2014. Consideration paid for the conversion and redemption of the 2.25% Notes was $237.5 million, including $182.8 million in cash and 701,795 shares of the Company's common stock, which was recognized as a decrease to treasury stock. In conjunction with the conversion and redemption of the 2.25% Notes, the Company received 421,309 shares of its common stock in settlement of the purchased ten-year call options on its common stock (“2.25% Purchased Options”) and 2.25% Warrants, which was recognized as an increase to treasury stock. As a result of the conversion and redemption of the 2.25% Notes, the Company recognized a loss of $16.9 million based on the difference in the carrying value of the liability component and the fair value immediately prior to the conversion and redemption.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For the nine months ended September 30, 2014 and 2013, the contractual interest expense and the discount amortization, which are recorded as other interest expense in the accompanying Consolidated Statements of Operations, were as follows: 
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(dollars in thousands)
Year-to-date contractual interest expense
 
$
1,875

 
$
3,084

Year-to-date discount amortization (1)
 
$
5,366

 
$
5,590

Effective interest rate of liability component
 
7.7
%
 
7.7
%
 (1)    Represents the incremental impact of the accounting for convertible debt as primarily codified in ASC 470, Debt.
The Company determined the discount using the estimated effective interest rate for similar debt with no convertible features. The original effective interest rate of 7.50% was estimated by comparing debt issuances from companies with similar credit ratings during the same annual period as the Company. The effective interest rate differs from the 7.50% due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount and were being amortized to interest expense through 2016. These costs were written off as part of the conversion of the 2.25% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 2.25% Notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3.00% Convertible Senior Notes
On June 25, 2014, the Company repurchased $92.5 million of the $115.0 million principal outstanding of its 3.00% Convertible Senior Notes due 2020 (“3.00% Notes”) in a tender offer, leaving an outstanding balance of $22.6 million as of June 30, 2014. Consideration paid for this repurchase was $210.4 million. In conjunction with the repurchase, the Company recognized a loss of $23.6 million for the three months ended June 30, 2014 based on the difference in the carrying value of the liability component and the fair value immediately prior to the purchase. Subsequent to June 30, 2014, the Company settled the purchased ten-year call options on its common stock (“3.00% Purchased Options”) and 3.00% Warrants in the same proportion as the 3.00% Notes repurchased on June 25, 2014 and received $26.4 million in cash as a result, which was recognized as an increase to additional paid in capital.
In September 2014, the Company repurchased the remaining outstanding $22.6 million of the 3.00% Notes. Total consideration paid for the repurchase was $49.5 million in cash. In conjunction with the repurchase, the Company recognized a loss of $5.9 million for the three months ended September 30, 2014 based on the difference in the carrying value of the liability component and the fair value immediately prior to the repurchase. Also, in September 2014, the Company settled the remaining 3.00% Purchased Options and 3.00% Warrants in conjunction with the repurchase and received $6.2 million in cash, which was recognized as an increase to additional paid in capital.
For the nine months ended September 30, 2014 and 2013, the contractual interest expense and the discount amortization, which are recorded as interest expense in the accompanying Consolidated Statements of Operations, were as follows:
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(dollars in thousands)
Year-to-date contractual interest expense
 
$
1,839

 
$
2,588

Year-to-date discount amortization (1) 
 
$
1,810

 
$
2,410

Effective interest rate of liability component
 
8.6
%
 
8.6
%
(1)    Represents the incremental impact of the accounting for convertible debt as primarily codified in ASC 470, Debt.
The Company determined the discount using the estimated effective interest rate for similar debt with no convertible features. The original effective interest rate of 8.25% was estimated by receiving a range of quotes from the underwriters for the estimated rate that the Company could reasonably expect to issue non-convertible debt for the same tenure. The effective interest rate differs from the 8.25% due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount and were being amortized to interest expense through 2020. These costs were written off as part of the extinguishment of the 3.00% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 3.00% Notes.
5.00% Senior Notes
On June 2, 2014, the Company issued $350.0 million aggregate principal amount of its 5.00% Senior Notes ("5.00% Notes") due 2022. Subsequently, on September 9, 2014, the Company issued an additional $200.0 million of 5.00% Notes at a discount of 1.5% from face value. The 5.00% Notes will mature on June 1, 2022 and pay interest semiannually, in arrears, in cash on each June 1 and December 1, beginning December 1, 2014. Using proceeds of certain equity offerings, the Company may redeem up to 35.0% of the 5.00% Notes prior to June 1, 2017, subject to certain conditions, at a redemption price equal to 105% of principal amount of the 5.00% Notes plus accrued and unpaid interest. Otherwise, the Company may redeem some or all of the 5.00% Notes prior to June 1, 2017 at a redemption price equal to 100% of the principal amount of the 5.00% Notes redeemed, plus an applicable premium, and plus accrued and unpaid interest. On or after June 1, 2017, the Company may redeem some or all of the 5.00% Notes at specified prices, plus accrued and unpaid interest. The Company may be required to purchase the 5.00% Notes if it sells certain assets or triggers the change in control provisions defined in the 5.00% Notes indenture. The 5.00% Notes are senior unsecured obligations and rank equal in right of payment to all of the Company's existing and future senior unsecured debt and senior in right of payment to all of its future subordinated debt.
The 5.00% Notes are guaranteed by substantially all of the Company's U.S. subsidiaries. The U.S. subsidiary guarantees rank equally in the right of payment to all of the Company's U.S. subsidiary guarantor’s existing and future subordinated debt. In addition, the 5.00% Notes are structurally subordinated to the liabilities of its non-guarantor subsidiaries.
In connection with the issuance of the 5.00% Notes, the Company entered into registration rights agreements (the “Registration Rights Agreements”) with the initial purchasers. Pursuant to the Registration Rights Agreements, the Company has agreed to file a registration statement with the Securities and Exchange Commission, so that holders of the 5.00% Notes can exchange the 5.00% Notes for registered 5.00% Notes that have substantially identical terms as the 5.00% Notes. The Company has also agreed to use commercially reasonable efforts to cause the exchange to be completed by June 2, 2015. The Company will be required to pay additional interest on the 5.00% Notes if it fails to comply with its obligations to register the 5.00% Notes within the specified time period.

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Underwriters' fees and the discount relative to the $550.0 million totaled $10.4 million, which were recorded as a reduction of the 5.00% Notes principal balance and are being amortized over a period of eight years. The 5.00% Notes are presented net of unamortized underwriter fees and discount of $10.2 million as of September 30, 2014. At the time of issuance of the 5.00% Notes, the Company capitalized $2.2 million of debt issuance costs, which are included in Other Assets on the accompanying Consolidated Balance Sheet and amortized over a period of eight years. Unamortized debt issuance costs as of September 30, 2014 totaled $2.1 million.
Real Estate Credit Facility
Group 1 Realty, Inc., a wholly-owned subsidiary of the Company, is party to a real estate credit facility with Bank of America, N.A. and Comerica Bank (the “Real Estate Credit Facility”) providing the right for up to $99.1 million of term loans, of which $74.1 million had been used as of September 30, 2014. The term loans can be expanded provided that (a) no default or event of default exists under the Real Estate Credit Facility; (b) the Company obtains commitments from the lenders who would qualify as assignees for such increased amounts; and (c) certain other agreed upon terms and conditions have been satisfied. This facility is guaranteed by the Company and substantially all of the existing and future domestic subsidiaries of the Company and is secured by the real property owned by the Company that is mortgaged under the Real Estate Credit Facility. The Company capitalized $1.1 million debt issuance costs related to the Real Estate Credit Facility that are being amortized over the term of the facility, $0.4 million of which were still unamortized as of September 30, 2014.
The interest rate is equal to (a) the per annum rate equal to one-month LIBOR plus 2.00% per annum, determined on the first day of each month; or (b) 0.95% per annum in excess of the higher of (i) the Bank of America prime rate (adjusted daily on the day specified in the public announcement of such price rate), (ii) the Federal Funds Rate adjusted daily, plus 0.50% or (iii) the per annum rate equal to the one-month LIBOR plus 1.05% per annum. The Federal Funds Rate is the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the business day succeeding such day.
The Company is required to make quarterly principal payments equal to 1.25% of the principal amount outstanding and is required to repay the aggregate amount outstanding on the maturity dates of the individual property borrowings, ranging, from December 29, 2015 through February 27, 2017. During the nine months ended September 30, 2014, the Company made additional borrowings of $0.2 million and made principal payments of $9.1 million on outstanding borrowings from the Real Estate Credit Facility. As of September 30, 2014, borrowings outstanding under the Real Estate Credit Facility totaled $58.8 million, with $3.1 million recorded as a current maturity of long-term debt in the accompanying Consolidated Balance Sheet.
The Real Estate Credit Facility also contains usual and customary provisions limiting the Company’s ability to engage in certain transactions, including limitations on the Company’s ability to incur additional debt, additional liens, make investments, and pay distributions to its stockholders. In addition, the Real Estate Credit Facility requires certain financial covenants that are identical to those contained in the Company’s Revolving Credit Facility. As of September 30, 2014, the Company was in compliance with all applicable covenants and ratios under the Real Estate Credit Facility.
Acquisition Line
See Note 8, "Credit Facilities," for further discussion on the Company's Revolving Credit Facility and Acquisition Line.
Other Real Estate Related and Long-Term Debt
The Company, as well as certain of its wholly-owned subsidiaries, has entered into separate term mortgage loans in the U.S. with four of its manufacturer-affiliated finance partners, Toyota Motor Credit Corporation (“TMCC”), Mercedes-Benz Financial Services USA, LLC (“MBFS”), BMW Financial Services NA, LLC (“BMWFS”) and FMCC, as well as several third-party financial institutions (collectively, “Real Estate Notes”). The Real Estate Notes are on specific buildings and/or properties and are guaranteed by the Company. Each loan was made in connection with, and is secured by mortgage liens on, the real property owned by the Company that is mortgaged under the Real Estate Notes. The Real Estate Notes bear interest at fixed rates between 3.67% and 9.00%, and at variable indexed rates plus a spread between 1.50% and 3.35% per annum. The Company capitalized $1.3 million of related debt issuance costs related to the Real Estate Notes that are being amortized over the terms of the notes, $0.5 million of which were still unamortized as of September 30, 2014.
The loan agreements with TMCC consist of eight term loans. As of September 30, 2014, $50.2 million was outstanding under the TMCC term loans, with $10.1 million classified as a current maturity of long-term debt. For the nine months ended September 30, 2014, the Company made no additional borrowings and made principal payments of $1.4 million. These loans will mature by September 2020 and provide for monthly payments based on a 20-year amortization schedule. These eight loans are cross-collateralized and cross-defaulted with each other and are cross-defaulted with the Revolving Credit Facility.
The loan agreements with MBFS consist of two term loans. As of September 30, 2014, $27.6 million was outstanding under the MBFS term loans, with $1.1 million classified as a current maturity of long-term debt. For the nine months ended September 30, 2014, the Company made no additional borrowings and made principal payments of $17.9 million. The

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agreements provide for monthly payments based on a 20-year amortization schedule and will mature by January 2031. These two loans are cross-collateralized and cross-defaulted with each other and are also cross-defaulted with the Revolving Credit Facility.
The loan agreements with BMWFS consist of 14 term loans. As of September 30, 2014, $66.7 million was outstanding under the BMWFS term loans, with $4.3 million classified as a current maturity of long-term debt. For the nine months ended September 30, 2014, the Company made no additional borrowings and made principal payments of $3.4 million. The agreements provide for monthly payments based on a 15-year amortization schedule and will mature by September 2019. In the case of three properties owned by subsidiaries, the applicable loan is also guaranteed by the subsidiary real property owner. These 14 loans are cross-collateralized with each other. In addition, they are cross-defaulted with each other, the Revolving Credit Facility, and certain dealership franchising agreements with BMW of North America, LLC.
The loan agreements with FMCC consist of two term loans. As of September 30, 2014, $18.6 million was outstanding under the FMCC term loans, with $0.8 million classified as a current maturity of long-term debt. For the nine months ended September 30, 2014, the Company made additional borrowings and principal payments of $13.8 million and $0.6 million, respectively. The agreements provide for monthly payments based on a 20-year amortization schedule that will mature by January 2024. These two loans are cross-defaulted with the Revolving Credit Facility.
In addition, agreements with third-party financial institutions consist of 17 term loans for an aggregate principal amount of $109.8 million, to finance real estate associated with the Company’s dealerships. The loans are being repaid in monthly installments that will mature by November 2022. As of September 30, 2014, borrowings under these notes totaled $98.8 million, with $5.5 million classified as a current maturity of long-term debt. For the nine months ended September 30, 2014, the Company made additional borrowings and principal payments of $37.9 million and $3.5 million, respectively. These 17 loans are cross-defaulted with the Revolving Credit Facility.
The Company has also entered into 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, “Foreign Notes”) are being repaid in monthly installments that will mature by August 2027. As of September 30, 2014, borrowings under the Foreign Notes totaled $34.7 million, with $4.1 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets. For the nine months ended September 30, 2014, the Company made additional borrowings and principal payments of $6.8 million and $2.9 million, respectively.
During the nine months ended September 30, 2014, the Company entered into working capital loan agreements with third-party financial institutions in Brazil for R$38.0 million. The proceeds were used to partially pay off manufacturer-affiliated floorplan borrowings. These loans will mature by February 2017.
Fair Value of Long-Term Debt
The Company's outstanding 5.00% Notes had a fair value of $533.5 million as of September 30, 2014. Of the $316.7 million and $279.2 million other real estate related and long-term debt as of September 30, 2014 and December 31, 2013, respectively, $153.9 million and $164.1 million represented fixed interest rate borrowings. The fair value of such fixed interest rate borrowings was $174.4 million and $190.0 million as of September 30, 2014 and December 31, 2013, respectively. The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of September 30, 2014 and December 31, 2013. 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.
10. FAIR VALUE MEASUREMENTS
ASC 820 defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; requires disclosure of the extent to which fair value is used to measure financial and non-financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date; 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

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•Level 3 — unobservable inputs based upon the reporting entity’s internally developed assumptions that market participants would use in pricing the asset or liability.
The Company’s financial instruments consist primarily of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, investments in debt and equity securities, accounts payable, credit facilities, long-term debt and interest rate swaps. The fair values of cash and cash equivalents, contracts-in-transit and vehicle receivables, accounts and notes receivable, accounts payable, and credit facilities approximate their carrying values due to the short-term nature of these instruments or the existence of variable interest rates. The Company periodically invests in unsecured, corporate demand obligations with manufacturer-affiliated finance companies, which bear interest at a variable rate and are redeemable on demand by the Company. Therefore, the Company has classified these demand obligations as cash and cash equivalents in the accompanying Consolidated Balance Sheets. The Company determined that the valuation measurement inputs of these instruments include inputs other than quoted market prices, that are observable or that can be corroborated by observable data by correlation. Accordingly, the Company has classified these instruments within level 2 of the hierarchy framework. The Company's derivative financial instruments are recorded at fair market value. See Note 3, "Derivative Instruments and Risk Management Activities" for further details regarding the Company's derivative financial instruments. See Note 9, "Long-term Debt" for details regarding the fair value of the Company's long-term debt.
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 debt instruments and interest rate derivative financial instruments as having met such criteria. The respective fair values measured on a recurring basis as of September 30, 2014 and December 31, 2013, respectively, were as follows:
 
 
As of September 30, 2014
 
 
Level 1
 
Level 2
 
Total
 
 
(In thousands)
Assets:
 
 
 
 
 
 
       Interest rate derivative financial instruments
 
$
—

 
$
534

 
$
534

       Debt securities:
 
 
 
 
 
 
               Demand obligations
 
$
—

 
$
30,198

 
$
30,198

Total
 
$
—

 
$
30,732

 
$
30,732

Liabilities:
 
 
 
 
 
 
Interest rate derivative financial instruments
 
$
—

 
$
23,483

 
$
23,483

Total
 
$
—

 
$
23,483

 
$
23,483

 
 
As of December 31, 2013
 
 
Level 1
 
Level 2
 
Total
 
 
(In thousands)
Assets:
 
 
 
 
 
 
       Interest rate derivative financial instruments
 
$
—

 
$
3,919

 
$
3,919

Total
 
$
—

 
$
3,919

 
$
3,919

Liabilities:
 
 
 
 
 
 
Interest rate derivative financial instruments
 
$
—

 
$
26,078

 
$
26,078

Total
 
$
—

 
$
26,078

 
$
26,078

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

23
Table of Contents GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Legal Proceedings
Currently, the Company is not party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company's results of operations, financial condition, or cash flows, including class action lawsuits. However, the results of current, or future, matters cannot be predicted with certainty, and an unfavorable resolution of one or more of such matters could have a material adverse effect on the Company's results of operations, financial condition, or cash flows.
Other Matters
The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by the Company’s subsidiaries of their respective dealership premises. Pursuant to these leases, the Company’s subsidiaries generally agree to indemnify the lessor and other parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements in connection with the sale of assets or businesses in which it agrees to indemnify the purchaser, or other parties, from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability would be limited by the terms of the applicable agreement.
From time to time, primarily in connection with dealership dispositions, the Company’s subsidiaries assign or sublet to the dealership purchaser the subsidiaries’ interests in any real property leases associated with such dealerships. In general, the Company’s subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, the Company and its subsidiaries generally remain subject to the terms of any guarantees made by the Company and its subsidiaries in connection with such leases. Although the Company generally has indemnification rights against the assignee or sublessee in the event of non-performance under these leases, as well as certain defenses, and the Company presently has no reason to believe that it or its subsidiaries will be called on to perform under any such assigned leases or subleases, the Company estimates that lessee rental payment obligations during the remaining terms of these leases were $3.2 million as of September 30, 2014. The Company’s exposure under these leases is difficult to estimate and there can be no assurance that any performance of the Company or its subsidiaries required under these leases would not have a material adverse effect on the Company’s business, financial condition, or cash flows. The Company and its subsidiaries also may be called on to perform other obligations under these leases, such as environmental remediation of the leased premises or repair of the leased premises upon termination of the lease. However, the Company does not have any known material environmental commitments or contingencies and presently has no reason to believe that it or its subsidiaries will be called on to so perform.
In the ordinary course of business, the Company is subject to numerous laws and regulations, including automotive, environmental, health and safety, and other laws and regulations. The Company does not anticipate that the costs of such compliance will have a material adverse effect on its business, consolidated results of operations, financial condition, or cash flows, although such outcome is possible given the nature of its operations and the extensive legal and regulatory framework applicable to its business. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, established a new consumer financial protection agency with broad regulatory powers. Although automotive dealers are generally excluded, the Dodd-Frank Act could lead to additional, indirect regulation of automotive dealers through its regulation of automotive finance companies and other financial institutions. In addition, the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, has the potential to increase the Company’s future annual employee health care costs. Further, new laws and regulations, particularly at the federal level, may be enacted, which could also have a materially adverse impact on its business.

24
Table of Contents GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

12. INTANGIBLE FRANCHISE RIGHTS AND GOODWILL
The following is a roll-forward of the Company’s intangible franchise rights and goodwill accounts by reportable segment:
 
Intangible Franchise Rights
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
(In thousands)
 
BALANCE, December 31, 2013
$
216,412

 
$
8,659

 
$
76,434

 
$
301,505

 
Additions through acquisitions
60,122

 
—

 
2,490

 
62,612

 
Purchase price allocation adjustments
(2,114
)
 
—

 
(9,061
)
 
(11,175
)
 
Disposals and assets held for sale
(12,075
)
 
—

 
(508
)
 
(12,583
)
 
Impairments
—

 
—

 
(2,800
)
 
(2,800
)
 
Currency translation
—

 
(131
)
 
(1,758
)
 
(1,889
)
 
BALANCE, September 30, 2014
$
262,345

 
$
8,528

 
$
64,797

 
$
335,670

 
 
Goodwill
 
 
U.S.
 
U.K.
 
Brazil
 
Total
 
 
(In thousands)
 
BALANCE, December 31, 2013
$
612,468

 
$
19,602

 
$
105,233

 
$
737,303

(1) 
Additions through acquisitions
103,424

 
—

 
—

 
103,424

 
Purchase price allocation adjustments
1,459

 
—

 
5,976

 
7,435

 
Disposals and assets held for sale
(17,140
)
 
—

 
(1,813
)
 
(18,953
)
 
Currency translation
—

 
(296
)
 
(3,865
)
 
(4,161
)
 
Tax adjustments
(52
)
 
—

 
—

 
(52
)
 
BALANCE, September 30, 2014
$
700,159

 
$
19,306

 
$
105,531

 
$
824,996

(1) 
(1) Net of accumulated impairment of $40.3 million.


25
Table of Contents GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in the balances of each component of accumulated other comprehensive loss for the nine months ended September 30, 2014 and 2013 were as follows: 
 
 
Nine Months Ended September 30, 2014
 
 
Accumulated foreign currency translation loss
 
Accumulated loss on interest rate swaps
 
Total
 
 
(In thousands)
Balance, December 31, 2013
 
$
(37,827
)
 
$
(13,850
)
 
$
(51,677
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 

Pre-tax
 
(7,329
)
 
(9,259
)
 
(16,588
)
Tax effect
 
—

 
3,472

 
3,472

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 


Floorplan interest expense
 
—

 
7,331

 
7,331

Other interest expense
 
—

 
1,138

 
1,138

Tax effect
 
—

 
(3,176
)
 
(3,176
)
Net current period other comprehensive loss
 
(7,329
)
 
(494
)
 
(7,823
)
Balance, September 30, 2014
 
$
(45,156
)
 
$
(14,344
)
 
$
(59,500
)
 
 
Nine Months Ended September 30, 2013
 
 
Accumulated foreign currency translation loss
 
Accumulated loss on interest rate swaps
 
Total
 
 
(In thousands)
Balance, December 31, 2012
 
$
(6,126
)
 
$
(26,931
)
 
$
(33,057
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Pre-tax
 
(23,487
)
 
7,998

 
(15,489
)
Tax effect
 
—

 
(2,999
)
 
(2,999
)
Amounts reclassified from accumulated other comprehensive income to:
 
 
 
 
 
 
Floorplan interest expense
 
—

 
7,390

 
7,390

Other interest expense
 
—

 
930

 
930

Tax effect
 
—

 
(3,120
)
 
(3,120
)
Net current period other comprehensive (loss) income
 
(23,487
)
 
10,199

 
(13,288
)
Balance, September 30, 2013
 
$
(29,613
)
 
$
(16,732
)
 
$
(46,345
)

26
Table of Contents GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

14. SEGMENT INFORMATION
As of September 30, 2014, the Company had three reportable segments: (1) the U.S., (2) the U.K., and (3) Brazil. Each of the reportable segments is comprised of retail automotive franchises, which sell new vehicles, used vehicles, parts and automotive services, finance and insurance products, and collision centers. The vast majority of the Company's corporate activities are associated with the operations of the U.S. operating segments and therefore the corporate financial results are included within the U.S. reportable segment.
The reportable segments identified above are the business activities of the Company for which discrete financial information is available and for which operating results are regularly reviewed by its chief operating decision maker to allocate resources and assess performance. The Company's chief operating decision maker is its Chief Executive Officer. Reportable segment revenue, income (loss) before income taxes, provision for income taxes and net income (loss) were as follows for the three and nine months ended September 30, 2014 and 2013:
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
U.S.
 
U.K.
 
Brazil
 
Total
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Total revenues
$
2,175,605

 
$
252,201

 
$
198,642

 
$
2,626,448

 
$
6,070,827

 
$
751,226

 
$
576,896

 
$
7,398,949

Income (loss) before income taxes
43,146

 
5,840

 
(5,117
)
 
43,869

 
123,474

 
15,974

 
(8,172
)
 
131,276

(Provision) benefit for income taxes
(20,375
)
 
(1,159
)
 
3,827

 
(17,707
)
 
(57,439
)
 
(2,814
)
 
3,304

 
(56,949
)
Net income (loss) (1)
22,771

 
4,681

 
(1,290
)
 
26,162

 
66,035

 
13,160

 
(4,868
)
 
74,327

(1) Includes the following, after tax: loss due to extinguishment of long-term debt of $17.9 million and $38.7 million for the three and nine months ended September 30, 2014, respectively, in the U.S. segment; asset impairment charges of $2.6 million and $3.6 million for the three and nine months ended September 30, 2014, respectively, in the U.S. segment, and $4.0 million for the three and nine months ended September 30, 2014, in the Brazil segment; gain on real estate and dealership transactions of $8.6 million and $8.9 million for the three and nine months ended September 30, 2014, respectively, in the U.S. segment; and the tax benefit of deductible goodwill of $3.4 million for the three and nine months ended September 30, 2014 in the Brazil segment.
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
U.S.
 
U.K.
 
Brazil
 
Total
 
U.S.
 
U.K.
 
Brazil (3)
 
Total
 
(In thousands)
Total revenues
$
1,889,378

 
$
234,914

 
$
215,855

 
$
2,340,147

 
$
5,492,819

 
$
613,428

 
$
532,842

 
$
6,639,089

Income before income taxes
47,332

 
4,514

 
434

 
52,280

 
139,111

 
10,355

 
2,241

 
151,707

Provision for income taxes
(18,369
)
 
(907
)
 
(239
)
 
(19,515
)
 
(56,475
)
 
(2,260
)
 
(701
)
 
(59,436
)
Net income (2)
28,963

 
3,607

 
195

 
32,765

 
82,636

 
8,095

 
1,540

 
92,271

(2) Includes the following, after tax: loss due to catastrophic events of $0.2 million and $7.4 million for the three and nine months ended September 2013, respectively, in the U.S. segment; gain on real estate and dealership transactions of $0.2 million and $5.4 million for the three and nine months ended September 2013, respectively, in the U.S. segment; and acquisition costs of $4.9 million, $0.1 million and $1.3 million in the U.S., U.K. and Brazil segments, respectively, for the nine months ended September 30, 2013.
(3) Represents financial data from date of acquisition on February 28, 2013.
 
As of September 30, 2014
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)
Total assets
$
3,362,758

 
$
279,299

 
$
320,452

 
$
3,962,509

 
As of December 31, 2013
 
U.S.
 
U.K.
 
Brazil
 
Total
 
(In thousands)