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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1999, for AutoNation, Inc. (formerly Republic Industries, Inc.). The Company operates in two primary segments: Automotive Retail and Automotive Rental. A significant strategic shift occurred in March 1999 when the Company decided to sell its entire interest in its solid waste subsidiary, Republic Services, Inc. ("RSG"), rather than completing a planned tax-free distribution. Consequently, the solid waste segment is classified as discontinued operations for all periods presented.

Key Financial Metrics

Note: Total Debt calculated as sum of Revenue Earning Vehicle Debt ($4,767.5M), Notes Payable/Long-Term Debt ($2,830.9M), and other current liabilities related to debt.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 71.6% to $5.35 billion, driven primarily by a 94.7% surge in Automotive Retail sales ($4.56 billion vs. $2.34 billion). This growth is attributed largely to acquisitions ($432.2 million in cash paid for acquisitions in Q1 1999) and an 8.7% increase in same-store retail sales.
• Segment Performance:
  • Automotive Retail: Operating income rose to $106.7 million (2.3% margin) from $56.4 million (2.4% margin). Cost of operations increased to 86.6% of revenue due to product mix.
  • Automotive Rental: Revenue grew slightly to $791.0 million. However, the segment reported an operating loss of $5.0 million compared to $19.1 million income in 1998. This decline is due to higher fleet costs and implementation costs for the "Global Odyssey" operating system, which also negatively impacted volume.
• Discontinued Operations: Income from the solid waste segment decreased to $29.4 million from $40.3 million, reflecting the decision to divest the business.
• Debt Structure: In February 1999, the Company issued $1.8 billion in rental vehicle asset-backed medium-term notes. Total debt levels increased significantly to fund acquisitions and fleet expansion.

Outlook, Risks, and Management Commentary

• RSG Divestiture: The Company agreed to sell 100 million shares of RSG in April 1999, receiving approximately $1.63 billion in proceeds in May 1999. Proceeds will be used to repay non-vehicle debt, finance acquisitions, and fund share repurchases.
• Share Repurchases: The Company repurchased 8.6 million shares for $113.3 million in Q1 1999. Through March 31, 1999, $249.3 million of the authorized $500 million repurchase program had been utilized.
• Year 2000 (Y2K) Compliance: The Company estimates total Y2K costs at approximately $22.0 million. While most systems are being remediated, risks remain regarding third-party vendor compliance. The Company has developed contingency plans to mitigate potential disruptions.
• Seasonality: Automotive retail typically sees higher volumes in Q2 and Q3. Automotive rental is highly seasonal, with Q3 being the strongest quarter; Q1 and Q4 are historically weaker.
• Accounting Changes: The Company will adopt SFAS 133 (Derivatives) effective January 1, 2000, which may increase earnings volatility.

Investor Verification Checklist

• RSG Sale Closing: Verify the final closing of the Republic Services, Inc. sale and the actual net proceeds received versus the estimated $1.63 billion.
• Global Odyssey Impact: Monitor the resolution of the "Global Odyssey" system issues at National Car Rental and their effect on Q2 volume and profitability.
• Acquisition Integration: Assess the integration of the $432.2 million in Q1 acquisitions and their contribution to same-store sales growth.
• Debt Maturities: Review the maturity schedule of the $1.8 billion in new medium-term notes and the $3.24 billion commercial paper program.
• Y2K Readiness: Confirm the status of third-party vendor compliance and the execution of contingency plans as the year 2000 approaches.