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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

For the quarterly period ended March 31, 2003

OR

Commission file number 1-7541

THE HERTZ CORPORATION

The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format as permitted.

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 X   No

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes    No X .

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of March 31, 2003: Common Stock, $0.01 par value - 100 shares.

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PART I - FINANCIAL INFORMATION

ITEM l. Condensed Consolidated Financial Statements

REPORT OF INDEPENDENT ACCOUNTANTS

To The Hertz Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of The Hertz Corporation (an indirect, wholly owned subsidiary of Ford Motor Company) and its subsidiaries as of March 31, 2003, the related condensed consolidated statement of operations for each of the three- month periods ended March 31, 2003 and 2002, and the condensed consolidated statement of cash flows for each of the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the accompanying condensed consolidated interim financial statements, on January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which changed the method for accounting for stock-based employee compensation.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of income, stockholder’s equity and cash flows for the year then ended (not presented herein), and in our report dated January 17, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
April 11, 2003

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ASSETS

The accompanying notes are an integral part of this statement.

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The accompanying notes are an integral part of this statement.

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The accompanying notes are an integral part of this statement.

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Note 1 – Basis of Presentation

          The Hertz Corporation (together with its subsidiaries, referred to herein as “Hertz” or the “Company”) is an indirect wholly owned subsidiary of Ford Motor Company (“Ford”).

          The summary of accounting policies set forth in Note 1 to the consolidated financial statements contained in the Form 10-K for the fiscal year ended December 31, 2002, filed by the Company with the Securities and Exchange Commission on March 18, 2003, has been followed in preparing the accompanying condensed consolidated financial statements.

          The condensed consolidated financial statements for interim periods included herein have been reviewed, but not audited, by the Company’s independent accountants. In the Company’s opinion, all adjustments (which include only normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods have been made. Results for interim periods are not necessarily indicative of results for a full year.

          Certain prior period amounts were reclassified to conform with current period presentation consistent with the presentation in the Form 10-K Report. Reclassifications include amounts reported cumulatively in the first half of 2002 related to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets,” as described in Note 3.

Note 2 – Recently Adopted Pronouncements

          In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Company adopted this statement, effective January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial position, results of operations or cash flows.

          In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and recognition of liabilities for costs associated with exit or disposal activities, requiring that such liabilities be recognized and measured initially at fair value only when a liability is incurred. SFAS No. 146 is effective for disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 as of January 1, 2003. The adoption of SFAS No. 146 did not have a material effect on the Company’s financial position, results of operations or cash flows.

          In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also requires additional disclosure about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable prospectively to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statements issued after December 15, 2002. The adoption of FIN 45 did not have a material effect on the Company’s financial position, results of operations or cash flows.

          In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in both annual and interim financial statements about the effects of stock-based compensation. The annual and interim disclosure guidance of SFAS No. 148 is effective for fiscal years ending after December 15, 2002. The Company adopted the fair value recognition provisions of SFAS No. 123, effective January 1, 2003. Under the modified prospective method of adoption selected by the Company, stock-based employee compensation cost recognized in 2003 is the same as that which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied from its original effective date. The following table illustrates the effect on net income as if the fair value based method had been applied to all outstanding and unvested awards in each period.

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          In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses when a company should include in its financial statements the assets and liabilities of unconsolidated variable interest entities. FIN 46 is effective for all variable interest entities created after January 31, 2003 and for variable interest entities in which an enterprise obtains an interest after that date. FIN 46 is effective for fiscal years or interim periods beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not have any variable interest entities as defined in FIN 46. Accordingly, the adoption of FIN 46 did not affect the Company’s financial position, results of operations or cash flows.

Note 3 – Goodwill and Other Intangible Assets

          The Company accounts for its goodwill under SFAS No. 142 “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill is no longer amortized, but instead must be tested for impairment at least annually. Other intangible assets continue to be amortized over their useful lives.

          The Company adopted SFAS No. 142 beginning January 1, 2002. Upon its adoption, the Company recorded a one-time, non-cash charge of $294 million to reduce the carrying value of its goodwill. The Company recognized this impairment charge effective as of January 1, 2002 as a cumulative effect of change in accounting principle.

          The goodwill impairment charge represented a portion of the goodwill of the industrial and construction equipment rental segment. The goodwill write-off was the result of a reduction in projected cash flows used to determine fair value due to the unfavorable economic conditions as of the date of adoption, which reduced demand for industrial and construction equipment in North America. The Company will conduct the required annual goodwill impairment test in the second quarter of 2003.

          The following summarizes the changes in the Company’s goodwill, by segment, and other intangible assets during the first three months of 2003 (in thousands of dollars):

(1)

Consists of changes resulting from the translation of foreign currencies at different exchange rates on January 1, 2003 and March 31, 2003 and amortization of certain intangible assets.

Note 4 – Income Taxes

          The benefit for income taxes is based upon the expected effective tax rate applicable to the full year. The effective tax rate in 2003 is lower than the U.S. statutory rate of 35% primarily due to the mix of pretax operating results between countries with different tax rates.

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Note 5 - Depreciation of Revenue Earning Equipment

          Depreciation of revenue earning equipment includes the following (in thousands of dollars):

          The adjustment of depreciation upon disposal of revenue earning equipment for the three months ended March 31, 2003 and 2002 included net gains of $2.9 million and $1.8 million, respectively, on the sale of equipment in the Company’s industrial and construction equipment rental operations and a net loss of $4.5 million and a net gain of $1.4 million, respectively, in the car rental operations.

          During the three months ended March 31, 2003, the Company purchased Ford vehicles at a cost of approximately $1.2 billion, and sold Ford vehicles to Ford or its affiliates under various repurchase programs for approximately $1.0 billion.

Note 6 - Debt

          Debt at March 31, 2003 and December 31, 2002 consisted of the following (in thousands of dollars):

          The aggregate amounts of maturities of debt for the twelve-month periods following March 31, 2003 are as follows (in millions): 2004, $2,783.6 (including $2,231.7 of commercial paper and short-term borrowings); 2005, $901.6; 2006, $605.0; 2007, $260.3; 2008, $498.8, after 2008, $2,140.5.

          At March 31, 2003, approximately $978 million of the Company’s consolidated stockholder’s equity was free of dividend limitations pursuant to its existing debt agreements.

          During 2002, the Company established an Asset Backed Securitization (“ABS”) program to reduce its borrowing costs and enhance financing resources for its domestic car rental fleet. The ABS program provides for the initial issuance of up to $1 billion of asset backed commercial paper and subsequent issuance of asset backed medium-term notes. These notes are issued by wholly owned and consolidated special purpose entities and are included in debt in the balance sheet. All debt issued under the ABS program is collateralized by the assets of the ABS program consisting of revenue earning vehicles acquired by the Company for use in its daily rental business, restricted cash and investments and certain receivables related to revenue earning vehicles.

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          At March 31, 2003, $700.0 million of asset backed commercial paper was outstanding under the ABS program. The average interest rate as of March 31, 2003 was 1.3%. The secured commercial paper has a maximum term of 58 days when issued. At March 31, 2003, the outstanding commercial paper was secured by $692.0 million net book value of revenue earning vehicles, $12.1 million of receivables and $2.6 million of restricted cash. (Restricted cash is included in “prepaid expenses and other assets” in the consolidated balance sheet.)

Note 7 - Segment Information

          The Company’s business principally consists of two significant segments: rental of cars and light trucks (“car rental”); and rental of industrial, construction and materials handling equipment (“industrial and construction equipment rental”). The contributions of these segments, as well as “corporate and other,” to revenues and income (loss) before income taxes for the three months ended March 31, 2003 and 2002 are summarized below (in millions of dollars). Corporate and other includes general corporate expenses, certain interest expense, as well as other business activities such as claim management services (in millions of dollars).