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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 0-20328

AMTROL Inc.

1400 Division Road, West Warwick, RI 02893-1008

Registrant’s telephone number, including area code: (401) 884-6300

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 issuer’s classes of common stock, as of the latest practicable date: $.01 Par Value: 100 shares of Common stock as of November 14, 2003.

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AMTROL INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003

INDEX

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AMTROL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)

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

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AMTROL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited - in thousands)

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

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AMTROL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited - in thousands)

Nine Months Ended September 30, 2003

Nine Months Ended September 30, 2002

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

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AMTROL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)

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

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AMTROL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly, in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows of AMTROL Inc. and its subsidiaries (the “Company”) for the interim periods presented. Such adjustments consisted of only normal recurring items. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire year. These condensed consolidated financial statements do not include all disclosures associated with annual consolidated financial statements and accordingly should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K.

2. Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Significant Accounting Policies

Revenue Recognition and Related Costs

In accordance with Staff Accounting Bulletin (“SAB”) No. 101, the Company recognizes revenue only when there is a valid contract or purchase order, which includes a fixed price; the goods have been delivered in accordance with the shipping terms; and there is an expectation that the collection of the revenue is reasonably assured.

The Company generally recognizes revenue upon shipment of its products to customers net of applicable provisions for discounts and allowances. Allowances for cash discounts and volume rebates, among others, are recorded as a reduction to revenue at the time of sale based upon the estimated future outcome. Cash discounts and volume rebates are based upon certain percentages and sales targets agreed to with the Company’s customers, which are typically earned by the customers over an annual period. At September 30, 2003 and 2002, the Company had accrued $3.0 million for such volume allowances. These amounts are included in accrued expenses in the accompanying condensed consolidated balance sheets.

Inventories

The Company’s inventories are stated at the lower of cost or market including material, labor and manufacturing overhead (see Note 6). The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating

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obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause the actual results to differ from the estimates at the time such inventory is disposed or sold. The Company believes that its procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to the actual amounts.

Warranty

The Company extends various warranties covering most of its products ranging from a limited one-year warranty to a limited lifetime warranty against defects in materials and workmanship. The specific terms and conditions of the warranties depend on the type of product that is sold. The Company’s warranties are generally limited to the replacement of the defective parts or products at the Company’s option. The Company estimates the costs that may be incurred under its warranty program and records a liability at the time of sale. Factors that influence the Company’s warranty liability include the amount of production, manufactured cost of the product, historical warranty returns and anticipated returns based upon engineering and material improvements. The Company periodically assesses the adequacy of its warranty reserve through a detailed analysis and adjusts the reserve accordingly.

As part of the Company's regular review of its warranty reserve at September 30, 2003, the Company increased its warranty reserve by $0.7 million. This was due to higher than anticipated level of warranty returns associated with its limited lifetime products during the current period.

The following chart illustrates the changes in the Company’s warranty reserve during the latest nine month period:

Goodwill

Goodwill represents the excess of acquisition costs over the estimated fair value of the net assets acquired. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement

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of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that amortization of goodwill cease and that the Company evaluate the recoverability of goodwill and other intangible assets annually, or more frequently if events or changes in circumstances, such as a decline in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values are established using a discounted cash flow methodology (specifically, the income approach). The determination of discounted cash flows is based on the Company’s strategic plans and long-range forecasts. The revenue growth rates included in the forecasts are the Company’s best estimates based on current and anticipated market conditions, and the profit margin assumptions are projected based on the current and anticipated costs structures. In accordance with the SFAS No. 142 transition procedures, the Company recorded a goodwill impairment charge in the first quarter of 2002 for the cumulative effect of a change in accounting principle of $38.1 million upon adoption of SFAS No. 142, as further described in Note 5.

Deferred Financing Costs

Deferred financing costs are stated at cost as a component of other assets and amortized over the life of the related debt using the effective interest method. Amortization of deferred financing costs is included in interest expense.

Foreign Currency Translation

Assets and liabilities of non-U.S. operations have been translated into United States dollars using the quarter-end rate of exchange. Shareholders’ equity has been converted using historical rates, and revenues and expenses at the average exchange rates prevailing during the three and nine month periods. The cumulative effect of the resulting translation was reflected as a separate component of shareholders’ equity.

Recent Accounting Pronouncements

As of January 1, 2003, the Company adopted the provisions of SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical

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Corrections” (“SFAS No. 145”), issued in April 2002. SFAS No. 145 addresses the reporting of gains and losses resulting from the extinguishment of debt, accounting for sale-leaseback transactions and rescinds or amends other existing authoritative pronouncements. SFAS No. 145 requires that any gain or loss on extinguishment of debt that does not meet the criteria of APB 30 for classification as an extraordinary item shall not be classified as extraordinary and shall be included in earnings from continuing operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities no later than the end of the first reporting period ending after December 15, 2003. The Company believes the impact of adopting FIN 46 will not have a material effect on its consolidated financial statements.

4.     Long-Term Debt

Revolving Credit and Term Loans

The Company is a party to two credit facilities: a $42.5 million senior first-priority secured credit facility arranged by Foothill Capital Corporation (the “Foothill Facility”) and a senior second-priority secured credit facility with affiliates of The Cypress Group L.L.C. (the “Cypress Facility”).

The Foothill Facility provides the Company with (i) a term loan facility consisting of a five-year Term A loan, $7.7 million at September 30, 2003, bearing interest at LIBOR plus 3.5%, and a three-year Term B loan, $5.6 million as of September 30, 2003, bearing interest at the greater of the Wells Fargo Reference Rate (approximates the prime rate) plus 3.5% or 9.25%, (collectively the “Term Loans”) and (ii) a five-year Revolving Credit Facility, bearing interest at LIBOR plus 2.5% or the Wells Fargo Reference Rate plus 0.5%, providing the lesser of (a) $35.0 million less the aggregate outstanding principal amount of the Term A loan less letter of credit usage and (b) borrowing base less letter of credit usage. At September 30, 2003, total availability and aggregate borrowings under the Revolving Credit Facility were $12.4 million and $6.5 million, respectively.

The Cypress Facility consists of an original issue term loan of $25.0 million with additional issuances representing accreted interest and one additional issuance described below (collectively, “Term Loan C”). The Term Loan C has a maturity date of December 26, 2006 and bears Payment-In-Kind (PIK) interest fixed at 12% per annum paid quarterly, which at the lenders option can be paid in common stock of the Company. In addition, 60,000 warrants with an exercise price of $0.01 were issued under the Cypress facility. The Company expects that the effective interest rate will be greater than 12% given the additional interest expense associated with the warrants. At September 30, 2003, the aggregate borrowings under the Cypress Facility, net of original issue discount, were $29.8 million.

Under the terms of the Foothill Facility and Cypress Facility, the Company, as of September 30, 2003, was required to comply, and was in compliance, with the affirmative and negative covenants and restrictions.

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Senior Subordinated Notes

The Company issued $115.0 million of Senior Subordinated Notes due 2006 (the “Notes”) of which $112.4 million was outstanding as of September 30, 2003. The Notes are unsecured obligations of the Company issued pursuant to the Note Indenture Agreement (the “Indenture”). The Notes bear interest at a rate of 10.625% per annum that is payable semi-annually on each June 30 and December 31.

The Notes are redeemable at the option of the Company on or after December 31, 2001. The Notes will be subject to redemption, in whole or in part, at various redemption prices, declining from 105.313% of the principal amount to par on and after December 31, 2003. Upon a “Change of Control” (as defined in the Indenture), each Note holder has the right to require the Company to repurchase such holder’s Notes at a purchase price of 101% of the principal amount plus accrued interest.

In March 2003, the Company purchased a portion of the Notes with a face value of $2.6 million. The purchase was financed through the issuance of additional Term Loan C debt of $1.1 million. The extinguishment resulted in a gain of $1.5 million that was included in Other, net on the Company’s Condensed Consolidated Statement of Operations. The Company and/or affiliates of the Company, including entities related to Cypress may continue, from time to time, to purchase the Notes previously issued by the Company in the open market or by other means. As of September 30, 2003, Cypress held Notes with a face value of $11.7 million.

The Indenture contains certain affirmative and negative covenants and restrictions. As of September 30, 2003, the Company was in compliance with the various covenants.

5.     Cumulative Effect of Change in Accounting Principle

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that amortization of goodwill cease and that the Company evaluate the recoverability of goodwill and other intangible assets annually, or more frequently if events or changes in circumstances indicate that the carrying value of an asset might be impaired.

Under SFAS No. 142, the Company was required to test all existing goodwill for impairment (using a two-step method) as of January 1, 2002, on a “reporting unit” basis. The Company determined the reporting units to be AMTROL North America, AMTROL ALFA, AMTROL NOVA and AMTROL Poland. In step 1, goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. The fair values of the reporting units were determined utilizing a discounted cash flow methodology and considered such assumptions as weighted average cost of capital, revenue growth, profitability, capital expenditures and premium for control. For reporting units that failed step 1, the Company proceeded to step 2. In step 2, the Company calculated the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair

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value of the reporting unit as determined in step 1. The Company then compared the implied fair value of goodwill as determined in step 2 above to the carrying value of goodwill.

As a result of the impairment review, the Company recorded an after-tax goodwill impairment charge of $38.1 million, which was recorded as a cumulative effect of a change in accounting principle in the first quarter of 2002. This charge consists of $34.5 million at the AMTROL North America unit and $3.6 million at AMTROL NOVA. The impairment charge was principally due to the change in the methodology from the undiscounted cash flow method used earlier under the Company’s previous accounting policy, to the discounted cash flow method used in accordance with SFAS No. 142.

6.     Inventories

Inventories are stated at the lower of cost or market and were as follows (in thousands):

7.     Accounting for Derivative Instruments and Hedging Activities

The Company has an interest rate swap contract and an interest rate cap (the “Contract”) outstanding as of September 30, 2003, with an initial notional amount of $15 million. Under this arrangement, which will mature on June 30, 2004, the Company receives the 90-day LIBOR rate and pays a fixed rate of 4.60% for the period from January 1, 2001 through maturity, unless LIBOR increases to 7.1%. If LIBOR increases to 7.1%, then the Company continues to receive the 90-day LIBOR rate but now pays the 90-day LIBOR rate for all subsequent periods capped at a maximum of 7.1%. The LIBOR rate has not exceeded 7.1% since inception of the Contract. The Contract was designated as a cash flow hedge of variable future cash flows associated with the Foothill Facility Term Loan A and B Debt.

As of September 30, 2003, the fair value of the instrument ($0.1 million) was recorded in other noncurrent liabilities with a corresponding entry to accumulated other comprehensive loss. Subsequent changes in the fair value of the swap will be recorded through accumulated other comprehensive loss (except for changes related to ineffectiveness, which will be recorded through net income). The Company does not currently anticipate any material ineffectiveness under the hedge for 2003.

During the nine months ended September 30, 2003, the Company purchased forward contracts to hedge its foreign currency exposures, which relate primarily to its operations in Portugal. A portion of revenues from the Company’s Portuguese operations were denominated in non-Euro based currencies so as the Euro strengthened, the non-Euro denominated receivables lost value. In order to mitigate any currency exchange losses against future receivables, the Company’s Portuguese operations expanded its use of forward contracts, which are generally three months in duration, to hedge against the currency movements of U.S. Dollar and British Pound currencies. At September 30, 2003, the Company’s Portuguese operations had forward contracts for the purchase of 1.3 million U.S. Dollars and 0.4 million British Pounds with due dates ranging from October 2003 through December 2003. The value of these forward contracts was immaterial.

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8.     Provision for Income Taxes

The effective income tax rates used in the interim consolidated financial statements are estimates of the full year’s rates. The Company has recorded a provision on its Portugese operations. Net deferred tax assets recognized on the Company’s balance sheet continue to require management’s evaluation as to their realization. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. The amount expected to be realized is based upon estimates derived from tax planning strategies which the Company believes are currently prudent and feasible. A valuation allowance has been provided for certain net operating loss carryforwards, as it is more likely than not that the related deferred tax assets for these carryforwards will not be realized. Additions to the valuation allowance may be required in the event that estimates are changed.

9.     Business Segment Information

The Company’s reportable segments are delineated geographically. In addition to the geographic delineation, the segments are managed separately because of their different product offerings, markets served and cost structures.

The Company’s North American segment operates manufacturing facilities in Rhode Island, Kentucky, Maryland and Ohio, and operates a distribution facility in Ontario, Canada. This segment manufactures and markets products used principally in flow control, storage, heating and other treatment of fluids in the water system and HVAC markets. These products are marketed throughout the world but primarily in North America, Western Europe and Asia.

The Company’s European segment includes the Company’s facilities in Guimaraes, Portugal, Donaueschingen, Germany and Swarzedz, Poland. The Guimaraes facility manufactures returnable and non-returnable steel gas cylinders for storing cooking, heating and refrigerant gases that are marketed worldwide. The Donaueschingen facility manufactures residential and commercial water heaters marketed primarily in Switzerland, Austria and Germany. The Swarzedz facility refurbishes gas cylinders.

The primary criteria by which financial performance is evaluated and resources are allocated include net sales and income from operations. The following is a summary of key financial data by segment:

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EBITDA is earnings (net income/loss) before interest, taxes, depreciation and amortization. The method of calculating EBITDA is consistent with the definition contained in the Foothill Facility and the Indenture. Readers of financial statements frequently consider EBITDA a useful tool in evaluating a company’s performance. Therefore, the Company believes that inclusion of EBITDA is useful supplemental information. However, EBITDA is not a measure of true cash flow since it does not incorporate changes of other assets or liabilities that may generate or require cash. EBITDA is not a generally accepted accounting measure. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for reconciliation of a GAAP financial measure to EBITDA per the requirements of Regulation G. Long-Lived assets include property, plant and equipment and goodwill.

10.     Commitments and Contingencies

At September 30, 2003, the Foothill Facility contained a sublimit to support the issuance of letters of credit in the amount of $3.0 million. At September 30, 2003, letters of credit outstanding amounted to $0.4 million.

The Company is involved in various legal proceedings that, in the opinion of management, will not result in a material adverse effect on its financial condition or results of operations.

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AMTROL INC. AND SUBSIDIARIES

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

This section should be read in conjunction with the Condensed Consolidated Financial Statements of the Company included elsewhere herein and the Company’s Form 10-K for 2002.

The Company and its representatives may from time to time make written or oral statements, including statements contained in the Company’s filings with the Securities and Exchange Commission (“SEC”) and in its reporting to customers, which constitute or contain “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995 or the SEC in its rules, regulations and releases.

All statements other than statements of historical fact included in this Form 10-Q and elsewhere relating to the Company’s financial position, strategic initiatives and statements addressing industry developments are forward-looking statements. When incorporated in this discussion, the words “expect(s)”, “feel(s)”, “believe(s)”, “anticipate(s)” and similar expressions are intended to identify some of these forward-looking statements. Forward-looking statements include those containing these phrases but also any other statements that are not references to historical fact. Although the Company believes that the expectations reflected in such forward-looking statements are expressed in good faith and are believed to have a reasonable basis, there can be no assurance that such expectations or beliefs will result or be achieved or accomplished. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The following are some of the important factors that can vary or change or involve substantial risk and cause actual results to differ materially from such expectations: the Company’s ability to successfully implement its business strategy; the availability and cost of raw materials; changes in domestic or foreign government regulation or enforcement policies, particularly related to refrigerant gases or cylinders and building and energy efficiency requirements or restrictions or limitations or general reduction in the use of domestic wells; significant weather conditions adverse to the Company’s business; development of competing technologies; acceptance of the Company’s existing and planned new products in international markets; competition in the Company’s markets, particularly price competition; the rate of growth of developing economies and demand for the Company’s products; the ultimate cost of future warranty and other claims relating to the Company’s products and business; whether the Company succeeds in acquiring new businesses; availability of capital; foreign exchange rates; increases in interest rates; the business abilities and judgment of personnel; and general economic, financial and business conditions, both domestically and internationally.

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Results of Operations

The following table sets forth, for the periods indicated, the percentages of the Company’s net sales represented by certain income and expense items in the Company’s Condensed Consolidated Statements of Operations.

Three Months Ended September 30, 2003

Net sales for the third quarter of 2003 decreased $1.0 million or 2.1% compared to the same period in 2002. In North America, net sales decreased $3.2 million or 10.0% compared to the net sales in the third quarter of 2002 due principally to declines in sales of well tanks and disposable cylinders. The decline in well tank sales is attributable primarily to well drilling delays caused by heavy rainfall and flooding in portions of the Southeast, Mid-Atlantic and upper-Midwest states. The decline in disposable cylinder sales is attributable to a temporary production disruption during the third quarter at a major customer’s facility. Production resumed at the customer’s facility early in the fourth quarter. Net sales in Europe increased $2.2 million or 13.9% due principally to the strengthening of the Euro against the U.S. dollar. If the value of the Euro had remained at the average level of the third quarter of 2002, reported net sales in Europe for the third quarter of 2003 would be substantially unchanged as compared to the third quarter of 2002.

Gross profit for the third quarter of 2003 decreased $1.4 million or 11.9% from the third quarter of 2002. As a percentage of net sales, the gross profit percentage decreased to 21.9% in 2003 from 24.3% in 2002. This decrease was due principally to the higher proportion of lower margin sales from the Company’s European operations and increased steel costs in Europe.

Selling, general and administrative expenses for the third quarter of 2003 increased by $0.2 million or 3.1% compared to 2002. The increase is principally attributable to the strengthening of the Euro against the U.S. dollar.

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Other, net was substantially unchanged when compared to 2002.

Income taxes during the third quarter of 2003 decreased $0.4 million as compared to 2002 reflecting decreased operating profits in the Company’s European operations. During 2002, management decided to discontinue the recognition of tax benefits associated with pre-tax losses from the Company’s U.S. operations. Net deferred tax assets recognized on the Company’s balance sheet continue to require management’s evaluation as to their realization. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. The amount expected to be realized is based upon estimates derived from tax planning strategies which the Company believes are currently prudent and feasible. A valuation allowance has been provided for certain net operating loss carryforwards, as it is more likely than not that the related deferred tax assets for these carryforwards will not be realized.

The net loss for the third quarter of 2003 of $2.3 million compares to a net loss in the third quarter of 2002 of $1.0 million. The change was principally due to the higher proportion of lower margin sales from the Company’s European operations and increased steel costs in Europe.

Earnings before interest expense, taxes, depreciation and amortization (EBITDA) for the third quarter of 2003 were $4.9 million, a decrease of $1.5 million compared to the third quarter of 2002. As a percentage of net sales, EBITDA decreased to 10.5% in 2003 from 13.6% in 2002. The method of calculating EBITDA is consistent with the definition contained in the Foothill Facility and the Indenture. Readers of financial statements frequently consider EBITDA a useful tool in evaluating a company’s performance. Therefore, the Company believes that inclusion of EBITDA is useful supplemental information. However, EBITDA is not a measure of true cash flow since it does not incorporate changes of other assets or liabilities that may generate or require cash. EBITDA is not a generally accepted accounting measure. The following table illustrates the calculation of EBITDA (in thousands):

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