SecProbe.io

CORRESP
1
filename1.htm

Correspondence

October 28, 2011

Mr. Brian Cascio

Accounting Branch Chief

United States Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: FuelCell Energy, Inc. File No. 001-14204

Form 10-K for the Fiscal Year Ended October 31, 2010

Filed January 14, 2011

Form 10-Q for the Fiscal Quarter Ended July 31, 2011

Filed September 9, 2011

Form 8-K Dated September 6, 2011

Filed September 8, 2011

Dear Mr. Cascio:

This correspondence is in response to your letter dated September 29, 2011, to Michael Bishop,
Senior Vice-President and Chief Financial Officer of FuelCell Energy, Inc. (“FuelCell”, “FCE” or
the “Company”). In that letter, you requested that FuelCell respond to your comments following a
review of its 2010 Annual Report on Form 10-K filed on January 14, 2011. We will respond to the
comments in the order presented.

For the Staff’s reference, we have included, in this response letter, the original Staff comment in
italics which is followed by FuelCell’s response.

Form 10-K for the fiscal year ended October 31, 2010

Product Sales and Revenues, pages 56 and 59

1. Please revise future filings to discuss and quantify each of the underlying reasons for the
significant decrease in revenues each period. Please also discuss whether this trend is expected to
continue.

FuelCell Response:

We acknowledge the Staff’s comment and will enhance our disclosures in future filings related to
significant changes in revenues for each period and whether we expect the trend to continue.

    FuelCell Energy. Inc

    phone 203 825 6000

    3 Great Pasture Road

    fax 203 825 6100

    Danbury, CT 06813 1305

    www.fuelcellenergy.com

Mr. Cascio

Securities and Exchange Commission

October 28, 2011

Page 2

Liquidity and Capital Resources, page 61

2. We reference the disclosure that you plan to increase capacity from 70 MW to 90 MW of annual
production by investing $5 million to $7 million. In addition, you estimate that the further
expansion to 150 MW of annual production will require additional capital investments of $35 million
to $45 million. Given your limited cash flows, please revise future filings to disclose how you
plan to raise the capital required to increase production. Please also include a discussion of the
timeframe for when you expect the investments to occur.

FuelCell Response:

We acknowledge the Staff’s comment. It is our expectation that the Company would finance this
expansion through a combination of;

    (a)

    Cash flows from operations; the Company expects positive cash flows at an
annual production rate of 80 MW to 90 MW based on sales mix.

    (b)

    Debt financing; with improving operating results as the business grows, the
Company would expect to have access to the debt markets to finance capital expansion.

    (c)

    Equity or strategic investments; the Company will also pursue equity and
strategic investments to finance growth as necessary.

    (d)

    Potential local or state Government loans or grants in return for manufacturing
job creation.

The Company will include these considerations in future filings as well as a timeframe for
potential investments.

3. We see that revenue has decreased 20% from fiscal year 2009 to fiscal year 2010. During that
same period, inventories have increased 30%. Please revise future filings to discuss the reasons
for the investment in inventory in light of declining revenues.

FuelCell Response:

We acknowledge the Staff’s comment and will include additional disclosure around changes in
inventory compared to changes in revenue for the periods referenced in future filings.

Consolidated Financial Statements

4. We see that you recognized revenue of $6.9 million related to service agreements during fiscal
year 2010. Please revise future filings to separately present revenue and related cost of service
revenues, as required by Rule 5-03 of Regulation S-X.

Mr. Cascio

Securities and Exchange Commission

October 28, 2011

Page  3

FuelCell Response:

We acknowledge the Staff’s comment and have considered Rule 5-03 of Regulation S-X when preparing
the consolidated financial statements. The Company’s revenues from services were not more than 10
percent of the sum of all classes identified within Rule 5-03 of Regulation S-X. Total revenue for
all classes for fiscal year 2010 was $69.8 million. Rule 5-03 identifies subcaptions which should
appear separately on the face of the income statement, unless income is derived from more than one
of the subcaptions described under 210.5-03.1 which is not more than 10 percent of the sum of the
items and therefore may be combined with another class. The subcaptions under 210.5-03.1 are (a)
net sales of tangible products (gross sales less discounts, returns and allowances), (b) revenues
from operating revenues of public utilities or others, (c) income from rentals, (d) revenues from
services; and (e) other revenues.

The Company disclosed the following on page 56 of its Form 10-K for the fiscal year ended October
31, 2010 within Management’s Discussion and Analysis of Financial Condition and Results of
Operations:

Revenue in fiscal 2010 included $46.5 million of product sales (complete power plants,
modules and components), $3.6 million related to the sale of stack module assembly and
conditioning equipment to POSCO and for site engineering and construction work for projects
where we are responsible for complete power plant system installation, $6.9 million related
to service agreements and component sales and $2.2 million related to PPAs.

The $6.9 million related to service agreements and component sales includes only $6.8 million from
services and $0.1 million from sales of tangible products (component sales). The Company
categorizes these component sales separate from product sales because they are subsequent to the
original power plant equipment sale, but they are distinct individual sales not captured by revenue
under long-term service agreements with customers. Accordingly, revenues from services do not meet
the 10 percent threshold under Rule 5-03.

The Company notes that revenue related to services has declined in fiscal year 2011 as a percentage
of total revenues and is expected to continue to do so given the growth in revenue from product
sales. The Company will continue to monitor and report its various sources of revenues as defined
within the subcaptions outlined in Rule 5-03 to ensure compliance with Regulation S-X and revise
disclosures in future filings as necessary.

Note 1. Nature of Business and Significant Accounting Policies

Nature of Business, page 80

5. In future filings please clarify if the subsidiaries included in the first sentence of the
second paragraph on page 80 are 100% owned or otherwise disclose the ownership percentages.

FuelCell Response:

We acknowledge the Staff’s comment and will include additional disclosure in future filings to
clarify ownership percentages for each of our subsidiaries.

Mr. Cascio

Securities and Exchange Commission

October 28, 2011

Page 4

Inventories and Advanced Payments to Vendors, page 80

6. We reference the disclosure that prior to November 1, 2009, you provided for a lower of cost or
market reserve to the cost basis of inventory, including advance payments to vendors, at the time
of purchase. Please clarify your basis in the accounting literature for this treatment and tell us
how you considered the guidance in FASB ASC 330-10-35-7 in determining your accounting policy for
inventory prior to November 1, 2009. Your response should also discuss the timing of the purchase
of your inventory in relation to entering into a customer contract and whether there is a contract
in place at the time you record the lower of cost or market reserve.

FuelCell Response:

As background, the Company’s complete power plants have two primary components (a) the fuel cell
module and (b) the balance of plant (“BOP”) equipment further described as follows:

    (a)

    Completed fuel cell modules consist of either one 300 kilowatt fuel cell stack
for the sub-megawatt DFC300 power plant (SubMW) or four 350 kilowatt fuel cell stacks
for the megawatt-class power plants (MW). The fuel cell components are manufactured at
our production facility in Torrington, Connecticut and fuel cell kits are then exported
from this facility to Asia for local fuel cell stacking or the fuel cell components are
stacked in the Torrington facility for fuel cell modules designated for the United
States market. Completed fuel cell modules manufactured in Torrington are then shipped
to our facility in Danbury, Connecticut for conditioning, the final process that heats
up the module to operating temperature. Raw materials purchased from vendors become
work-in-process during the manufacturing process. Individual fuel cell components are
interchangeable between a SubMW fuel cell stack and a MW fuel cell stack. Upon
completion of production, the fuel cell module will either be (i) maintained in
inventory, (ii) assigned to a power plant product sale contract, or (iii) assigned to a
service contract, dependent on timing of production for existing sales contracts and
timing of stack failures in power plants under service contracts.

    (b)

    In addition to the fuel cell module, the power plant includes mechanical and
electrical balance of plant (“BOP”) equipment to monitor the flow of fuel into the
power plant and convert energy produced from the fuel cell stack into usable electrical
power. Certain BOP components are based on proprietary Company designs and the Company
procures fully assembled BOP equipment from vendors who often require advance payments
prior to production. BOP’s include a degree of customization dependent on the
customers’ application and fuel source. Upon completion of production, the BOP will
either be (i) maintained in inventory or (ii) assigned to a power plant product sale
contract.

Given the nature of the Company’s production process we have maintained inventory not specifically
identifiable to a customer contract primarily consisting of fuel cell raw materials, work in
process and stacks and modules.

Mr. Cascio

Securities and Exchange Commission

October 28, 2011

Page 5

As further background, prior to November 1, 2009 the Company was working to commercialize its fuel
cell products. This activity included developing and penetrating markets for its product,
reengineering and redesigning its products to decrease the cost to manufacture and also introducing
new larger scale products to meet market demand and take advantage of economies of scale to further
reduce costs. Additionally, product design changes and the long-term nature of customer contracts
impacted not only the manufacturing process for internally produced components but also the design,
cost and timing for fulfillment of externally produced components. As a result, the Company’s
customer contracts were sold at losses as pricing was consistent with the marketplace to enable
market development. As the Company procured raw materials or made advance payments to vendors for
BOP components prior to allocation of the inventory/advance payments to sales contracts and the
Company’s business model was based on selling product at a loss given market pricing, the Company
provided for a lower of cost or market reserve to the cost basis of inventory at the time of
purchase.

While the Company considered FASB ASC 330-10-35-7, which states that “if a business is expected to
lose money for a sustained period, the inventory shall not be written down to offset a loss
inherent in the subsequent operations”, the Company believes that the earliest and most appropriate
time to begin recording a loss was at the time inventory was procured which would ultimately
fulfill a contract. As a result of this write-down of inventory, the inventory reserve resulted in
no further need for a contract loss reserve. The Company does not believe that recording a lower
of cost or market reserve was offsetting a loss inherent in subsequent operations as stated in ASC
330-10-35-7, but essentially recording a loss or portion thereof which under contract loss
accounting would have been recorded, and in substance is consistent with the requirements to record
a contract loss reserve under FASB ASC 605-35-25-46.

Revenue Recognition, pages 68 and 81

7. We see that you recognize revenue from the sale and installation of fuel cell power plants under
the percentage of completion method. We also note the disclosure that prior to fiscal 2010, you did
not provide for a contract loss reserve on product sales contracts as products were in their early
stages of development and market acceptance, and the total costs and timing of production for
product sales contracts as well as installation and commissioning of these units could not be
reasonably estimated. Please tell us how you applied the percentage of completion method of revenue
recognition prior to fiscal year 2010. We reference FASB ASC 605-35-25-56 which states that the use
of the percentage of completion method depends on the ability to make reasonably dependable
estimates such as the extent of progress toward completion, contract revenues and contract costs.
In addition, FASB ASC 605-35-25-90 states that when lack of dependable estimates cause forecasts to
be doubtful, the completed contract method is preferable. Please provide us your analysis of how
you considered the accounting literature and explain to us why you believe the percentage of
completion method was appropriate for revenue recognition prior to fiscal 2010.

Mr. Cascio

Securities and Exchange Commission

October 28, 2011

Page 6

FuelCell Response:

Prior
to fiscal 2010, the Company did not provide for a contract loss reserve at the time customer
sales orders were entered into given the long term nature of the contracts and uncertainty over
certain of the future fulfillment costs. As described on the answer to comment 6, the Company’s
accounting model included a write-down of inventory upon receipt and production of inventory.

Under the Company’s application of percentage-of-completion accounting prior to fiscal 2010,
revenue was recognized over the period that the “hard costs” associated with a project were
incurred, with an estimate of installation and commissioning costs of less than 10% of the total
contract costs. These “hard costs” include direct materials, direct labor, and estimates of
overhead applied to the direct costs. These costs were generally straight forward from an
estimation standpoint once production for a particular contract commenced because the latest design
was known and costs of the power plant could be reasonably estimated. The estimate of installation
costs, herein referred to as “normal” installation costs, were based on the Company’s estimate of
costs that would be incurred to install and commission the fuel cell units absent the
identification of any problems during installation.

Revenue associated with installation and commissioning was recognized when the installation and
commissioning costs were incurred. As installation and commissioning costs had historically
exceeded the expected “normal” installation costs to perform these procedures and were
characterized more comparable to development costs under ASC 730-10-15-3, these costs were expensed
when incurred, at most times near the end of completion of the contract. The majority of the
installation/commissioning costs were resolved within the quarter they were identified, and to the
extent they were not, management estimated and accrued a loss for these additional costs in the
quarter identified, using the actual experience gained subsequent to the quarter, prior to issuance
of its financial statements.

Given the developmental stages associated with the Company’s products, significant effort had been
undertaken by the Company to refine its understanding of the tec