SecProbe.io

CORRESP
1
filename1.htm

Correspondence

 January 11, 2012

 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.

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

 Filed January 14, 2011

 File No. 001-14204

Dear Mr. Cascio:

 This
correspondence is in response to the requested information from our conference call on December 22, 2011. On that conference call, the Staff requested the following:

1)
 A quantitative and qualitative materiality assessment on the financial statement impact if the Company had accounted for the sale of its power
plants using the completed contract method of revenue recognition, instead of the percentage of completion method, for each of the fiscal years 2006 through 2010 and a qualitative analysis on the quarters within these fiscal years.

2)
 Explanation of what changes occurred in fiscal 2009 allowing the Company to estimate total contract costs as disclosed in its Form 10-K for the
fiscal year ended October 31, 2010.

3)
 A draft of the disclosure to be included in the Company’s Form 10-K for the fiscal year ended October 31, 2011 to be filed in January 2012
regarding the revenue recognition model that will be used on contracts where the Company determines it is unable to reasonably estimate total contract costs.

4)
 An example of a customer contract from fiscal 2007 or 2008 and an example of a recent customer contract from 2009 or 2010.

 For the Staff’s reference, our responses in this letter include each of the above referenced requests
in italics followed by FuelCell’s response.

 Request 1) Prepare a quantitative and qualitative
materiality assessment on the financial statement impact if the Company had accounted for the sale of its power plants using the completed contract method of revenue recognition, instead of the percentage of completion method, for each of the fiscal
years 2006 through 2010 and a qualitative analysis on the quarters within these fiscal years.

 Mr. Cascio

 Securities and Exchange Commission

 January 11, 2012

 Page
 2

 FuelCell Response:

 In consideration of this response, the Company has performed a thoughtful analysis of all contracts for which revenue was recognized under the percentage of completion method during the fiscal periods
2006 through 2010. This included a thorough review of the characteristics of each of our power plant contracts, and the experience level we were gaining throughout this period with respect to the attributes that distinguished a contract that had
inherent hazards versus a typical contract that we had developed a strong history of providing to customers within very small tolerances of error from our original cost estimates. As such, we constructed and evaluated a comparison of original cost
estimates versus final actual costs for each contract within this period, as well as performed calculations of revenue / cost of sales had the Company used the completed contract method instead of percentage of completion for contracts which
contained inherent hazards.

 As discussed with the Staff, the Company’s disclosures in its fiscal 2010 Form 10-K indicate
a bright line of November 1, 2009 as the transition date whereby the Company could begin estimating total contract costs for all power plant sales. Such language was included due to certain installation and commissioning costs being inherently
hazardous to estimate in certain situations where the Company was producing and installing first article products, contracting to deliver power plants which related to new applications, or certain situations where the Company may not have had the
relevant level of experience in delivering the unique application that the customer desired. However, in reviewing the attributes of our contracts during the five year period ended October 31, 2010, such circumstances were very limited during
this period. Additionally, based on a review of historical original cost estimates of project costs against final actual contract costs, we note that, for the majority of projects, total contract costs were within a reasonable and appropriate margin
of error versus original cost estimates. This pattern was true for almost all of our contracts, beginning with projects started at the beginning of fiscal 2008. Thus, while the Company had broad disclosure in the footnotes to its consolidated
financial statements regarding the inability to estimate installation and commissioning costs until the first quarter of fiscal 2010, the Company was in fact appropriately estimating total contract costs and applying the percentage of completion
method, with the exception of a very limited number of contracts. The distinguishing factors for these limited number of contracts was the fact that these power plant sales related to plants that were being constructed for new applications for which
there was limited experience, or related to new product lines or first article installations. Such contracts are distinguished from the Company’s normal power plant models and applications, for which the Company was able to estimate within very
tight tolerances starting in fiscal 2008, as the Company had been designing, constructing, and installing such typical plants for several years and at that point had an established track record of delivering such plants for costs which were within
reasonable tolerances from its original cost estimates.

 The Company has prepared a proforma presentation of results which
recasts certain contracts for power plants with new applications or first articles under the completed contract method. For those contracts which the company had the ability to estimate costs, adjustments were not made. Specifically, for the
proforma presentation below, the following analysis was performed:

•

 All commercial contracts from fiscal years 2006 and 2007, as well as all contracts for which the Company determined that it would have been
inherently hazardous to estimate at inception were assumed to be under the completed contract method as a result of insufficient product installation and application experience and estimating history. Revenue was recast and recognized under the
completed contract method in the proforma analysis in the fiscal period in which the project would have been considered substantially complete per FASB ASC 605-35-25-96.

 Mr. Cascio

 Securities and Exchange Commission

 January 11, 2012

 Page
 3

 The result of this proforma analysis, by fiscal year, is as follows:

September 30,

September 30,

September 30,

September 30,

 ($ in 000’s)

As reported

Proforma

$ Variance

%
Variance

 2010

 Revenue (P&L)

$
69,777

$
69,547

$
(230
)

0
%

 Net Loss to common shareholders (P&L)

$
(58,864
)

$
(58,864
)

$
—

0
%

 Deferred revenue (Balance Sheet)

$
25,499

$
25,729

$
230

 Inventory and deferred contract costs (Balance Sheet)

$
33,404

$
33,634

$
230

 2009

 Revenue (P&L)

$
88,016

$
89,586

$
1,570

2
%

 Net Loss to common shareholders (P&L)

$
(71,882
)

$
(71,882
)

$
—

0
%

 Deferred revenue (Balance Sheet)

$
17,013

$
15,443

$
(1,570
)

 Inventory and deferred contract costs (Balance Sheet)

$
25,433

$
23,863

$
(1,570
)

 2008

 Revenue (P&L)

$
100,735

$
107,703

$
6,968

7
%

 Net Loss to common shareholders (P&L)

$
(96,565
)

$
(96,565
)

$
—

0
%

 Deferred revenue (Balance Sheet)

$
29,585

$
22,617

$
(6,968
)

 Inventory and deferred contract costs (Balance Sheet)

$
24,523

$
17,555

$
(6,968
)

 2007

 Revenue (P&L)

$
48,288

$
44,523

$
(3,765
)

-8
%

 Net Loss to common shareholders (P&L)

$
(71,882
)

$
(71,882
)

$
—

0
%

 Deferred revenue (Balance Sheet)

$
20,486

$
24,251

$
3,765

 Inventory and deferred contract costs (Balance Sheet)

$
29,581

$
33,346

$
3,765

 2006

 Revenue (P&L)

$
33,288

$
39,625

$
6,337

19
%

 Net Loss to common shareholders (P&L)

$
(84,222
)

$
(84,222
)

$
—

0
%

 Deferred revenue (Balance Sheet)

$
9,785

$
3,448

$
(6,337
)

 Inventory and deferred contract costs (Balance Sheet)

$
14,121

$
7,784

$
(6,337
)

 To evaluate the materiality of changing the revenue recognition method from the percentage of completion
method to the completed contract method on the fiscal year results presented above, management utilized Staff Accounting Bulletin No. 99 (“SAB 99”). According to SAB 99, “…Under the governing principles, an assessment of
materiality requires that one views the facts in the context of the surrounding circumstances, as the accounting literature puts it, or the total mix of information, in the words of the Supreme Court. In the context of a misstatement of a financial
statement item, while the total mix includes the size in numerical or percentage terms of the misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. The shorthand in the
accounting and auditing literature for this analysis is that financial management and the auditor must consider both quantitative and qualitative factors in assessing an item’s materiality…”

 Mr. Cascio

 Securities and Exchange Commission

 January 11, 2012

 Page
 4

 Management reviewed the guidance set forth in SAB 99 and made an assessment regarding
whether changing the revenue recognition method from the percentage of completion method to the completed contract method for certain contracts was material to the fiscal years presented above based upon both quantitative and qualitative factors.

 Quantitative Factors

 Management analyzed the financial statement line items impacted as demonstrated in the table above on an as reported basis compared to on a proforma basis and does not believe that the variances would be
material to investors. Revenue fluctuated fairly significantly from one year to the next as the Company worked to commercialize its products and gain market acceptance. In addition, revenues fluctuated due to the sale of larger power plants
(megawatt and multi-megawatt power plants) as well as the specific needs of certain partners as they became more involved in local manufacturing of certain parts of the power plant.

Management also reviewed historical analysts’ comments on the Company to determine what aspects of performance investors were
focused on. We believe that due to the nature of its business (i.e., low volume of individual contracts, but contracts are relatively large dollar power plant installations) and the stage of commercialization, investors have been focused on product
cost reductions, cash utilization and order activity as reflected in backlog which demonstrates market acceptance and product penetration, rather than in which fiscal year contract backlog is recognized as revenue. Customer contract backlog is
disclosed in the Company’s SEC filings and the Company has historically issued press releases to announce new contracts. For the Staff’s reference, below are some of the comments on the Company as issued by analysts during 2007 through
2009. These comments demonstrate that the focus of investors was on metrics other than periodic changes in revenue.

 “Quarterly numbers will remain lumpy at the early stages of commercialization and we believe that cost out programs and traction in key markets are more relevant metrics near term. We anticipate an
update on ongoing cost/kW reductions through value engineering and updates on further traction in key end-markets, notably Korea and California.” – 2007

“As for many emerging energy technology companies more emphasis is placed on progress in technical and operational
milestones rather than P&L results.” – 2007

 “We believe investors will need to take a
longer-term focus in assessing the company’s progress rather than solely focusing on quarter-to-quarter trends.” – 2008

 “With the balance sheet recently firmed, gross margin positive products set to ship, and backlog inflecting, we are growing more comfortable with the FCEL story. Still, the global credit crunch is
preventing some projects from quickly moving forward, and backlog needs to gain much more critical mass for us to become bullish.” – 2009

 With regard to net loss to common shareholders, there is no impact whether the Company utilized the percentage of completion method or the completed contract method for certain contracts. The Company was
recognizing costs in excess of revenue (losses) as soon as estimable. Under the completed contract method project revenues and costs would have been deferred until completion of the project so there is no impact to net loss to common shareholders.

 Mr. Cascio

 Securities and Exchange Commission

 January 11, 2012

 Page
 5

 The Company has also presented above the impact to deferred revenue and deferred
contract costs under the percentage of completion method, compared to the completed contract method. Management does not believe the impact is material as the primary balance sheet focus of investors was on cash and investment levels, not changes to
deferred revenue or deferred contract cost levels from period to period.

 Qualitative Factors

Per SAB 99, there are a variety of qualitative considerations that one should review in order to determine the materiality of an issue.
The below qualitative analysis is relevant for the fiscal years presented in the table above as well as the quarterly periods within those fiscal years.

1.
 Whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of
imprecision inherent in the estimate.

 FCE response – Use of the
completed contract method results in a precise measurement of revenue recognition compared to the percentage of completion method.

2.
 Whether the misstatement masks a change in earnings or other trends.

FCE response – No, there is no change in net loss to common shareholders and the trend of revenue throughout
the 5 years ended October 31, 2010 does not change.

3.
 Whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise.

FCE response – Management believes analysts’ expectations for revenue were established based on the fact
that the Company utilized the percentage of completion method of revenue recognition. Analyst expectations of revenue would have been different if the Company was under the completed contract method for certain contracts, so the Company does not
believe this is meaningful qualitative consideration in this circumstance. Analysts do provide EPS expectations, however there would be no impact to EPS from what was reported if the completed contract method were used for such contracts rather than
the percentage of completion method.

4.
 Whether the misstatement changes a loss into income or vice versa.

FCE response – As noted in the quantitative comparison table above, there is no difference in net loss to
common shareholders under either revenue recognition method.

5.
 Whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant
role in the registrant’s operations or profitability.

 FCE response
– The Company has only one segment, so this consideration is not applicable.

6.
 Whether the misstatement affects the registrant’s compliance with regulatory requirements.

FCE response – There would be no impact on compliance with regulatory requirements if the completed
contract method of revenue recognition were utilized instead of percentage of completion for certain contracts not qualifying for percentage of completion accounting.

7.
 Whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements.

 FCE response – The Company does not have any loan covenants or other
contractual requirements which would be impacted if a different methodology were used to recognize revenue for certain contracts and diff