Accrued Liabilities

9 Months Ended

Jul. 31, 2011

Note 8. Accrued Liabilities

Accrued liabilities at July 31, 2011 and October 31, 2010 consisted of the following:


	July 31,		October 31,
	2011		2010

Accrued payroll and employee benefits⁽¹⁾	$	3,607	$	3,430
Accrued contract and operating costs⁽²⁾		230		2,126
Reserve for product warranty cost⁽³⁾		595		696
Reserve for long-term service agreement costs⁽⁴⁾		8,395		7,742
Reserve for B1200 repair and upgrade program⁽⁴⁾		10,582		—
Accrued taxes, legal, professional and other⁽⁵⁾		1,971		2,727

	$	25,380	$	16,721


(1)		Balance relates to amounts owed to employees for compensation and benefits as of the end of the period.

(2)		Balance includes estimated losses accrued on product sales contracts and amounts estimated as owed to customers related to contract performance.


(3)		Activity in the reserve for product warranty costs during the nine months ended July 31, 2011 included additions for estimates of potential future warranty obligations of $0.2 million on contracts in the warranty period and reserve reductions related to actual warranty spend and reversals to income of $0.3 million as contracts progress through the warranty period or are beyond the warranty period.

(4)		Refer to discussion below.

(5)		Balance includes accrued sales, use and payroll taxes as well as estimated legal, professional and other expense estimates as of the end of the period.

Reserve for long-term service agreement costs (LTSA)

The Company provides for reserves on all LTSA agreements when the estimated future stack replacement and service costs are estimated to exceed the remaining contract value. This includes power plants with our legacy 3-year stack design. We expect the replacement of these older 3-year stack designs to continue into mid 2012. Reserve estimates for future costs on LTSA agreements are determined by a number of factors including the estimated life of the stack, used replacement stacks available, our limit of liability on service agreements and future operating plans for the power plant. Our reserve estimates include cost assumptions based on what we anticipate the service requirements will be to fulfill obligations on a contract by contract basis, which in many cases is in excess of our contractual limit of liability under LTSAs which is limited to the amount of remaining service fees payable under the contract.

Reserve for B1200 repair and upgrade program

During the second quarter of fiscal 2011, the Company incurred an obligation to repair and upgrade a select group of 1.2 megawatt (MW) fuel cell modules produced between 2007 and early 2009. The repair and upgrade obligation was based on events that occurred and knowledge obtained concerning the performance of this select group of modules during the second fiscal quarter of 2011 however, the formal agreement to begin the repair and upgrade program was not finalized until May 2011. The program commenced in the third quarter of 2011 and is expected to conclude by mid-2012. The Company recorded a charge of approximately $8.8 million during the quarter ended April 30, 2011 recorded as a cost of product sales and revenues on the consolidated statements of operations. The charge consisted of the costs associated with the replacement of modules of $9.5 million and the costs associated with the repair of other modules of $4.1 million, partially off-set by the estimated fair value at the end of the respective LTSA contract terms for upgraded assets being deployed in the program of approximately $4.8 million, which will be returned to the Company at the expiration of the respective LTSA agreements if the customer does not renew the LTSA agreement through at least the remaining useful life of the upgraded assets. The reserve reflected on the consolidated balance sheet as of April 30, 2011 was approximately $11.3 million as certain costs were previously incorporated in the Company’s LTSA reserve. During the three months ended July 31, 2011, the Company incurred actual repair and upgrade costs of approximately $0.7 million resulting in a net reserve balance of $10.6 million at July 31, 2011.