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A majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress forof our contracts because it best depicts the transfer of control to the customer which occurs as we consume the costsmaterials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.

Under the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based on quantifiable measures of performance or on the achievement of specified events or milestones. The customer may retain a small portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a contract asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract. For some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

To determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single performance obligation or whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, we provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the entire contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. Due to the nature of the work requirerequired to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or a reduction of revenue) on a cumulative catch-up basis.

We have a standard, monthly process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule, technical requirements, and other contractual requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables.

Based on this analysis, any adjustments to revenue, operating costs and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive performance and may result in an increase in operating income during the performance of individual performance obligations if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. When estimates of total costs to be incurred exceed total estimates to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is recorded.becomes known. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net revenue, operating costs and the related impact to operating income are recognized monthly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. See Note 5

NOTE 3 – Segment Information for disaggregatedREVENUE RECOGNITION

Our revenue information.

Adoption of ASC Topic 606 did not have a material impact on our revenue or associated costs.

Incremental Costs – Our incremental costs of obtaining aby contract which consists of sales commission and proposal costs, are reviewed and those costs that are immaterial to the financial statements are expensedtype was as they occur. Those costs that are deemed to be material to the contract are deferred and amortized over the period of contract performance. We classify incremental costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of incremental costs are includedfollows (dollars in prepaid expenses and other current assets and other assets, net, respectively in our consolidated balance sheet. We had no amortization expense related to incremental costs in the second quarter of 2019 or 2018.

thousands):

Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The noncurrent portion of deferred revenue is included in other long-term liabilities in our consolidated balance sheets.

incurred.

Costs, estimated earnings and billings on uncompleted contracts consisted of the following at June 29, 2019March 28, 2020 and December 29, 2018:

		June 29, 2019				December 29, 2018
		(dollars in thousands)
Costs incurred on uncompleted contracts		$	18,912			$	34,800
Estimated earnings on uncompleted contracts			4,544				6,921
Earned revenues			23,456				41,721
Less: billings to date			23,916				39,150
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts		$	(460	)		$	2,571
Contract assets		$	2,190			$	3,175
Contract liabilities			(2,650	)			(604	)
Net contract assets (liabilities)		$	(460	)		$	2,571

28, 2019:

Our segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. The operating performance of our segments is regularly reviewed with these two operational leaders in charge of itsour engineering offices and its automation offices of these segments, the chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.

The Engineering, Procurement and Construction Management (“EPCM”) segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the energy industry throughout the United States. The Automation segment provides services related to the design, integration and implementation of advanced automation, information technology, process distributed control systems, analyzer systems, and electrical projects primarily to the upstream and downstream sectors of the energy industry throughout the United States. The Automation segment includes the government services group, which provides engineering, design, installation and operation and maintenance of various government, public sector and international facilities and the fabrication operation.

Revenues, operating income, and identifiable assets for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and includes costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments.

Segment information for the three months ended June 29,March 28, 2020 and March 30, 2019 and June 30, 2018 is as follows (dollars in thousands):

For the three months ended June 29, 2019:		EPCM				Automation				Corporate				Consolidated
Revenue		$	5,659			$	7,962			$	—			$	13,621
Gross profit			828				1,114				—				1,942
Gross Profit Margin			14.6	%			14.0	%							14.3	%
SG&A			589				390				1,471				2,450
Operating income (loss)			239				724				(1,471	)			(508	)
Other income, net															26
Interest expense, net															(4	)
Tax expense															(31	)
Net loss														$	(517	)

For the three months ended June 30, 2018:		EPCM				Automation				Corporate				Consolidated
Revenue		$	6,652			$	7,220			$	—			$	13,872
Gross profit			1,330				923				—				2,253
Gross Profit Margin			20.0	%			12.8	%							16.2	%
SG&A			531				663				1,675				2,869
Operating income (loss)			799				260				(1,675	)			(616	)
Other expense, net															(373	)
Interest expense, net															(5	)
Tax benefit															2
Net loss														$	(992	)

Segment information

Total assets by segment for the sixthree months ended June 29,March 28, 2020 and December 28, 2019 and June 30, 2018 isare as follows (dollars in thousands):

For the six months ended June 29, 2019:		EPCM				Automation				Corporate				Consolidated
Revenue		$	11,292			$	14,492			$	—			$	25,784
Gross profit			1,499				1,781				—				3,280
Gross Profit Margin			13.3	%			12.3	%							12.7	%
SG&A			1,176				819				2,760				4,755
Operating income (loss)			323				962				(2,760	)			(1,475	)
Other expense															41
Interest expense, net															(6	)
Tax expense															(51	)
Net loss														$	(1,491	)

For the six months ended June 30, 2018:		EPCM				Automation				Corporate				Consolidated
Revenue		$	11,747			$	15,312			$	—			$	27,059
Gross profit			1,746				1,919				—				3,665
Gross Profit Margin			14.9	%			12.5	%							13.5	%
SG&A			957				1,367				3,127				5,451
Operating income (loss)			789				552				(3,127	)			(1,786	)
Other expense															(378	)
Interest expense, net															(14	)
Tax expense															(14	)
Net loss														$	(2,192	)

Total Assets by Segment		As of June 29, 2019				As of December 29, 2018
		(dollars in thousands)
EPCM		$	6,597			$	4,792
Automation			8,673				10,550
Corporate			9,914				6,964
Consolidated		$	25,184			$	22,306

The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”). Under ASC 740-270 we estimate an annual effective tax rate based on year-to-date operating results and our projection of operating results for the remainder of the year. We apply this annual effective tax rate to the year-to-date operating results. If our actual results differ from the estimated annual projection, our estimated annual effective tax rate can change affecting the tax expense for successive interim results as well as the estimated annual tax expense results. Certain states are not included in the calculation of the estimated annual effective tax rate because the underlying basis for the tax is related to revenues and not taxable income. Amounts for Texas margin taxes are reported as income tax expense.

The Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions only allows the recognition of those tax benefits, based on their technical merits that are greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 20142016 and Texas margins tax returns prior to 20142016 are closed. Generally, the applicable statues of limitations are three to four years from their filings.

The Company recorded income tax expense of $31 thousand and $51$22 thousand for the three and six months ended June 29, 2019, respectively,March 28, 2020 as compared to income tax benefit of $2 thousand and income tax expense of $14$20 thousand for the three and six months ended JuneMarch 30, 2018, respectively.

2019.

The effective income tax rate for the three and six months ended June 29, 2019March 28, 2020 was (2.06)% and (0.20)%, respectively,2.15% as compared to 0.0% and (0.05)(2.06)% for the three and six months ended JuneMarch 30, 2018.2019. The effective tax rate differed from the federal statutory rate of 21% primarily due to the effect of the valuation allowances related to the unrealized deferred tax asset generated by the current year benefit.

From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or is subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on our financial position, results of operations or liquidity.

We carry a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance and a general umbrella policy, all with standard self-insured retentions/deductibles. We also provide health insurance to our employees (including vision and dental), and are which is partially self-funded for these claims. Provisions for expected future payments are accrued based on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for the self-funded portion of our insurance policies. We are not aware of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s insurance limits.

The components of lease expense were as follows:

		Six months ended June 29, 2019
Operating leases:
Operating costs		$	418
Selling, general and administrative expenses			922
			1,340
Short-term leases:
Operating costs			—
Selling, general and administrative expenses			255
			255
Total lease expense		$	1,595

follows (dollars in thousands):

Supplemental balance sheet information related to leases was as follows:

		Financial Statement Classification		June 29, 2019
Operating ROU assets		Right of Use asset		$	2,619
Operating lease liabilities:
Current operating lease liabilities		Other current liabilities		$	933
Noncurrent operating lease liabilities		Long Term Leases			1,718
Total operating lease liabilities				$	2,651

follows (dollars in thousands):

The weighted average remaining lease term and weighted average discount rate were as follows:

Maturities of operating lease liabilities as of June 29, 2019March 28, 2020 are as follows:

Year ending:		Amount
2019 (remaining months)		$	504
2020			1,012
2021			958
2022			288
Total lease payments		$	2,762
Less: imputed interest			(111	)
Total lease liabilities		$	2,651

Thefollows (dollars in thousands):

On April 13, 2020, ENGlobal was granted an unsecured loan (the “Loan”) from Origin Bank in the aggregate principal amount of future minimum annual rental payments applicable$4,915,800 pursuant to non-cancelable leasesthe Paycheck Protection Program under Division A, Title I of Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020. The Loan is evidenced by a promissory note, dated as of December 29, 2018 wereApril 13, 2020, by ENGlobal in favor of Origin Bank, as follows:

Year ending:		Minimal Rental Payments
2019		$	445
2020			445
2021			387
2022			64
Total		$	1,341

ENGLOBAL CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS