ENGlobal
Annual Report 2011

Plain-text annual report

ENGLOBAL CORP FORM 10-K (Annual Report) Filed 04/12/12 for the Period Ending 12/31/11 Address 654 N. SAM HOUSTON PKWY E SUITE 400 HOUSTON, TX 77060-5914 281-878-1000 0000933738 ENG 8711 - Engineering Services Industry Construction & Engineering Telephone CIK Symbol SIC Code Sector Fiscal Year Industrials 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K  1 X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 001-14217 ENGlobal Corporation (Exact name of registrant as specified in its charter) Nevada 88-0322261 (State or other jurisdiction of (I.R.S Employer Identification No.) incorporation or organization) 654 North Sam Houston Parkway East, Suite 400 77060-5914 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (281) 878-1000 Securities registered pursuant to Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered Common Stock, $0.001 par value NASDAQ Securities registered pursuant to Section 12(g) of the Exchange Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act Yes No X 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 shortened 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X  2 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company X (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No X The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on December 31, 2011 was $56,595,512.98 (based upon the closing price for shares of common stock as reported by the NASDAQ on that date). The number of shares outstanding of the registrant's common stock on March 1, 2012 is as follows: $0.001 Par Value Common Stock 26,822,518 shares Documents incorporated by reference Responses to Items 10, 11, 12, 13 and 14 of Part III of this report are incorporated herein by reference to certain information contained in the Company's definitive proxy statement for its 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2011.  ENGlobal Corporation 2011 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS 3 PART I PAGE ITEM 1. BUSINESS 4 ITEM 1A. RISK FACTORS 18 ITEM 2. PROPERTIES 22 ITEM 3. LEGAL PROCEEDINGS 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 24 ITEM 6. SELECTED FINANCIAL DATA 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 86 ITEM 9A. CONTROLS AND PROCEDURES 86 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 88 ITEM 11. EXECUTIVE COMPENSATION 88 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 88 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 88 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 88 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES 89 SIGNATURES SIGNATURES 95  PART I CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K (“Report”), including “Management's Discussion and Analysis of Financial Condition and Results of Operations,” as well as oral statements made by the Company and its officers, directors or employees, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based on Management's beliefs, current expectations, estimates and projections about the industries that the Company and its subsidiaries' serve, the economy and the Company in general. The words “expect,”“anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements; however, this Report also contains other forward-looking statements in addition to historical information. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. The Company cautions readers that the following important factors and the risks described in the section of this report entitled “Risk Factors,” among others, could cause the Company's actual results to differ materially from the forward-looking statements contained in this Report: (i) the effect of changes in the business cycle and downturns in local, regional and national economy and our ability to respond appropriately to the current worldwide economic financial situation; (ii) our ability to collect accounts receivable in a timely manner; (iii) our ability to accurately estimate costs and fees on fixed-price contracts; (iv) the effect of changes in laws and regulations with which the Company must comply, and the associated costs of compliance with such laws and regulations, either currently or in the future, as applicable; (v) the effect of changes in accounting policies and practices as may be adopted by regulatory agencies, as well as by the Financial Accounting Standards Board; (vi) the effect of changes in the Company's organization, compensation and benefit plans; (vii) the effect on the Company's competitive position within its market area in view of, among other things, the increasing consolidation within its services industries, including the increased competition from larger regional and out-of-state engineering and professional service organizations; (viii) the effect of increases and decreases in oil prices; (ix) the availability of parts from vendors; (x) our ability to increase or renew our line of credit; (xi) our ability to identify attractive acquisition candidates, consummate acquisitions on terms that are favorable to the Company and integrate the acquired businesses into our operations; (xii) our ability to hire and retain qualified personnel; (xiii) our ability to retain existing customers and get new customers; (xiv) our ability to mitigate losses; (xv) our ability to achieve our business strategy while effectively managing costs and expenses; (xvi) our ability to estimate exact project completion dates; (xvii) our ability to effectively monitor business done outside of the United States; and (xviii) the performance of the energy sector. The Company cautions that the foregoing list of important factors is not exclusive. We are under no duty and have no plans to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. ITEM 1. BUSINESS Overview ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”), incorporated in the State of Nevada in June 1994, is a leading provider of engineering and professional services principally to the energy sector. ENGlobal's net revenue from continuous operations has grown from $89.1 million in 2002 to $312.7 million in 2011 , a compounded annual growth rate of approximately 15.0% , even after taking into account significant declines in 2009 and 2010. We have accomplished this growth by expanding our engineering and professional service capabilities and our geographic presence through internal growth, including new initiatives, and through a series of strategic acquisitions. We now have 1,943 full-time equivalent employees in 11 offices located in the following cities: Houston, Beaumont and Freeport, Texas; Baton Rouge and Lake Charles, Louisiana; Tulsa, Oklahoma; Denver, Colorado; Mobile, Alabama; and Chicago, Illinois. 4 ITEM 1. BUSINESS (continued) The Engineering and Construction Segment The Engineering and Construction segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the midstream and downstream sectors throughout the United States. Services provided by the Engineering and Construction segment include feasibility studies, engineering, design, procurement and construction management. The Engineering and Construction segment includes the government services group, which provides engineering, design, installation and operation and maintenance of various government, public sector and international facilities. The Automation Segment The Automation segment provides services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation, information technology, electrical and heat tracing projects primarily to the upstream and downstream sectors throughout the United States as well as specific projects in the Middle East and Central Asia. The Field Solutions Segment The Field Solutions segment provides inspection, land management, right-of-way, environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to the midstream sector, including pipeline, utility and telecommunications companies and other owner/operators of infrastructure facilities throughout the United States. Available Information We are currently subject to the information reporting requirements of the Securities Exchange Act and we file annual, quarterly and special reports and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov . Our SEC filings are also available at our website at www.englobal.com . You may also read and copy any document we file at the SEC's public reference room at 100 F. Street, N.E., Washington, D.C. 20002. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. ENGlobal Website You can find financial and other information about ENGlobal at the Company's website at the URL address www.englobal.com . Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are provided free of charge through the Company's website and are available as soon as reasonably practicable after filing electronically or otherwise furnishing reports to the SEC. Information relating to corporate governance at ENGlobal, including: (i) our Code of Business Conduct and Ethics for all of our employees, including our Chief Executive Officer and Chief Financial Officer; (ii) our Code of Ethics for our Chief Executive Officer and Senior Financial Officers; (iii) information concerning our Directors and our Board Committees, including Committee charters; and (iv) information concerning transactions in ENGlobal securities by Directors and officers, is available on our website under the Investor Relations link. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. We will provide any of the foregoing information, for a reasonable fee, upon written request to Investor Relations, ENGlobal Corporation, 654 North Sam Houston Parkway East, Suite 400, Houston, Texas 77060-5914. 5 ITEM 1. BUSINESS (continued) Business Segments Our segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. In addition to internal growth, historically, our segments have grown through strategic acquisitions, which also served to augment management expertise. Engineering and Construction Segment General The Engineering and Construction segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the midstream and downstream sectors throughout the United States. Our Engineering and Construction segment offers feasibility studies, engineering, design, procurement and construction management. The Engineering and Construction segment includes the government services group, which provides engineering, design, installation and operation and maintenance of various government, public sector and international facilities. ENGlobal's engineering staff has the capability of developing a project from the initial planning stages through detailed design and construction management. Our services include: The Engineering and Construction segment offers a wide range of services as a single source provider. The Engineering and Construction segment currently operates through ENGlobal's wholly-owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. ENGlobal U.S., Inc. focuses on providing its services to the midstream and downstream segments of the oil and gas industry, chemical and petrochemical manufacturers, utilities and alternative energy developers. It also provides its services via in-plant personnel assigned to client locations throughout the United States. ENGlobal U.S., Inc. also focuses on energy infrastructure projects in the United States by offering personnel and services primarily in the areas of construction, construction management, process plant turnaround management, plant asset management, commissioning and start-up. 6 Percentage of Revenue Segments 2011 2010 2009 Engineering and Construction 56.1 % 52.6 % 44.7 % Automation 19.9 % 16.2 % 21.1 % Field Solutions 24.0 % 31.2 % 34.2 % 100.0 % 100.0 % 100.0 % Selected Financial Data 2011 2010 2009 (amounts in thousands) Revenue $ 175,387 $ 161,101 $ 153,675 Operating profit $ 7,835 $ (5,672 ) $ 4,597 Total assets $ 54,464 $ 53,333 $ 53,689 • conceptual studies; • project definition; • cost estimating; • engineering design; • environmental compliance; • material procurement; • project management: • facility inspection; and • construction management. ITEM 1. BUSINESS (continued) The Engineering and Construction segment has existing blanket service contracts under which it provides clients either with services on a time-and-material basis or with services on a fixed-price basis. The Company strives to establish longer term “alliance” or “preferred provider” relationships with its clients that can be expected to provide a steadier stream of work. In addition, this segment provides outsourced personnel to ENGlobal clients, a service that contributes to a more stable business mix for the Company. Our Engineering and Construction segment operates out of offices in Baton Rouge and Lake Charles, Louisiana; Beaumont, Houston and Freeport, Texas; Tulsa, Oklahoma; Chicago, Illinois; and Denver, Colorado. ENGlobal Government Services, Inc. primarily provides automated fuel handling systems and maintenance services to branches of the U.S. military and public sector entities. Other clients of this division are government agencies, refineries, petrochemical and process industry customers worldwide. The Government Services group can provide electrical and instrument installation, technical services, on-going maintenance, as well as calibration and repair services. As a service-based business, the Engineering and Construction segment is more labor than capital intensive. Our results primarily depend on our ability to generate revenue and collect cash in excess of any cost for employees and benefits, material, equipment and subcontracts, plus our selling, general and administrative (SG&A) expenses. The Engineering and Construction segment derives revenue primarily from time-and-material fees charged for professional and technical services, but its net income is derived primarily from services it provides to the oil and gas industry, utilities and alternative energy developers. The segment also enters into contracts providing for the execution of projects on a fixed-price basis, whereby some, or all, of the project activities related to engineering, material procurement and construction (EPC) are performed for a fixed-price amount. As a result of dramatic decreases in prices for energy commodities, lower profit spreads for downstream operators and a more difficult financing environment, we experienced a dramatic decrease in spending by the majority of our clients during 2009, 2010, and 2011. This reduction was most evident in the domestic refining and petrochemical industries, so that much of our work in this area consisted of maintenance, small capital retrofit and safety, regulatory and compliance driven work. Competition also increased greatly for the limited amount of project work on the market. As a result of stabilization of the economy in 2011, we experienced a stabilization of our revenues with projects consisting mainly of maintenance work. In August 2009, the Company acquired the operations of PCI Management and Consulting Company (“PCI”), a private Illinois based power consulting business. PCI provided engineering and project management services, specializing in projects related to steam and power generation, substation design, fuel conversions and the transmission and distribution of energy. 7 ITEM 1. BUSINESS (continued) Competition Our Engineering and Construction segment competes with a large number of public and private firms of various sizes, ranging from the industry's largest firms, which operate on a worldwide basis, to much smaller regional and local firms. Many of our competitors are larger than we are and have significantly greater financial and other resources available to them than we do. However, the largest firms in our industry are sometimes our clients, as they perform as program managers for very large scale projects and then subcontract a portion of their work to ENGlobal. We also have many competitors who are smaller than we are and who, as a result, may be able to offer services at more competitive prices. Competition is primarily centered on performance and the ability to provide the engineering, planning and project delivery skills required for completing projects in a timely and cost-efficient manner. The technical expertise of our management team and technical personnel and the timeliness and quality of our support services are key competitive factors. Automation Segment General The Automation segment provides services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation, information technology and heat tracing projects primarily to the upstream and downstream sectors throughout the United States as well as specific projects in the Middle East and Central Asia. This segment also designs, assembles, integrates and services control and instrumentation systems for specific applications in the energy and processing related industries. These services are offered to clients in the petroleum refining, petrochemical, pipeline, production, process and pulp and paper industries throughout the United States and Canada as well as the Middle East and the Caribbean. The Automation segment operates through ENGlobal's wholly-owned subsidiary, ENGlobal U.S., Inc. and derives revenue from both time-and-material fees and fees charged for professional and technical services on a fixed-price basis. As a service provider, our Automation segment is more labor than capital intensive. The segment's results primarily depend on our ability to accurately estimate costs on fixed-price contracts, generate revenue and collect amounts due under time-and-material contracts in excess of the cost of employees and benefits, material, equipment, subcontracts, and applicable SG&A expenses. Our Automation segment operates out of offices in Baton Rouge, Louisiana; Beaumont and Houston, Texas; and Mobile, Alabama. In April 2010, the Company acquired selected assets of Control Dynamics International, LP (“CDI”), a privately-held automation firm based in Houston, Texas. CDI designs and manufactures industrial automation control systems primarily for the upstream energy industry. CDI offers certain proprietary products, such as the Dolphin TM Universal Master Control Station (MCS), which can be configured to most subsea control projects. CDI also has expertise in blowout preventer control systems, supervisory control and data acquisition systems (SCADA), and Floating Production Storage and Offloading (FPSO) turret override protection systems. The services that CDI provides complement the services currently performed by the Automation segment and should allow ENGlobal to expand further into the upstream market. 8 Selected Financial Data 2011 2010 2009 (amounts in thousands) Revenue $ 62,216 $ 49,657 $ 72,322 Operating profit $ 2,037 $ (1,925 ) $ 4,568 Total assets $ 23,247 $ 24,883 $ 23,524 ITEM 1. BUSINESS (continued) Competition Our Automation segment competes with a large number of public and private firms of various sizes, ranging from the industry's largest firms, which operate on a worldwide basis, to much smaller regional and local firms. Many of our competitors are larger than we are and have significantly greater financial and other resources available to them than we do. We also have many competitors who are smaller than we are and who, as a result, may be able to offer services at more competitive prices. Competition is primarily centered on performance and the ability to provide the engineering, assembly and integration required to complete projects in a timely and cost-efficient manner. The technical expertise of our management team and technical personnel and the timeliness and quality of our support services are key competitive factors. Field Solutions Segment General Our Field Solutions segment provides inspection, land management, right-of-way, environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to the midstream sector, including pipeline, utility and telecommunications companies and other owner/operators of infrastructure facilities throughout the United States. The need to transport new sources of energy is the primary driver that results in demand for our rights-of-way and inspection services, including pipelines and electric power transmission lines, as well as their related facilities. For example, rights-of-way are required for pipelines that transport oil and gas from imported sources and from newly developed oil reserve basins in the U.S. Rights-of-way are also required for new electric power transmission lines needed to decongest circuits near population centers and to transport a growing amount of wind and solar power located in remote areas. In most cases, these rights-of-ways are acquired prior to the construction phase of the project. Once the construction phase of the project commences, ENGlobal provides qualified/certified inspectors through our inspection division. Included within the scope of our inspection services is construction management, welding inspection, coating and lining inspection, valves and assembly, pressure vessels, mechanical and associated plant and field process equipment oversight, structural fabrication, field fabrication, shop fabricated skid packages, turnkey responsibility for third party interpretations, process safety management data, ultrasonic thickness and flaw detection, magnetic particle examination, liquid penetrate examination, hydrostatic testing and pigging, holiday testing and vacuum testing. The Field Solutions segment derives revenue from time-and-material fees charged for professional and technical services and, as a service company, is more labor than capital intensive. Results for the Field Solutions segment primarily depend on its ability to generate revenue and collect cash under time-and-material contracts in excess of costs for employees and benefits, material, equipment, subcontracts, and SG&A expenses. Our Field Solutions segment operates out of offices in Houston, Texas; Denver, Colorado; and Tulsa, Oklahoma, as well as other satellite offices across the United States. Competition 9 Selected Financial Data 2011 2010 2009 (amounts in thousands) Revenue $ 75,144 $ 95,481 $ 117,465 Operating profit $ 160 $ 3,673 $ 7,475 Total assets $ 15,344 $ 19,702 $ 24,708 ITEM 1. BUSINESS (continued) The Field Solutions segment competes with a range of small and mid-size firms that provide right-of-way mapping, title assistance, appraisals, landowner negotiations and inspection services. Competition is primarily centered on retaining experienced inspectors, landsmen and other qualified professionals. Inspection personnel must have knowledge of integrity services to serve oil and gas pipelines and related facilities. In addition, inspection specialists must have a thorough understanding of governmental and public regulatory factors, as well as a firm grasp on health and safety issues that are involved in any construction environment. Inspectors must hold certifications for welding, field fabrication and shop fabricated packages, pressure vessels, valves and assemblies and structural fabrication. Land and right-of-way specialists must have a thorough understanding of governmental and public regulatory requirements. These professionals must consider socioeconomic and environmental factors and coordinate planning for the relocation of utilities, displaced persons and businesses. Also, they must often assist in developing replacement housing units, which may involve the expenditure of large sums, condemnation, damages, restriction of access and similar complicating factors. Retaining these qualified, skilled professionals is crucial to the operation of our Field Solutions segment. Acquisitions and Sales In the past, we have expanded our business through both internal initiatives and through strategic acquisitions. These acquisitions allowed us to (i) expand our client base and the range of services that we provide to our clients, (ii) add new technical capabilities that can be marketed to our existing client base, (iii) grow our business geographically, and (iv) capture more of each project's value. In 2011, we did not target acquisitions as we believed the time and expense required would take away from the successful execution of our Company strategy. In 2012, as part of our Strategic Initiative, we plan to continue to evaluate and assess acquisition opportunities that will either complement our existing business base or that will provide ENGlobal with additional capabilities or geographical coverage. Historically, ENGlobal has transitioned acquisitions under the ENGlobal brand name as soon as feasible, given the size and scope of the acquisition, but typically within two years. This strengthens ENGlobal's market position as a diversified supplier of engineering and related services and takes advantage of ENGlobal's reputation for quality in all of the services the Company provides. Smaller acquisitions are almost immediately identified as a division of an existing segment. Seasonality Our revenues are generated by services, and therefore holidays and employee vacations during our fourth quarter exert downward pressure on revenues for that quarter, which is only partially offset by the year-end efforts on the part of many clients to spend any remaining funds budgeted for services and capital expenditures during the year. Our clients' annual budget process is normally completed in the first quarter, which can slow the award of new work at the beginning of the year. Principally due to these factors, our first and fourth quarters are typically less robust than our second and third quarters. Business Strategy Our objective is to strengthen the Company's position as a leading full service provider of project delivery services to the energy industry by enhancing our overall range of capabilities in the areas of engineering and construction, automation and field solutions services. In October 2011, our Executive Management Team created a Strategic Plan for 2012 which included the creation of a new strategy for growth organically, through joint venture and partnership arrangements and through acquisitions. The Company believes organic growth will occur with the improvement in the global economy, our improved employee base, and the ability to take advantage of cross-selling under the One Englobal culture. We also plan to make strategic acquisitions with companies that have positive synergies and that will either expand the types of services we perform or expand our geographic reach. 10 ITEM 1. BUSINESS (continued) Sales and Marketing ENGlobal derives revenue primarily from three sources: (1) business development, (2) preferred provider/alliance agreements with strategic clients, and (3) referrals from existing customers and industry members. Our Senior Vice President of Business Development supervises our in-house business development assigned to clients and territories within the United States. Client relationships are nurtured by our geographic advantage of having office locations near our larger customers. By having clients in close proximity, we are able to provide single, dedicated points of contact. Our growth depends in large measure on our ability to attract and retain qualified business development managers and business development personnel with a respected reputation in the energy industry. Management believes that in-house marketing allows for more accountability and control, thus increasing profitability. Our business development focuses on building long-term relationships with customers and clients in order to provide solutions throughout the life-cycle of their facilities. Additionally, we seek to capitalize on cross-selling opportunities among our various segments - Engineering and Construction, Automation and Field Solutions. Sales leads are often jointly developed and pursued by the business development personnel from these various segments. We have also formed relationships with international agents and companies with the plan to partner on select international projects in certain jurisdictions. However, we will only pursue international opportunities if we believe the risk profile is appropriate. Additionally, ENGlobal expects to primarily provide services for international clients from its U.S. offices rather than opening offices overseas. Finally, since our clients typically consist of large integrated oil and gas companies with worldwide business operations, we will attempt to leverage our existing client relationships to showcase our capabilities for their international projects. We are currently pursuing projects in the Middle East, United Arab Emirates, South America and Africa. Products and services are also promoted through trade advertising, participation in industry conferences and on-line Internet communication via our corporate home page at www.englobal.com . The ENGlobal site provides information about our operating segments and illustrates our Company's full range of services and capabilities. We use internal and external resources to maintain and update our website on an ongoing basis. Through the ENGlobal website, we seek to provide visitors and investors with a single point of contact for obtaining information about ENGlobal's services. ENGlobal develops preferred provider and alliance agreements with clients in order to facilitate repeat business. These preferred provider agreements, also known as master services agreements or umbrella agreements, are typically two to three years in length. Although the agreement is not a guarantee for work under a certain project, ENGlobal generally offers a slightly reduced billing structure to clients willing to commit to arrangements that are expected to provide a steady stream of work. With the terms of the contract settled, add-on projects with these customers are easier to negotiate and can be accepted quickly, without the necessity of a bidding process. Management believes that these agreements can serve to stabilize project-centered operations in the Engineering and Construction segment. Much of our business is repeat business and we are introduced to new customers in many cases by referrals from existing customers and industry members. Management believes referral marketing provides the opportunity for increased profitability because referrals do not involve direct selling. Rather, they allow satisfied customers to sell our services and products on our behalf. ENGlobal strives to develop our clients' trust, and then benefits by word-of-mouth referrals. Our past acquisition program has provided the benefit of expanding our existing customer base and range of services. Management believes that cross-selling among our businesses is an effective way to build client loyalty by solidifying the client relationship, thereby reducing attrition and increasing the lifetime profitability of each project. The Company also believes that cross-selling can help ensure more predictable revenue and can be a cost effective way to grow our business as customers are able to realize efficiencies as well as leverage results from using a single supplier for multiple products and services. 11 ITEM 1. BUSINESS (continued) Customers Our customer base consists primarily of Fortune 500 companies in the energy industry. While we do not have continuing dependence on any single client or a limited group of clients, one or a few clients may contribute a substantial portion of our revenue in any given year or over a period of several consecutive years due to the longevity of major projects, such as facility upgrades or expansions. ENGlobal may work for many different subsidiaries or divisions of our clients, which involves multiple parties to material contracts. The loss of a single contract award would not likely have a material impact on our financial results but the loss of a single large customer, across multiple divisions within the same customer, or the reduction in demand for our services by several customers in the same year would likely have such an effect. The Company continues to focus substantial attention on improving customer services in order to enhance satisfaction and increase customer retention. Revenue generated through sources such as in-plant staffing and preferred provider relationships are longer-term in nature and are not typically limited to one project. For example, our Engineering and Construction segment provides outsourced technical and other personnel that are assigned to work at client locations. In the past, these assignments often span multiple projects and multiple years, and although these engagements involve a lower margin, they help contribute to a steady stream of work. A major long-term trend among our clients and their industry counterparts has been outsourcing engineering services. This trend has fostered the development of ongoing, longer-term client arrangements, rather than one-time limited engagements. These arrangements vary in scope, duration and degree of commitment. While there is typically no guarantee that work will result from these agreements, often the arrangements form the basis for a longer-term client relationship. Despite their variety, we believe that these partnering relationships have a stabilizing influence on our revenue. These engagements may provide for any of the following: Overall, our ten largest customers, who vary from one period to the next, accounted for 49% of our total revenue for 2011 , 53% of total revenue for 2010 and 50% of total revenue for 2009 . Most of our projects are specific in nature and we generally have multiple projects with the same clients. If we were to lose one or more of our significant clients and were unable to replace them with other customers or other projects, our business would be materially adversely affected. Our top three clients in 2011 were BASF Corporation , ExxonMobil and Chevron . Even though we frequently receive work from repeat clients, our client list may vary significantly from year to year. Our potential revenue in all segments is dependent on continuing relationships with our customers. Engineering and Construction Segment: In the Engineering and Construction segment, our ten largest customers vary from one year to the next. These customers accounted for 63% of our total revenue for 2011 , 73% of total revenue for 2010 and 67% of total revenue for 2009 . This segment's top three clients in 2011 were BASF Corporation , Chevron and ExxonMobil . Although the Engineering and Construction segment frequently receives work from repeat clients, its client list may vary significantly from year to year. In order to generate revenue in future years, we must continue efforts to obtain new engineering and construction management projects. The in-plant division within the Engineering and Construction segment generates the majority of its revenue through in-plant staffing and construction related staffing at field locations. We consider all of these longer-term in nature and not typically limited to one project. Automation Segment: 12 • a minimum number of work man-hours over a specified period; • the provision of at least a designated percentage of the client's requirements; • the designation of the Company as the client's sole or preferred source of services at specific locations or on specific projects; or • a non-binding preference or intent, or a general contractual framework, for what the parties expect will be an ongoing relationship. ITEM 1. BUSINESS (continued) In the Automation segment, our ten largest customers vary from one year to the next. These customers accounted for 62% of our total revenue for 2011 , 62% of total revenue for 2010 and 76% of total revenue for 2009 . This segment's top three clients in 2011 were Formosa Plastics Corporation , Anadarko Midstream and Caspian Pipeline Consortium . Foreign customers accounted for 1% of our Automation segment revenue for 2011 , 2% of Automation segment revenue for 2010 and 12% of Automation segment revenue for 2009 . We closed our Calgary office in 2010; however, less than 1% and 3% of our revenue came from our Canadian operations in 2010 and 2009, respectively. Although the Automation segment frequently receives work from repeat clients, its client list may vary significantly from year to year. The Automation Segment's clients are primarily in the midstream and downstream process industries, and their needs result primarily from requirements to upgrade obsolete distributed control systems or process analytical equipment. Until 2011, we provided industrial electrical maintenance services, expert supervision and craft labor to our clients in downstream power generation facilities. This division was classified as a discontinued operation effective September 30, 2011. Field Solutions Segment: In the Field Solutions segment, our ten largest customers vary from one year to the next. These customers accounted for 78% of our total revenue for 2011 , 78% of total revenue for 2010 and 77% of total revenue for 2009 . Our top three clients in 2011 were Spectra Energy , Ruby Pipeline and Magellan Midstream Partners . The Field Solutions segment's clients currently consist primarily of pipeline operators or electric utilities, with both types of clients having needs to acquire rights-of-way for pipelines or electric transmission. Though the Field Solutions segment frequently receives work from repeat clients, its client list may vary significantly from year to year with outsourced rights-of-way, inspectors and other personnel assigned to work at project sites across the United States. Factors affecting our Field Solutions business that are beyond our control include client spending, regulatory requirements, title assistance, landowner negotiations and eminent domain-condemnation proceedings. Typically, backlog in this segment is more difficult to ascertain due to these factors. 13 ITEM 1. BUSINESS (continued) Contracts We generally enter into two principal types of contracts with our clients: time-and-material contracts and fixed-price contracts. Our mix of net revenue between time-and-material and fixed-price contracts is shown in the table below. Our clients typically determine the type of contract to be utilized for a particular engagement, with the specific terms and conditions of a contract resulting from a negotiation process between the Company and our client. Backlog Backlog represents an estimate of gross revenue of all awarded contracts that have not been completed and will be recognized as revenue over the life of the project. Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur. Further, most contracts with clients may be terminated by either party at will, in which case the client would only be obligated to us for services provided through the termination date. As a result, no assurances can be given that the amounts included in backlog will ultimately be realized. In addition, it is not clear how our backlog will be impacted by current or future economic conditions. At December 31, 2011 , our backlog was approximately $302.0 million compared to an estimated $244.2 million at December 31, 2010 . We expect the majority of our backlog to be completed during 2012 . 14 Time-and-material % Fixed-price % (revenue in thousands) Engineering and Construction $ 160,356 $ 15,031 Automation 18,767 43,449 Field Solutions 75,076 68 Total company $ 254,199 81.3 % $ 58,548 18.7 % • Time-and-Material . Under our time-and-material contracts, we are paid for labor at either negotiated hourly billing rates, a multiple of our actual labor rate or through reimbursement for allowable hourly rates and other expenses. We are paid for material and contracted services at an agreed upon multiplier of our cost, and at times we pass non-labor costs for equipment, materials and subcontractor services through with no profit. Profitability on these contracts is driven by billable headcount, the amount of non-labor related services and cost control. Many of these contracts have upper limits, referred to as “not-to-exceed”amounts. Generally, our scope is not defined under a “not-to-exceed” agreement, and we are not under any obligation to provide services beyond the limits of the contract, but if we generate costs and billings that exceed the upper limits of the contract ceiling or are not allowable, we may be unable to obtain reimbursement for the excess cost. Further, the continuation of each contract partially depends upon the customer's discretionary periodic assessment of our performance on that contract. • Fixed-Price . Under a fixed-price contract, we provide the customer a total project for an agreed-upon price, subject to project circumstances and changes in scope. Fixed-price projects vary in size and may include engineering activities and related services, responsibility for the procurement of materials and equipment, and oversight of the construction through a subcontractor. Fixed-price contracts carry certain inherent risks, including risks of losses from underestimating costs, delays in project completion, problems with new technologies, the impact of the economy on labor shortages, increases in equipment and materials costs, natural disasters, and other events and changes that may occur over the contract period. Another risk is our ability to secure written change orders prior to commencing work on contract changes in scope, without which we may not receive payment for work performed. Consequently, the profitability of fixed-price contracts may vary substantially. ITEM 1. BUSINESS (continued) The backlog at December 31, 2011 consists of $275.0 million with commercial customers and $27.0 million with the United States government. Backlog on federal programs includes only the portion of the contract award that has been funded. The backlog for each of our segments at December 31, 2011 was as follows: Backlog includes gross revenue under two types of contracts: (1) contracts for which work authorizations have been received on a fixed-price basis or time-and-material projects that are well defined, and (2) time-and-material evergreen contracts at an assumed 12 month run-rate, under which we place employees at our clients' site to perform day-to-day project efforts. There is no assurance as to the percentage of backlog that will be recognized under either type of contract. Customer Service and Support We provide service and technical support to our customers in varying degrees depending upon the business line and on customer contractual arrangements. The Company's technical staff provides initial telephone support services for its customers. These services include isolating and verifying reported failures and authorizing repair services in support of customer requirements. We also provide on-site engineering support if a technical issue cannot be resolved over the telephone. On projects for which we have provided engineered systems, we provide on-site factory acceptance tests and worldwide start-up and commissioning services. We also pass through the manufacturers' limited warranty coverage for products we re-sell. The Company seeks to provide experienced customer service representatives in order to achieve increased client satisfaction and loyalty. Dependence Upon Suppliers Our ability to provide clients with services and systems in a timely and competitive manner depends on the availability of products and parts from our suppliers at competitive prices and on reasonable terms. Our suppliers are not obligated to have products on hand for timely delivery nor can they guarantee product availability in sufficient quantities to meet our demands. There can be no assurance that we will be able to obtain necessary supplies at prices or on terms we find acceptable. However, in an effort to maximize availability and maintain quality control, we generally procure components from multiple distributors on our clients' behalf and in some cases we can take advantage of national agreements our clients may have entered into. For example, all of the product components used by our Automation segment are fabricated using components and materials that are available from numerous domestic manufacturers and suppliers. There are approximately five principal suppliers of distributed control systems, each of which can be replaced by an equally viable competitor, and our clients typically direct the selection of their preferred supplier. No one manufacturer or vendor provides products that account for more than 1% of our revenue. Thus, in the vast majority of cases, we anticipate little or no difficulty in obtaining components in sufficient quantities and in a timely manner to support our manufacturing and assembly operations in the Automation segment. Units produced through the Automation segment are normally not produced for inventory and component parts; rather, they are typically purchased on an as-needed basis. By being vendor neutral, ENGlobal is able to provide quality technology and platforms for the design of plant systems such as 3D modeling, process simulation and other technical applications. Despite the foregoing, our Automation segment relies on certain suppliers for necessary components and there can be no assurance that these components will continue to be available on acceptable terms. If a vendor does not continue to contract with us, it may be difficult to obtain alternative sources of supply without a material disruption in our ability to provide products and services to our customers. While we do not believe that such a disruption is likely, if it did occur, it could have a material adverse effect on our financial condition and results of operations. 15 Engineering and Construction segment $ 124.0 million Automation segment 101.7 million Field Solutions segment 76.3 million ITEM 1. BUSINESS (continued) Patents, Trademarks, Licenses Our success depends in part upon our ability to protect our proprietary technology, which we do primarily through protection of our trade secrets and confidentiality agreements. In addition, the U.S. Patent and Trademark Office registered our “Integrated Rack” TM patent application in 2008. Our trade names are protected by registration as well as by common law trademark rights. Our trademark for the use of “ENGlobal”® in connection with our products is registered with the U.S. Patent and Trademark Office and we claim common law trademark rights for “ENGlobal” TM in connection with our services. We also have pending trademark applications for “Engineered for Growth” ® and we claim common law trademark rights for “Global Thinking…Global Solutions” TM , “CARES - Communicating Appropriate Responses in Emergency Situations” TM , “Flare-Mon” TM , “Purchased Data” TM , “viMAC” TM , “ENGlobal Vu” TM , “riFAT” TM , and “ENGlobal Power Islands” TM . There can be no assurance that the protective measures we currently employ will be adequate to prevent the unauthorized use or disclosure of our technology, or the independent third party development of the same or similar technology. Although our competitive position to some extent depends on our ability to protect our proprietary and trade secret information, we believe that other factors, such as the technical expertise and knowledge base of our management and technical personnel, as well as the timeliness and quality of the support services we provide, will also help us to maintain our competitive position. Government Regulations ENGlobal and certain of our subsidiaries are subject to various foreign, federal, state, and local laws and regulations relating to our business and operations, and various health and safety regulations established by the Occupational Safety and Health Administration (OSHA). The Company and our professional staff are subject to a variety of state, local and foreign licensing, registration and other regulatory requirements governing the practice of engineering and other professional disciplines. For example, OSHA requires Process Safety Management to prevent the release of hazardous chemicals, the Department of Transportation (DOT) requires that pipeline operators are in full compliance with pipeline safety regulations, and the Environmental and Protection Agency (EPA) provides incentives to reduce chemical emissions. Currently, we are not aware of any situation or condition relating to the regulation of the Company, its subsidiaries, or personnel that we believe is likely to have a material adverse effect on our results of operations or financial condition. Employees As of December 31, 2011 , the Company and its subsidiaries employed 1,943 individuals. Of these employees, 1,245 were employed in engineering and related positions, 250 were employed as inspectors, 267 were employed as project support staff, 73 were employed in technical production positions, 84 were employed in administration, finance and management information systems and 24 were employed in sales and marketing. We believe that our ability to recruit and retain highly skilled and experienced technical, sales and management personnel has been and will continue to be critical to our ability to execute our business plan. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. We believe that relations with our employees are good. 16 ITEM 1. BUSINESS (continued) Benefit Plans ENGlobal sponsors a 401(k) profit sharing plan for its employees. Until January 2009, the Company made matching contributions equal to 66.66% of employee contributions up to 6% of employee compensation for regular (as distinguished from project or contract) employees. All other employees except our inspection personnel were matched at 50% of employee contribution up to 6% of compensation, as defined by the plan. The Company, at the direction of the Board of Directors, may make other discretionary contributions. Our employees may elect to make contributions pursuant to a salary reduction agreement upon meeting age and length-of-service requirements. On January 1, 2009, due to economic conditions, the Company elected to reduce its match on regular employees to 50% and all other employees except our pipeline inspectors to 33.33% of employee contributions up to 6% of employee compensation. On April 4, 2009, the Company elected to suspend its match to all employees. Effective October 21, 2011, the Company reinstated the employer match to 25% of employee contributions up to 6% of employee compensation for all employees. The Company made contributions of $186,519 , $0 , and $981,768 , respectively, for the years ended December 31, 2011 , 2010 , and 2009 . Geographic Areas In prior years, we had business operations in Calgary, Alberta but we currently do not have Canadian operations. Our U.S. and Canadian revenues over the last three years were: Long-lived assets consist of property, plant and equipment, net of depreciation (“PPE”). Our U.S. and Canadian PPE over the last three years were: ENGlobal was awarded an engineering, procurement, and commissioning services agreement from the Caspian Pipeline Consortium (CPC). Granted under two contracts, one to the Russian Federation and one to the Republic of Kazakhstan, the three-phase award is expected to have a total value of approximately $85 million over four years. As previously announced by CPC, its shareholders agreed to launch the Expansion Project construction on April 19, 2011. Under the Russian Federation contract, ENGlobal’s scope includes engineering, procuring equipment, buildings, programming, and fabrication of 230 control system panels for eight new pump stations and the upgrade of three existing pump stations, storage facilities, and marine terminal. The contract for Republic of Kazakhstan consists of engineering, procuring equipment, buildings, and fabrication of 78 control system panels for two new and two existing pump stations, start-up and commissioning services for the local control systems and valves. 17 2011 2010 2009 (dollars in thousands) US operations revenue $ 312,747 $ 305,897 $ 341,629 Canadian operations revenue — 342 1,833 Total revenue $ 312,747 $ 306,239 $ 343,462 2011 2010 2009 (dollars in thousands) US operations PPE $ 3,384 $ 4,416 $ 5,967 Canadian operations PPE — — 16 Total PPE $ 3,384 $ 4,416 $ 5,983 ITEM 1A. RISK FACTORS (continued) ITEM 1A. RISK FACTORS Set forth below and elsewhere in this Report and in other documents that we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report. You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Report could have a material adverse effect on our business, financial condition and results of operations and that upon the occurrence of any of these events, the trading price of our common stock could decline. Our indebtedness could limit our ability to finance future operations or engage in other business activities. As of December 31, 2011 , we had $16.4 million of total outstanding indebtedness against our revolving line of credit, which is currently limited to $30.4 million . Significant factors that could increase our indebtedness and/or limit our ability to finance future operations include: The Company was not in compliance with all of its covenants under the Wells Fargo Credit Facility as of December 31, 2011 and Wells Fargo waived its default rights with respect to the breach for the fourth quarter of 2011. Wells Fargo has extended the due date of the line of credit from April 30, 2012 to May 31, 2012. We are working on closing a new line of credit, which we believe will have terms better than those of our existing credit facility, on or before May 31, 2012. However, even with a new line of credit, our indebtedness could limit our ability to expand or engage in other business activities, and would have a material adverse impact on our financial condition. Our future revenue depends on our ability to consistently bid and win new contracts, provide high quality, cost-effective services, and to maintain and renew existing contracts. Our failure to effectively obtain future contracts could adversely affect our profitability. Our future revenue and overall results of operations require us to successfully bid on new contracts, provide high quality, cost-effective services, and renew existing contracts. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors, such as market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to perform under the terms of the contract. When negative market conditions arise, or if we fail to secure adequate financial arrangements or required governmental approvals, we may not be able to pursue particular projects, which could adversely affect our profitability. These factors have impacted our operations in the past several years and may continue to do so. The failure to attract and retain key professional personnel could adversely affect the Company. Our success depends on attracting and retaining qualified personnel even in an environment where the contracting process is more difficult. We are dependent upon our ability to attract and retain highly qualified managerial, technical and business development personnel. In particular, competition for key management personnel continues to be intense. We cannot be certain that we will retain our key managerial, technical and business development personnel or be able to attract or assimilate key personnel in the future. Failure to attract and retain such personnel would materially adversely affect our businesses, financial position, results of operations and cash flows. This is a major risk factor that could materially impact our operating results. Our dependence on one or a few customers could adversely affect us. One or a few clients have in the past and may in the future contribute a significant portion of our consolidated revenue in any one year or over a period of several consecutive years. In 2011 , our top three clients, BASF Corporation , ExxonMobil and Chevron , accounted for approximately 7% , 7% and 6% of our revenue respectively. As our backlog 18 ◦ our inability to extend the senior revolving credit facility past its current end date of May 31, 2012 or replace it with alternative financing; ◦ our ability to meet current credit facility financial ratios and covenants; ◦ our inability to collect accounts receivable within contractual terms; ◦ client demands for extending contract payment terms; ◦ material losses and/or negative cash flows on significant projects; and ◦ clients' failure to pay our invoices timely due to economic conditions or causes. ITEM 1A. RISK FACTORS (continued) frequently reflects multiple projects for individual clients, one major customer may comprise a significant percentage of our backlog at any point in time. Because these significant customers generally contract with us for specific projects, we may lose them in other years as their projects with us are completed. If we do not continually replace them with other customers or other projects, our business could be materially adversely affected. Also, the majority of our contracts can be terminated at will. Although we have long-standing relationships with many of our significant customers, our contracts with these customers are on a project-by-project basis and the customers may unilaterally reduce or discontinue their purchases at any time. In addition, dissatisfaction with the results of a single project could have a much more widespread impact on our ability to get additional projects from a single major client. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations. Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. As of December 31, 2011 , our backlog was approximately $302.0 million . We cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog and the revenue and profits that we actually earn. These adjustments are exacerbated by current economic conditions. Acquisitions may adversely affect our ability to manage our business. Acquisitions have contributed to our growth in the past and we plan to continue making acquisitions on terms management considers favorable to us. The successful acquisition of other companies involves an assessment of future revenue opportunities, operating costs, economies and earnings after the acquisition is complete, and potential industry and business risks and liabilities beyond our control. This assessment is necessarily inexact and its accuracy is inherently uncertain. In connection with our assessments, we perform reviews of the acquisition target that we believe to be generally consistent with industry practices. These reviews, however, may not reveal all existing or potential problems, nor will they permit a buyer to become sufficiently familiar with the target companies to assess fully their deficiencies and capabilities. We cannot assure you that we will identify, finance and complete additional suitable acquisitions on acceptable terms or that acquisitions we consummate will be profitable. In addition, we may not be able to successfully integrate future acquisitions into our existing operations. Any acquisition will require substantial attention from our management, which may limit the amount of time that management can devote to day-to-day operations. Our inability to find attractive acquisition candidates or to effectively manage the integration of businesses we acquire could adversely affect our profitability. Our dependence on subcontractors and equipment manufacturers could adversely affect us. We rely on third party subcontractors as well as third party suppliers and manufacturers to complete our projects. To the extent that we cannot engage subcontractors or acquire supplies or materials, our ability to complete a project in a timely fashion may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price or time-and-material contracts, we could experience losses on these contracts. In addition, if a subcontractor or supplier is unable to deliver its services or materials according to the negotiated contract terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may be required to purchase the services or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services or materials were needed. If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected. Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed and materials supplied. We bear the risk that our clients will pay us late or not at all. Though we evaluate and attempt to monitor our clients' financial condition, there is no guarantee that we will accurately assess their creditworthiness. Even if they are credit-worthy, they may delay payments in an effort to manage their cash flow. Financial difficulties or business failure experienced by one or more of our major customers has had and could, in the future, continue to have a material adverse effect on both our ability to collect receivables and our results of operations. 19 ITEM 1A. RISK FACTORS (continued) Liability claims could result in losses. Providing engineering and design services involves the risk of contract, professional errors and omissions and other liability claims, as well as adverse publicity. Further, many of our contracts require us to indemnify our clients not only for our negligence, if any, but also for the concurrent negligence and, in some cases, sole negligence of our clients. We currently maintain liability insurance coverage, including coverage for professional errors and omissions. However, claims outside of or exceeding our insurance coverage may be made. A significant claim could result in unexpected liabilities, take management time away from operations, and have a material adverse impact on our cash flow. We may incur significant costs in providing services in excess of original project scope without having an approved change order. After commencement of a contract, we may perform, without the benefit of an approved change order from the customer, additional services requested by the customer that were not contemplated in our contract price due to customer changes or to incomplete or inaccurate engineering, project specifications, and other similar information provided to us by the customer. Our construction contracts generally require the customer to compensate us for additional work or expenses incurred under these circumstances as long as we obtain prior written approval. A failure to obtain adequate written approvals prior to performing the work could require us to record an adjustment to revenue and profit recognized in prior periods under the percentage-of-completion accounting method. Any such adjustments, if substantial, could have a material adverse effect on our results of operations and financial condition, particularly for the period in which such adjustments are made. There can be no assurance that we will be successful in obtaining, through negotiation, arbitration, litigation or otherwise, approved change orders in an amount sufficient to compensate us for our additional, unapproved work or expenses. Failure to maintain adequate internal controls could adversely affect us. Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price. Our internal controls over financial reporting may not be adequate and our independent auditors may not be able to certify as to their adequacy. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. If we identify deficiencies in our internal control over financial reporting, our business and our stock price could be adversely affected. We have, in the past, identified material weaknesses in our internal controls, and while these have been cured, if we determine that we have further material weaknesses, it could affect our ability to ensure timely and reliable financial reports and the ability of our auditors to attest to the effectiveness of our internal controls. If our independent auditors are not able to certify the adequacy of our internal controls, it could have a significant adverse effect on our business and reputation. Business conducted in many international markets involves complex and evolving tax rules, which subjects us to international tax compliance risks. Many of the foreign tax jurisdictions in which we intend to expand have complex and subjective rules regarding the valuation of inter-company services, cross-border payments between affiliated companies and the related effects on the taxes to which we are subject, including income tax, value-added tax and transfer tax. From time to time, our foreign subsidiaries will be subject to tax audits and may be required to pay additional taxes, interest or penalties should the taxing authority assert different interpretations, or different allocations or valuations, of our services. There is a risk, if one or more taxing authorities significantly disagree with our interpretations, allocations or valuations that any additional taxes, interest or penalties which may result could be material and could reduce our income and cash flow from our international operations. Our business and operating results could be adversely affected by our inability to accurately estimate the overall risks, revenue or costs on a contract. Revenue recognition for a contract requires judgment relative to assessing the contracts estimated risks, revenue and costs and technical issues. Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables. Changes in underlying assumptions, circumstances 20 ITEM 1A. RISK FACTORS (continued) or estimates have in the past and may continue to adversely affect future period financial performance. Our strategy to expand internationally may fail, which may impede our growth and harm our operating results. We are currently planning expansion into new international markets. The costs of entering the global market, as well as setting up the infrastructure to manage international affairs could be costly and consume valuable time of many of our key executives. Other key challenges we will face in pursuing our international strategy include the need to hire and train personnel capable of supporting customers and managing operations in foreign countries, secure commercial relationships to help establish our presence in international markets, localize our products to target the specific needs and preferences of foreign customers, which may differ from our traditional customer base in the United States, implement new systems, procedures and controls to monitor our operations in new markets and obtain licenses or authorizations that may be required to perform our services internationally. In addition, we are subject to risks associated with operating in foreign countries including multiple, changing and often inconsistent enforcement of foreign ownership and other laws and regulations that could have a direct or indirect adverse impact on our business and market opportunities; political and economic instability; changes in local economic environments, including inflation, recession and foreign currency exchange rate fluctuations; competition with existing market participants which have a longer history in and greater familiarity with the foreign markets we enter; possible longer payment cycles for customers in some foreign countries; difficulty and expense associated with enforcement of agreements and collection of receivables through legal systems in some foreign countries; and difficulty and expense associated with managing a large organization spread throughout numerous foreign countries. Many of these factors typically become more prevalent during periods of economic stress; therefore, current global economic differences may exacerbate these risks. In addition, compliance with foreign and U.S. laws and regulations that are applicable to our international operations will be complex and may increase our cost of doing business in international jurisdictions and our international operations could expose us to fines and penalties if we fail to comply with these regulations. These laws and regulations include U.S. laws such as the Foreign Corrupt Practices Act. Although we are in the process of implementing policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors and agents will not take actions in violation of our policies. Any such violations could subject us to civil or criminal penalties and could also materially damage our reputation, our brand, our international expansion efforts and our business and negatively impact our operating results. In addition, if we fail to address the challenges and risks associated with international expansion and acquisition strategy, we may encounter difficulties implementing our strategy, which could impede our growth or harm our operating results. Force majeure events such as natural disasters could negatively impact the economy and the industries we service, which may negatively affect our financial condition, results of operations and cash flows. Force majeure events, such as hurricanes, could negatively impact the economies of the areas in which we operate. For example, during 2008, Hurricanes Gustav and Ike caused considerable damage along the Gulf Coast not only to the refining and petrochemical industry, but also the commercial segment which competes for labor, materials and equipment resources needed throughout the entire United States. In some cases, we remain obligated to perform our services after a natural disaster even though our contracts may contain force majeure clauses. In those cases, if we are not able to react quickly and/or negotiate contractual relief on favorable terms to the Company, our operations may be significantly and adversely affected, which would have a negative impact on our financial condition, results of operations and cash flows. Unsatisfactory safety performance can affect customer relationships, result in higher operating costs and result in high employee turnover. Our workers are subject to the normal hazards associated with providing services on constructions sites and industrial facilities. Even with proper safety precautions, these hazards can lead to personal injury, loss of life, damage to, or destruction of property, plant and equipment, and environmental damages. We are intensely focused on maintaining a safe environment and reducing the risk of accidents across all of our job sites. However, poor safety performance may limit or eliminate potential revenue streams from many of our largest customers and may materially increase our future insurance and other operating costs. In hiring new employees, we normally target experienced personnel; 21 ITEM 1A. RISK FACTORS (continued) however, we also hire inexperienced employees. Even with thorough safety training, inexperienced employees have a higher likelihood of injury which could lead to higher operating costs and insurance rates. Our Board of Directors has authorized an increase in the number of shares in our Equity Incentive Plan. This, combined with other possible sales of ENGlobal common stock could result in a decrease in the market value to existing stockholders of the shares they hold. Our Articles of Incorporation authorize our Board of Directors to issue up to an additional 48,177,482 shares of common stock and an additional 2,000,000 shares of blank check preferred stock as of the date of filing. These shares may be issued without stockholder approval unless the issuance is 20% or more of our outstanding common stock, in which case the NASDAQ requires stockholder approval. We may issue shares of stock in the future in connection with acquisitions or financings. In addition, we may issue restricted stock or options under our 2009 Equity Incentive Plan. Future issuances of substantial amounts of common stock, or the perception that these sales could occur, may affect the market price of our common stock. In addition, the ability of the Board of Directors to issue additional stock may discourage transactions involving actual or potential changes of control of the Company, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock. ITEM 2. PROPERTIES Facilities We lease space in 11 buildings in the U.S. totaling approximately 339,000 square feet. The leases have remaining terms ranging from monthly to seven years and are on terms that we consider commercially reasonable. ENGlobal has no major encumbrances related to these properties. Our principal office is located in Houston, Texas. We have other offices in Beaumont and Freeport, Texas; Baton Rouge and Lake Charles, Louisiana; Blackwell, Oklahoma; Denver, Colorado; Mobile, Alabama; Tulsa, Oklahoma, and Chicago, Illinois. Approximately 230,000 square feet of our total office space is designated for our professional, technical and administrative personnel. We believe that our office and other facilities are well maintained and adequate for existing and planned operations at each operating location. Our Automation segment performs fabrication assembly in its Houston, Texas shop facility with approximately 104,000 square feet of space. ITEM 3. LEGAL PROCEEDINGS From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or are 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. As of the date of this filing, all such active proceedings and claims of substance that have been raised against any subsidiary business entity have been adequately allowed for, or are covered by insurance, such that, if determined adversely to the Company, individually or in the aggregate, they would not have a material adverse effect on our results of operations or financial position. In June 2008, ENGlobal filed an action in the United States District Court for the Eastern District of Louisiana; Case Number 08-3601, against South Louisiana Ethanol LLC (“SLE”) entitled ENGlobal Engineering, Inc. and ENGlobal Construction Resources, Inc. vs. South Louisiana Ethanol, LLC. The lawsuit sought to enforce collection of $15.8 million owed to ENGlobal and its affiliates for services performed on an ethanol plant in Louisiana. In August 2009, SLE filed for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of Louisiana, Case Number 09-12676. In connection with the bankruptcy proceedings, the plant assets were sold and the court issued an order allocating proceeds from the sale and authorizing their distribution. ENGlobal received $209,017 and may receive an additional $845,500 depending on the outcome of an on-going dispute with a subcontractor. On July 7, 2010, a class action lawsuit was filed in the United States District Court for the Southern District of Texas, Houston Division entitled “Michael Phillips, on behalf of Himself and Others Similarly Situated, v. ENGlobal 22 ITEM 3. LEGAL PROCEEDINGS (continued) Corporation.” The lawsuit was filed on behalf of approximately 200 welding inspectors seeking damages for violations of the Fair Labor Standards Act. The plaintiffs sought unpaid overtime, liquidated damages, attorneys’ fees, costs and expenses. While ENGlobal settled the wage and hour portion of the lawsuit and modified its pay practices, the suit was amended to include a retaliation claim involving approximately five of the class members. That portion of the claim is still pending but it is not expected to have a material adverse effect on our results of operations or financial position. 23  PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Holders The Company's common stock has been quoted on the NASDAQ Global Stock Market (NASDAQ) under the symbol “ENG.”Newspaper and on-line stock listings identify us as “ENGlobal.” The following table sets forth the high and low sales prices of our common stock for the periods indicated. The foregoing figures, based on information published by NASDAQ, do not reflect retail mark-ups or markdowns and may not represent actual trades. As of December 31, 2011 , approximately 238 stockholders of record held the Company's common stock. We do not have information regarding the number of holders of beneficial interests in our common stock. The Company is authorized to issue 2,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”). The Board of Directors has the authority to approve the issuance of all or any of these shares of Preferred Stock in one or more series, to determine the number of shares constituting any series and to determine any voting powers, conversion rights, dividend rights and other designations, preferences, limitations, restrictions and rights relating to such shares without any further action by the stockholders. While there are no current plans to issue the Preferred Stock, it was authorized in order to provide the Company with flexibility, such as businesses becoming available for acquisition. 24 Fiscal Year Ended December 31 2011 2010 High Low High Low First quarter $ 5.47 $ 3.55 $ 3.48 $ 2.77 Second quarter 4.41 3.00 3.64 2.06 Third quarter 4.20 2.71 2.60 2.10 Fourth quarter 2.96 2.05 3.79 2.41 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued) Performance Table The following table compares the five-year cumulative total stockholder return of ENGlobal Corporation as compared to the NASDAQ Market Index and a self-instructed peer group index, consisting of the following companies: Furmanite Corporation (formerly Xanser Corporation), Michael Baker Corporation, Matrix Service Company, Tetra Tech, Inc., Willbros Group and VSE Corporation. The table assumes an investment of $100.00 in our common stock and each index (including reinvestment of dividends) on December 31 , 2006 and shown through December 31, 2011 . Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Exchange Act, which might incorporate future filings made by the Company under those statutes, the Company's Stock Performance Table will not be incorporated by reference into any of those prior filings, nor will such report or table be incorporated by reference into any future filings made by the Company under those Acts. Equity Compensation Plan Information The following table sets forth certain information concerning the Company's equity compensation plans as of December 31, 2011 . See Note 13 in the attached financial statements. (1) Includes options issued under our 1998 Incentive Plan. For a brief description of the material features of the Plan, see Note 13 of the Notes to the Consolidated Financial Statements. (2) Includes unvested restricted stock awards issued under our 2009 Incentive Plan. For a brief description of the material features of the Plan, see Note 13 of the Notes to the Consolidated Financial Statements. The Company's 1998 Incentive Plan expired in June 2008. At the June 18, 2009 Annual Meeting of Stockholders, the Company's stockholders voted to approve the adoption of the ENGlobal Corporation 2009 Equity Incentive Plan authorizing the issuance of up to 480,000 shares, the same number of shares that remained under the expired ENGlobal Corporation 1998 Incentive Plan. 25 THE STOCK PRICE PERFORMANCE SHOWN IN THE TABLE BELOW REPRESENTS HISTORICAL PRICE PERFORMANCE AND IS NOT NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE PERFORMANCE. COMPARISION OF 5-YEAR CUMULATIVE TOTAL RETURN AMOUNT ENGLOBAL NASDAQ MARKET INDEX (U.S.) AND PEER GROUP INDEX 2006 2007 2008 2009 2010 2011 ENGLOBAL CORP. $ 100.00 $ 176.67 $ 50.54 $ 48.68 $ 57.85 $ 32.81 NASDAQ MARKET INDEX (U.S.) $ 100.00 $ 110.26 $ 65.65 $ 95.19 $ 112.10 $ 110.81 PEER GROUP INDEX $ 100.00 $ 156.73 $ 101.16 $ 123.75 $ 108.70 $ 81.88 ASSUMES $100 INVESTED ON DECEMBER 31, 2006 ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDED DECEMBER 31, 2011 Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans {Excluding Securities in Column (a)} (c) Equity compensation plan approved by security holders 770,000 (1) $ 6.81 0 Equity incentive plan approved by security holders 145,819 (2) $ 2.90 111,281 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued) Dividend Policy The Company has never declared or paid a cash dividend on its common stock. The Company intends to retain any future earnings for reinvestment in its business and does not intend to pay cash dividends in the foreseeable future. In addition, restrictions contained in our loan agreements governing our credit facility with Wells Fargo Bank limit the amount of dividends that can be paid on our common stock. We anticipate similar restrictions in the credit facility we are currently working to close. T he payment of dividends in the future, if any, will depend on numerous factors, including the Company's earnings, capital requirements and operating and financial position as well as general business conditions. Stock Repurchase Program Effective May 14, 2010, our Board of Directors authorized a total expenditure of $2.5 million to repurchase shares of the Company's common stock. Through open market purchases under this authorization, we purchased 981,099 shares at an average cost of $2.41 per share during the twelve months ended December 31, 2010 . No shares were purchased during the twelve months ended December 31, 2011 . At December 31, 2011 , approximately $0.1 million remains authorized in the stock repurchase program. The program does not have an expiration date. Restrictions, contained in our loan agreements governing our credit facility with Wells Fargo Bank, limit the amount of our common stock that we can repurchase and in accordance with amendments to the loan agreement with Wells Fargo, the Company does not currently intend to purchase additional shares under this program. 26  ITEM 6. SELECTED FINANCIAL DATA Summary Selected Historical Consolidated Financial Data The following tables set forth our selected financial data. The data for the years ended December 31, 2011 , 2010 and 2009 have been derived from the audited financial statements appearing elsewhere in this document. The data as of December 31 , 2008 and 2007 have been derived from audited financial statements not appearing in this document. You should read the selected financial data set forth below in conjunction with our financial statements and the notes thereto included in Part II, Item 8; Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations;” and other financial information appearing elsewhere in this document. 27 Years Ended December 31, 2011 2010 2009 2008 2007 (in thousands, except per share amounts) Statement of Operations Revenue Engineering and Construction $ 175,387 $ 161,101 $ 153,675 $ 265,331 $ 233,772 Automation 62,216 49,657 72,322 59,730 37,766 Field Solutions 75,144 95,481 117,465 168,271 91,689 Total revenue $ 312,747 $ 306,239 $ 343,462 $ 493,332 $ 363,227 Costs and expenses Engineering and Construction 160,033 148,848 142,272 224,391 188,907 Automation 56,132 47,106 63,619 52,245 34,382 Field Solutions 69,303 88,328 106,518 152,889 82,321 Selling, general and administrative 31,263 39,975 28,027 32,208 34,291 Total costs and expenses $ 316,731 $ 324,257 $ 340,436 $ 461,733 $ 339,901 Operating income (loss) $ (3,984 ) $ (18,018 ) $ 3,026 $ 31,599 $ 23,326 Interest income (expense), net (1,028 ) (442 ) (573 ) (1,636 ) (2,514 ) Other income (expense), net (61 ) (319 ) 173 64 (138 ) Foreign currency gain (loss) — — 1 (4 ) (1 ) Income (loss) from continuing operations before provision for income taxes $ (5,073 ) $ (18,779 ) $ 2,627 $ 30,023 $ 20,673 Provision for income taxes (831 ) (6,553 ) 1,394 11,765 8,209 Income (loss) from continuing operations $ (4,242 ) $ (12,226 ) $ 1,233 $ 18,258 $ 12,464 Income (loss) from discontinued operations, net of taxes $ (2,834 ) $ 474 $ — $ — $ — Net income (loss) $ (7,076 ) $ (11,752 ) $ 1,233 $ 18,258 $ 12,464 ITEM 6. SELECTED FINANCIAL DATA (continued) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is qualified in its entirety by, and should be read in conjunction with, our Consolidated Financial Statements including the Notes thereto, included elsewhere in this Annual Report on Form 10-K. Note 18 to the Financial Statements contain segment information. Overview Results of Operations While ENGlobal continues to face a number of challenges, we are cautiously optimistic about the prospects for 2012. Despite recognizing losses in 2011, we have experienced a significant improvement in our financial results, as compared to 2010, reducing losses by 40%. In this regard, we have successfully reduced our expenses by reducing employee headcount, closing offices, as appropriate, discontinuing underperforming divisions, and creating an enhanced Years Ended December 31, 2011 2010 2009 2008 2007 (in thousands, except per share amounts) Per Share Data Basic earnings (loss) per share Continuing operations $ (0.16 ) $ (0.45 ) $ 0.05 $ 0.67 $ 0.46 Discontinued operations (0.11 ) 0.02 — — — Net income (loss) per share $ (0.27 ) $ (0.43 ) $ 0.05 $ 0.67 $ 0.46 Weighted average common shares outstanding - basic (000's) 26,722 27,151 27,330 27,180 26,916 Diluted earnings (loss) per share Continuing operations $ (0.16 ) $ (0.45 ) $ 0.04 $ 0.66 $ 0.45 Discontinued operations (0.11 ) 0.02 — — — Net income (loss) per share $ (0.27 ) $ (0.43 ) $ 0.04 $ 0.66 $ 0.45 Weighted average common shares outstanding - diluted (000's) 26,722 27,151 27,567 27,672 27,435 Cash Flow Data Operating activities, net $ 5,579 $ (6,151 ) $ 23,002 $ 8,346 $ (1,980 ) Investing activities, net (2,874 ) (3,026 ) (4,205 ) (2,871 ) (1,614 ) Financing activities, net (2,729 ) 9,079 (19,673 ) (5,273 ) 3,074 Exchange rate changes 1 4 19 (110 ) 25 Net change in cash and cash equivalents $ (23 ) $ (94 ) $ (857 ) $ 92 $ (495 ) Balance Sheet Data Working capital $ 26,675 $ 30,200 $ 36,308 $ 58,586 $ 42,915 Property and equipment, net $ 3,384 $ 4,416 $ 5,983 $ 5,744 $ 6,472 Total assets $ 104,179 $ 110,324 $ 110,635 $ 152,705 $ 119,590 Long-term debt, net of current portion $ — $ 252 $ 6,098 $ 23,614 $ 29,318 Long-term capital leases, net of current portion $ — $ — $ 51 $ 243 $ — Stockholders' equity $ 58,500 $ 65,102 $ 78,711 $ 76,766 $ 55,797  28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) operational focus on cost controls. Cross-selling efforts through our “One ENGlobal” program are beginning to come to fruition with several large projects now underway and products such as the ENGlobal Power Island appear to create significant potential for growth. In addition, we are seeing an increase in capital project spending in the downstream refining, chemicals and petrochemicals sectors. Our Wells Fargo Credit Facility expires on May 31, 2012. However, we have competitive proposals from two major financial institutions and we are working toward entering into a new credit facility prior to that date or in obtaining an alternative source of financing. While there can be no assurances that these challenges will be resolved, we believe that 2012 may be the year we will return to profitability and growth. Despite the relative increase in capital project spending in certain limited markets, we believe that overall, client spending continues to be limited, which we believe may be due to the uncertainty experienced by businesses in a presidential election year and the possible impact of proposed regulation of the oil and gas industry, such as the proposed fracking legislation. In addition, pricing continues to be very competitive. However, we have an ongoing, extremely focused marketing effort and we have seen an increase in proposal activity, as well as an increase in backlog. In particular, we are focused on international expansion as we believe that the many significant projects will be located outside of the United States. Our “One ENGlobal”philosophy is resulting in cross-selling on large projects, and we expect to see this type of activity continue. Despite these efforts, we have not seen a significant increase in awards, and revenues increased only minimally from 2010 to 2011, a situation which is receiving considerable management attention. Employee recruitment and retention continues to be an issue we are addressing. To this end, we have improved employee benefits (although not to 2009 levels) and we believe employee morale has improved. Nevertheless, the market for qualified employees has become very active and, even after employees are hired, retention in a tight labor market has been challenging. We continue our efforts to improve on timely collection of accounts receivable, and to focus on improving our internal systems, such as accounting and human resources. We have encountered issues with collection of accounts receivable on a large international project due to administrative matters and this has had a negative impact on our cash flow but we believe that the issues surrounding this payment will be resolved in the short term. We continue our efforts to improve on timely collection of accounts receivable, and to focus on improving our internal systems, such as accounting and human resources. For several years, ENGlobal has worked through certain litigation matters that have been the cause of a material portion of our losses. While additional issues will undoubtedly arise in the future, we have resolved or established reserves which we believe to be adequate for material outstanding litigation issues. With the exception of reclassifications related to our discontinued operations (see below), total amounts reported for prior periods will remain the same, but amounts reported on a segment basis are reported in the three segments that the Company now operates in, rather than the four segments in which the Company previously operated and reported. During the third quarter of 2011, as part of its strategic evaluation of operations, the Company determined that the anticipated future performance of the Electrical Services group did not warrant maintaining it as a part of the ENGlobal suite of services. As a result, effective July 1, 2011, the Company initiated a plan to sell or, if necessary, ultimately terminate the operations of its Electrical Services group. These assets and their related operations have been classified as discontinued operations and are presented as such in the Company's re-casted consolidated financial statements. The net assets and liabilities related to the discontinued operations are shown on the Consolidated Balance Sheet as Assets held for sale and Liabilities held for sale, respectively. The results of the discontinued operations are shown on the Consolidated Statements of Operations as a loss from discontinued operations, net of taxes. Pending the sale or termination of the Electrical Services Group, we continue to abide by our contractual details to complete the projects to the client's satisfaction. The Engineering and Construction segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the midstream and downstream 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) sectors throughout the United States. Services provided by the Engineering and Construction segment include feasibility studies, engineering, design, procurement and construction management. The Automation segment provides services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation, information technology, electrical and heat tracing projects primarily to the upstream and downstream sectors throughout the United States as well as specific projects in the Middle East and Central Asia. The Field Solutions segment provides inspection, land management, right-of-way, environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to the midstream sector, including pipeline, utility and telecommunications companies and other owner/operators of infrastructure facilities throughout the United States. The Company's revenue is composed of engineering, procurement and construction management (EPCM) services revenue and the sale of fabricated engineered automation systems. The Company recognizes service revenue as soon as the services are performed. The majority of the Company's engineering services have historically been provided through time-and-material contracts whereas a majority of the Company's engineered automation system sales are earned on fixed-price contracts. In the course of providing our services, we routinely provide materials and equipment and may provide construction or construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with handling fees, which in total are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The use of subcontractor services can change significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percent of revenue may not be indicative of the Company's core business trends. Operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, bad debt and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment's operations. All other SG&A expense is comprised primarily of business development costs, as well as costs related to executive, investor relations/governance, finance, accounting, health/safety/environmental, human resources, legal and information technology departments and other costs generally unrelated to specific projects but which are incurred to support corporate activities and initiatives. The following tables set forth, for the periods indicated, certain financial data derived from our consolidated statements of operations. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Consolidated Results of Operations for the Twelve Months Ended December 31 , 2011 and 2010 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) For the twelve months ended December 31, 2011 (dollars in thousands) Engineering and Construction Automation Field Solutions All Other Consolidated Revenue before eliminations $ 175,387 $ 62,216 $ 75,144 $ — $ 312,747 Inter-segment eliminations — — — — — Revenue 175,387 62,216 75,144 — 312,747 100.0 % Gross profit 15,354 6,084 5,841 — 27,279 8.7 % SG&A 7,519 4,047 5,681 14,016 31,263 10.0 % Operating income (loss) 7,835 2,037 160 (14,016 ) (3,984 ) (1.3 )% Other income (expense) (61 ) — % Interest income (expense) (1,028 ) (0.3 )% Tax provision 831 0.3 % Net loss from continuing operations $ (4,242 ) (1.4 )% Diluted earnings per share from continuing operations $ (0.16 ) For the twelve months ended December 31, 2010 (dollars in thousands) Engineering and Construction Automation Field Solutions All Other Consolidated Revenue before eliminations $ 161,149 $ 51,020 $ 95,481 $ — $ 307,650 Inter-segment eliminations (48 ) (1,363 ) — — (1,411 ) Revenue 161,101 49,657 95,481 — 306,239 100.0 % Gross profit 12,253 2,551 7,153 — 21,957 7.2 % SG&A 17,925 4,476 3,480 14,094 39,975 13.1 % Operating income (loss) (5,672 ) (1,925 ) 3,673 (14,094 ) (18,018 ) (5.9 )% Other income (expense) (319 ) (0.1 )% Interest income (expense) (442 ) (0.1 )% Tax provision 6,553 2.1 % Net loss from continuing operations $ (12,226 ) (4.0 )% Diluted earnings per share from continuing operations $ (0.45 ) Increase/(Decrease) in 2011 to 2010 Operating Results (dollars in thousands) Engineering and Construction Automation Field Solutions All Other Consolidated Revenue before eliminations $ 14,238 $ 11,196 $ (20,337 ) $ — $ 5,097 Inter-segment eliminations 48 1,363 — — 1,411 Revenue 14,286 12,559 (20,337 ) — 6,508 2.1 % Gross profit 3,101 3,533 (1,312 ) — 5,322 24.2 % SG&A (10,406 ) (429 ) 2,201 (78 ) (8,712 ) (21.8 )% Operating income (loss) 13,507 3,962 (3,513 ) 78 14,034 (77.9 )% Other income (expense) 258 (80.9 )% Interest income (expense) (586 ) 132.6 % Tax provision (5,722 ) (87.3 )% Net loss from continuing operations $ 7,984 (65.3 )% Diluted earnings per share from continuing operations $ 0.29  Consolidated Results of Operations for the Twelve Months 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Ended December 31 , 2010 and 2009 For the twelve months ended December 31, 2010 (dollars in thousands) Engineering and Construction Automation Field Solutions All Other Consolidated Revenue before eliminations $ 161,149 $ 51,020 $ 95,481 $ — $ 307,650 Inter-segment eliminations (48 ) (1,363 ) — — (1,411 ) Revenue 161,101 49,657 95,481 — 306,239 100.0 % Gross profit 12,253 2,551 7,153 — 21,957 7.3 % SG&A 17,925 4,476 3,480 14,094 39,975 13.1 % Operating income (loss) (5,672 ) (1,925 ) 3,673 (14,094 ) (18,018 ) (5.9 )% Other income (expense) (319 ) (0.1 )% Interest income (expense) (442 ) (0.1 )% Tax provision 6,553 2.1 % Net loss from continuing operations $ (12,226 ) (4.0 )% Diluted earnings per share from continuing operations $ (0.45 ) For the twelve months ended December 31, 2009 (dollars in thousands) Engineering and Construction Automation Field Solutions All Other Consolidated Revenue before eliminations $ 154,807 $ 72,418 $ 118,330 $ — $ 345,555 Inter-segment eliminations (1,132 ) (96 ) (865 ) — (2,093 ) Revenue 153,675 72,322 117,465 — 343,462 100.0 % Gross profit 11,403 8,703 10,947 — 31,053 9.0 % SG&A 6,806 4,135 3,472 13,614 28,027 8.2 % Operating income (loss) 4,597 4,568 7,475 (13,614 ) 3,026 0.9 % Other income (expense) 174 0.1 % Interest income (expense) (573 ) (0.2 )% Tax provision (1,394 ) (0.4 )% Net income from continuing operations $ 1,233 0.4 % Diluted earnings per share from continuing operations $ 0.04 Increase/(Decrease) in 2010 to 2009 Operating Results (dollars in thousands) Engineering and Construction Automation Field Solutions All Other Consolidated Revenue before eliminations $ 6,342 $ (21,398 ) $ (22,849 ) $ — $ (37,905 ) Inter-segment eliminations 1,084 (1,267 ) 865 — 682 Revenue 7,426 (22,665 ) (21,984 ) — (37,223 ) (10.8 )% Gross profit 850 (6,152 ) (3,794 ) — (9,096 ) (29.3 )% SG&A 11,119 341 8 480 11,948 42.6 % Operating income (loss) (10,269 ) (6,493 ) (3,802 ) (480 ) (21,044 ) (695.4 )% Other income (expense) (493 ) (283.3 )% Interest income (expense) 131 (22.9 )% Tax provision 7,947 (570.1 )% Net loss from continuing operations $ (13,459 ) (1,091.6 )% Diluted earnings per share from continuing operations $ (0.49 )  33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OVERALL COMPARISONS Revenue The $6.5 million overall increase in revenue for the twelve months ended December 31, 2011 , as compared to the comparable 2010 period, resulted from an increase of $12.5 million in our Automation segment and $14.3 million to our Engineering and Construction segment, offset by a decrease of $20.3 million in our Field Solutions segment. Overall revenue increased in 2011 as a result of project work from new clients. However, the majority of the increase was due to $21.9 million of additional work from existing clients. In addition, 2011 revenues were impacted by existing projects that were either finished or saw significantly diminished activity during the 12-month period. Our clients are continuing to perform “run and maintain” type smaller projects which focus on work for required maintenance to keep the plant up and running but not on new capital expansions. Competition for the project work on the market continues to be intense. Our revenue decrease from 2009 to 2010 was a result of our clients' continued cancellation or delay of scheduled capital projects due to the economy in general, lower energy commodity prices and lower energy processing margins. Our clients were continuing to perform “run and maintain” type smaller projects which focus on work for required maintenance to keep the plant up and running but not on new capital expansions. Competition had also increased greatly for the amount of project work on the market. In addition, 2010 revenues were impacted by the completion of several larger projects which were not replaced with new project work. Gross Profit The increase in gross profit as a percentage of revenue in 2011 relative to 2010 was caused by several factors including lower travel expenses as part of an operational focus on cost control, lower material costs as a function of current project requirements and lower variable labor costs due to an operational focus on utilization, resulting in higher margins. The decrease in gross profit as a percentage of revenue in 2010 relative to 2009 . was caused by several factors including lower utilization of our billable resources, resulting in increased overhead costs to retain employees, increased overhead costs to expand our marketing to new sectors and new clients, increased per-employee costs of benefits and market pressure to renegotiate some of our existing contracts, resulting in lower margins. Also, we had significant increases in procurement activities which are generally performed at lower margins than labor. Selling, General and Administrative (“SG&A”) Expenses The decrease in operating SG&A expense for the twelve months ended December 31, 2011 , as compared to the comparable 2010 period, primarily consisted of decreases in bad debt expense of $9.7 million mainly attributable to the SLE receivable write off in 2010. Also, the Electrical Services group in our Automation segment moved to a smaller facility, reducing facilities expense by $0.3 million. We are now in the process of selling certain Electrical assets and terminating the operations of that division which should further decrease our SG&A. The increase in operating SG&A expense for the twelve months ended December 31, 2010 , as compared to the comparable 2009 period, primarily consisted of increases in bad debt expense of $9.7 million mainly attributable to the SLE write off, net of allowance adjustments, $1.0 million in professional services expenses, $0.4 million in salaries and employee related expenses, $0.2 million in depreciation and amortization expenses and $0.1 million in taxes, offset by decreases of $0.1 million in stock compensation expense. The decrease in all other SG&A expense for the twelve months ended December 31, 2011 , as compared to the comparable 2010 period, was primarily the result of decreases of $1.1 million in salaries and employee related expenses, offset by an increase of $0.1 million in professional services expenses. As a percentage of revenue, all other SG&A expense decreased to 4.5% for the twelve months ended December 31, 2011 , from 4.6% for the comparable prior year period. 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The increase in all other SG&A expense for the twelve months ended December 31, 2010 , as compared to the comparable 2009 period, was primarily the result of increases of $1.1 million in salaries and employee related expenses, offset by decreases of $0.3 million in depreciation and amortization expense, $0.1 million in stock compensation expense, $0.1 million in professional services expenses and $0.1 million in office expenses. As a percentage of revenue, all other SG&A expense increased to 4.6% for the twelve months ended December 31, 2010 , from 4.0% for the comparable prior year period. Operating Profit The increase in operating income for the twelve months ended December 31, 2011 , as compared to the comparable 2010 period, was attributable to higher revenue levels as well as decreased costs for both travel expenses and variable labor, due to increased focus on cost controls and improved utilization. These decreased costs contributed to higher operating income as a percentage of revenue. The decrease in operating income for the twelve months ended December 31, 2010 , as compared to the comparable 2009 period, was attributable to lower revenue levels as well as increased costs for both new sales efforts, maintaining core employees at a time when the Company had fewer projects and the SLE and Bigler write offs. These increased costs contributed to lower operating income as a percentage of revenue as well as decreased contract margins in response to market pressures. Other Income (Expense) Other expense decreased in 2011 compared to the same period in 2010 due mainly to a decrease in investments written off in 2010 of approximately $413,000 compared to other expenses in 2011 of approximately $61,000. Other expense in 2011 consisted primarily of approximately $57,000 paid in government penalties. Other expense for the same period in 2010 mainly consisted of $413,000 to write off an investment with a developer that was unable to obtain project financing and $56,000 in taxes, offset by income of $150,000 for a legal settlement. Other income in 2009 mainly consisted of $315,000 from insurance proceeds related to Hurricane Ike, offset by expense of $145,000 in losses from an investment in a Costa Rican company. Interest Income (Expense) Interest expense increased between 2011 and 2010 due to the increase in our credit facility as well as increasing interest rates in 2011, as compared to 2010. Interest expense decreased between 2010 and 2009 due to the lower balances on our line of credit throughout most of the year. Net Income (Loss) As a result of changes detailed above, Net Income increased $4.7 million to a loss of $7.1 million in 2011 from a loss of $11.8 million in 2010 , increasing as a percentage of total revenue from (4.0)% in 2010 to (1.4)% in 2011 . Net Income decreased $13.0 million to a loss of $11.8 million in 2010 from net income of $1.2 million in 2009 , decreasing as a percentage of total revenue from 0.4% in 2009 to (4.0)% in 2010 . 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 2011 Compared to 2010 and 2010 Compared to 2009 Engineering and Construction Segment : Twelve Months Ended December 31, 2011 2010 Increase/(Decrease) (dollars in thousands) Revenue before eliminations $ 175,387 $ 161,149 $ 14,238 Inter-segment eliminations — (48 ) 48 Total revenue $ 175,387 $ 161,101 $ 14,286 Detailed revenue Detail-design $ 124,505 71.0 % $ 70,123 43.5 % $ 54,382 77.6 % Field services 15,508 8.8 % 59,972 37.2 % (44,464 ) (74.1 )% Procurement services 17,563 10.0 % 17,200 10.7 % 363 2.1 % Fixed-price 17,811 10.2 % 13,806 8.6 % 4,005 29.0 % Total revenue $ 175,387 100.0 % $ 161,101 100.0 % $ 14,286 8.9 % Gross profit 15,354 8.8 % 12,253 7.6 % 3,101 25.3 % Operating SG&A expense 7,519 4.3 % 17,925 11.1 % (10,406 ) (58.1 )% Operating income (loss) $ 7,835 4.4 % $ (5,672 ) (3.5 )% $ 13,507 238.1 % Twelve Months Ended December 31, 2010 2009 Increase/(Decrease) (dollars in thousands) Revenue before eliminations $ 161,149 $ 154,807 $ 6,342 Inter-segment eliminations (48 ) (1,132 ) 1,084 Total revenue $ 161,101 $ 153,675 $ 7,426 Detailed revenue Detail-design $ 70,123 43.5 % $ 92,181 60.0 % $ (22,058 ) (23.9 )% Field services 59,972 37.2 % 57,246 37.2 % 2,726 4.8 % Procurement services 17,200 10.7 % 399 0.3 % 16,801 4,210.8 % Fixed-price 13,806 8.6 % 3,849 2.5 % 9,957 258.7 % Total revenue $ 161,101 100.0 % $ 153,675 100.0 % $ 7,426 4.8 % Gross profit 12,253 7.6 % 11,403 7.4 % 850 7.5 % Operating SG&A expense 17,925 11.1 % 6,806 4.4 % 11,119 163.4 % Operating income $ (5,672 ) (3.5 )% $ 4,597 3.0 % $ (10,269 ) (223.4 )% 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Revenue Engineering and Construction revenue accounted for 56.1% of our total revenue for 2011 . Revenue gains are due to an increase in capital project spending in the downstream refining, chemicals and petrochemicals sectors along with increased spending in the midstream sector. This is consistent with our strategic long-term view of these markets. The Engineering and Construction segment's estimated backlog at December 31, 2011 was $124.0 million . Our detail design service revenues increased by 77.6% from 2010 to 2011 , but decreased by 23.9% from 2009 to 2010 . The increase in 2011 reflects the increased capital spending by our traditional clients for both in-plant seconded technical staff and for engineering, design, procurement and construction management services. The decrease in 2010 was mainly due to decreased demand for engineering and related professional services for energy related projects. This decrease in demand was caused by delayed or canceled capital project work by clients in reaction to the economy. This area of service revenues was impacted the most due to the level of capital work that is performed in this area. Our field services revenues decreased by 74.1% from 2010 to 2011 , but increased by 4.8% from 2009 to 2010 . In 2011 , our clients' demands decreased as a reaction to the economy. However, we are now exploring the possibility of marketing to a broader range of prospective clients. Revenue from procurement services increased 2.1% from 2010 to 2011 and increased significantly from 2009 to 2010 . The increase in 2011 was the result of additional volume of procurement for EPC contracts due to increases in midstream and government services arenas. The significant increase in 2010 , as compared to the comparable 2009 period, was due to work performed for a new client that was expanding a gas field with exhuming, holding and loading functionality. Fixed-price revenues increased 258.7% from 2009 to 2010 and again by 29.0% from 2010 to 2011 . Due to the current economy and increased activity in the midstream sector where fixed price projects are common, more clients are requesting work to be performed on a fixed-price basis to control their costs and shift risk to their contractors. We expect to continue to see increased trends in this type of work awarded by the clients. Gross Profit Our Engineering and Construction segment's total gross profit increased 25.3% in 2011 , as compared with 2010 , and increased 7.5% in 2010 , as compared with 2009 . Of the overall increase in gross profit for 2011 , $14.2 million was attributable to increase revenues, offset by an increase of $10.1 million in direct costs. As a percentage of the Engineering and Construction segment revenue, the Engineering and Construction segment's gross profit increased from 7.4% in 2009 to 7.6% in 2010 , and increased to 8.8% in 2011 from 7.6% in 2010 . The increase during 2011 is mainly due to management of variable labor costs and improving market conditions for the Company's services. The increase in total gross profit percentages for 2010 , as compared to 2009 , is mainly due to cost cutting measures implemented in response to the lower revenues during 2009, which included decreasing our number of employees; therefore, reducing our overhead costs. Operating Selling, General and Administrative (“SG&A”) Expenses The decrease in the Engineering and Construction segment's SG&A expense in 2011 from 2010 was due to large write offs of bad debt in 2010. The increase in the Engineering and Construction segment's SG&A expense in 2010 from 2009 was due to increases of $10.0 million in bad debt expense mainly attributable to the SLE and Bigler write offs net of allowance adjustments, $0.8 million in professional services expenses and $0.5 million in salaries and employee related expenses, offset by decreases of $0.2 million in facilities expenses and $0.1 million in stock compensation expenses. Operating Income 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Of the overall increase in the Engineering and Construction segment's operating income for 2011 stated as a percent of revenues, the majority was due to significant increases in our detail design revenues. Of the overall decrease in the Engineering and Construction segment's operating income for 2010 stated as a percent of revenues, 6.2 percentage points of change was due to increased SG&A expenses for the write off of the SLE and Bigler receivables. 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Automation Segment : 39 Twelve Months Ended December 31, 2011 2010 Increase/(Decrease) (dollars in thousands) Revenue before eliminations $ 62,216 $ 51,020 $ 11,196 Inter-segment eliminations — (1,363 ) 1,363 Total revenue $ 62,216 $ 49,657 $ 12,559 Detailed revenue Fabrication $ 36,989 59.5 % $ 25,917 52.2 % $ 11,072 42.7 % Non-fabrication 25,227 40.5 % 23,740 47.8 % 1,487 6.3 % Total revenue $ 62,216 100.0 % $ 49,657 100.0 % $ 12,559 25.3 % Gross profit 6,084 9.8 % 2,551 5.1 % 3,533 138.5 % Operating SG&A expense 4,047 6.5 % 4,476 9.0 % (429 ) (9.6 )% Operating income (loss) $ 2,037 3.3 % $ (1,925 ) (3.9 )% $ 3,962 205.8 % Twelve Months Ended December 31, 2010 2009 Increase/(Decrease) (dollars in thousands) Revenue before eliminations $ 51,020 $ 72,418 $ (21,398 ) Inter-segment eliminations (1,363 ) (96 ) (1,267 ) Total revenue $ 49,657 $ 72,322 $ (22,665 ) Detailed revenue Fabrication $ 25,917 52.2 % $ 35,792 49.5 % $ (9,875 ) (27.6 )% Non-fabrication 23,740 47.8 % 36,530 50.5 % (12,790 ) (35.0 )% Total revenue $ 49,657 100.0 % $ 72,322 100.0 % $ (22,665 ) (31.3 )% Gross profit 2,551 5.1 % 8,703 12.1 % (6,152 ) (70.7 )% Operating SG&A expense 4,476 9.0 % 4,135 5.7 % 341 8.2 % Operating income $ (1,925 ) (3.9 )% $ 4,568 6.3 % $ (6,493 ) (142.1 )% ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Revenue The Automation segment contributed 19.9% of our total revenues for 2011 . Revenue from operations increased due to a number of projects undertaken to solve unique customer needs. In addition, the Caspian project, an $85 million contract with the Caspian Pipeline Consortium in Russia and Kazakhstan, entered the fabrication and drawing stages. The Automation segment's estimated backlog at December 31, 2011 was $101.7 million . The overall increase in our fabrication revenue from 2010 to 2011 is due to the Power Island installations, the start of the Caspian project and renewed interest in Remote Instrument Enclosures (RIE) and Continuous Emission Monitoring (CEM) buildings. The overall decrease in our fabrication revenue from 2009 to 2010 was mainly attributable to the completion of large international analytical projects in 2009. The overall increase in our non-fabrication revenue from 2010 to 2011 is mainly attributable to the Caspian project entering the drawing stage. The overall decrease in our non-fabrication revenue from 2009 to 2010 was mainly attributable to the completion of larger projects without the same level of new work to replace them due to clients' decreased spending on capital projects. Gross Profit Of the overall increase in our Automation segment's gross profit from 2010 to 2011 , $2.5 million is attributable to increased revenue while decreased costs contributed $1.0 million to the overall increase. The overall gross profit percentage increase is due to the Automation segment becoming more efficient and innovative in providing customer solutions. Of the total gross profit percentage decrease from 2009 to 2010 , 2.3 percentage points were attributable to reduced margins due to competitive pressure and increased overhead costs related to expanding our services during the year. This included the up-front costs associated with offering new services. As we had anticipated, margins improved in 2011 as the initial up-front costs had been expended in 2010 and did not offset 2011 sales. The remainder of the decrease in gross profit is due to higher direct costs, as a percentage of lower revenue. Selling, General and Administrative (“SG&A”) Expenses The overall decrease in our Automation segment's SG&A expense from 2010 to 2011 was attributable to the decreased amortization from a prior acquisition, a reduction of $82,000 in bad debt expense and the reduction of facility space, reducing costs by $300,000. The overall increase in our Automation segment's SG&A expense from 2009 to 2010 was attributable to increases of $286,000 in depreciation and amortization expenses, $102,000 in facilities expenses, $60,000 in bad debt expense, $41,000 in insurance costs, $36,000 in net losses on assets, $36,000 in professional services expenses and $27,000 in office expenses, offset by a decrease of $261,000 in salaries and employee related expenses. Operating Income The overall increase in our Automation segment's operating income from 2010 to 2011 is due to revenue generated from the expansion of client solutions, contained project costs and a focused effort on reduction of SG&A costs. The overall decrease in our Automation segment's operating income from 2009 to 2010 was due to increased overhead costs associated with expanding our services offered to our customers along with reduced revenues and increased costs due to competitive pressure. 40 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Field Solutions Segment : 41 Twelve Months Ended December 31, 2011 2010 Increase/(Decrease) (dollars in thousands) Revenue before eliminations $ 75,144 $ 95,481 $ (20,337 ) Inter-segment eliminations — — — Total revenue $ 75,144 $ 95,481 $ (20,337 ) Detailed revenue Inspection services $ 48,551 64.6 % $ 72,268 75.7 % $ (23,717 ) (32.8 )% Land services 26,593 35.4 % 23,213 24.3 % 3,380 14.6 % Total revenue $ 75,144 100.0 % $ 95,481 100.0 % $ (20,337 ) (21.3 )% Gross profit 5,841 7.8 % 7,153 7.5 % (1,312 ) (18.3 )% Operating SG&A expense 5,681 7.6 % 3,480 3.6 % 2,201 63.2 % Operating income $ 160 0.3 % $ 3,673 3.8 % $ (3,513 ) (95.6 )% Twelve Months Ended December 31, 2010 2009 Increase/(Decrease) (dollars in thousands) Revenue before eliminations $ 95,481 $ 118,330 $ (22,849 ) Inter-segment eliminations — (865 ) 865 Total revenue $ 95,481 $ 117,465 $ (21,984 ) Detailed revenue Inspection services $ 72,268 75.7 % $ 85,507 72.8 % $ (13,239 ) (15.5 )% Land services 23,213 24.3 % 31,958 27.2 % (8,745 ) (27.4 )% Total revenue $ 95,481 100.0 % $ 117,465 100.0 % $ (21,984 ) (18.7 )% Gross profit 7,153 7.5 % 10,947 9.3 % (3,794 ) (34.7 )% Operating SG&A expense 3,480 3.5 % 3,472 2.9 % 8 0.2 % Operating income $ 3,673 3.8 % $ 7,475 6.4 % $ (3,802 ) (50.9 )% ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Revenue The Field Solutions segment contributed 24.0% of our total revenues for 2011 . The Field Solutions segment's estimated backlog at December 31, 2011 was $76.3 million . The overall decrease in revenue from inspection related services from 2010 to 2011 is primarily attributable to completion of several larger projects and our inability to replace them with new similarly-sized projects. The overall decrease in revenue in inspection related services from 2009 to 2010 was primarily attributable to the completion of ongoing projects as well as our clients' delay or cancellation of projects. The overall increase in revenue from land related services from 2010 to 2011 was primarily attributable to expanded opportunities in the natural gas market. The overall decrease in revenue from land related services from 2009 to 2010 was primarily attributable to clients delaying capital projects and competitive pricing pressures as well as the completion or downsizing of several projects. Gross Profit The overall decrease in our Field Solutions segment's gross profit from 2010 to 2011 is primarily due to the segment's overall decrease in revenue. However, gross profit as a percentage of revenue increased from 7.5% to 7.8% because a smaller portion of the revenues were derived from inspection services which typically has lower margins. Also, margins from inspection services were negatively impacted by payroll changes made in the fourth quarter. Of the overall decrease in our Field Solutions segment's gross profit from 2009 to 2010 , $1.7 million is attributable to increased costs, while decreased revenues contributed to $2.1 million of the decrease. Of the total gross profit percentage decrease, 0.9 percentage points was attributable to lower margins resulting from competitive pressures, while the remaining 0.9 percentage points decrease is attributable to increased non-billable and indirect costs resulting from low employee utilization. Selling, General and Administrative (“SG&A”) Expenses The increase in our Field Solutions segment's SG&A expense for 2011 , as compared to the comparable 2010 period, was primarily attributable to increased professional service fees related to legal matters within the Inspection Division. The slight increase in our Field Solutions segment's SG&A expense for 2010 , as compared to the comparable 2009 period, was attributable to increases of $226,000 in salaries and employee related expenses, $95,000 in professional services expenses, $80,000 in facilities expenses and $18,000 in office expenses, offset by decreases of $300,000 in bad debt expense, $88,000 in depreciation and amortization expenses and $24,000 in marketing expenses. Operating Income The overall $3.5 million decrease in our Field Solutions segment's operating income for 2011 , as compared to 2010 , was due to lower overall revenues and higher legal fees. The overall $3.8 million decrease in our Field Solutions segment's operating income for 2010 , as compared to 2009 , was due to the completion of existing projects as well as delayed work along with increased costs due to competitive pressures. 42 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources Overview The Company defines liquidity as its ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary source of liquidity at December 31, 2011 was borrowings under our senior revolving credit facility with Wells Fargo Bank (the “Wells Fargo Credit Facility”), discussed under “Senior Revolving Credit Facility” below. Cash on hand at December 31, 2011 totaled $26 thousand and availability under the Wells Fargo Credit Facility totaled $9.7 million , after consideration of loan covenant restrictions, resulting in total liquidity of $9.7 million . We believe that we have sufficient available cash required for operations for the next 12 months. However, cash and the availability of cash could be materially restricted if: If any such event occurs, we would be forced to consider alternative financing options. Cash Flows from Operating Activities Operating activities provided $5.6 million in net cash in 2011 , used $6.2 million of net cash in 2010 , and provided $23.0 million in net cash in 2009 . For the year ended December 31, 2011 , the changes in working capital were primarily due to increased trade receivables of $0.3 million , decreased notes receivable of $2.5 million attributable to a payment received on the Alon USA receivable, decreased income taxes receivable of $6.7 million primarily due to a tax refund received in October 2011, decreased accounts payable of $0.6 million and decreased accrued compensation and benefits of $0.1 million . The increase in trade receivables was primarily the result of increased operating activity. Our days sales outstanding has increased from 56 days for the 12-month period ended December 31, 2010 to 70 days for the 12-month period ended December 31, 2011 . The Company manages its billing and client collection processes toward reducing days sales outstanding to the extent practicable. We believe that our allowance for bad debt is adequate to cover any potential non-payment by our customers. Cash Flows from Investing Activities Investing activities used cash totaling $2.9 million in 2011 , compared to $3.0 million in 2010 and $4.2 million in 2009 . In 2011 , investing activities were primarily used for capital additions. In 2010 ,investing activities were primarily used for capital additions and the CDI transaction. In 2009 , investing activities were primarily used for capital additions and the PCI transaction. Future investing activities are anticipated to remain consistent with prior years and include capital additions for leasehold improvements, technical applications software and equipment, such as upgrades to computers, as well as acquisitions. The Wells Fargo Credit Facility discussed under “Senior Revolving Credit Facility” below limits annual capital expenditures to $3.5 million and acquisitions require prior approval by Wells Fargo. Cash Flows from Financing Activities Financing activities used cash totaling $2.7 million in 2011 , provided cash totaling $9.1 million in 2010 , and used cash totaling $19.7 million in 2009 . During 2011 , our primary financing mechanism was our line of credit under the Wells Fargo Credit Facility. The line of credit was used principally to finance working capital requirements. During 2011 , 43 • we are unable to extend the senior revolving credit facility past its current end date of May 31, 2012 or obtain alternative sources of financing, • amounts billed are not collected or are not collected in a timely manner, • circumstances prevent the timely internal processing of invoices, • project mix continues to shift from cost-reimbursable to fixed-price contracts and we are unable to accurately estimate the project costs, resulting in cost overruns, • the Company loses one or more of its major customers or its major customers significantly reduce the amount of work requested from the Company, or • acquisitions are not integrated timely or effectively ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) our borrowings on the line of credit were $159.9 million in the aggregate and we repaid an aggregate of $162.2 million . During 2010 , our borrowings on the line of credit were $121.4 million in the aggregate and we repaid an aggregate of $108.7 million on our short-term and long-term bank and other debt. We anticipate that future cash flows from financing activities will be borrowings, payments on the line of credit and payments on long-term debt instruments. Line of credit fluctuations are a function of timing related to operations, obligations and payments received on accounts receivable. We estimate that payments on long-term debt, including interest for the coming year, will be $16.6 million , however, i f we are unable to replace the Credit Facility or if we replace it at unfavorable terms, it could have a negative impact on the cash flows and the operations of the Company. Senior Revolving Credit Facility Historically, we have satisfied our cash requirements through operations and borrowings under a revolving credit facility. In December 2009, the Company entered into a new credit agreement with Wells Fargo Bank, which provided a 28-month, $25 million senior secured revolving credit facility (“Wells Fargo Credit Facility”). The Wells Fargo Credit Facility expires on May 31, 2012 and the Company is in the process of obtaining replacement financing. The Wells Fargo Credit Facility is guaranteed by substantially all of the Company's subsidiaries, is secured by substantially all of the Company's assets and positions Wells Fargo as senior to all other debt. On September 30, 2010, the Company entered into an amendment to the credit agreement with Wells Fargo Bank which converted our borrowings from a revolving credit facility to an asset based lending agreement. On August 1, 2011, the Company entered into an Amended and Restated Credit Agreement with Wells Fargo Bank which allows a maximum available principal amount of $35 million under the Credit Facility. The Amended and Restated Credit Facility allows for borrowings limited to an aggregate of 80% of our current eligible accounts receivable. The Wells Fargo Credit Facility is additionally limited by deductions from accounts receivable for items such as invoices past due over 90 days, fixed price work, foreign receivables and government work. These accounts receivable exclusions under the Credit Facility totaled $8.9 million at December 31, 2011. The Amended and Restated Credit Facility contains an unused commitment fee of fifty basis points (0.50%) per annum and allows for other indebtedness of up to $10 million to cover the Ex-Im bank credit facility, described in the "Letters of Credit" section, and up to $1.0 million in any 12 month period for the unsecured financing of insurance premiums. The outstanding balance on the Wells Fargo Credit Facility as of December 31, 2011 was $16.4 million this amount was subject to a fluctuating interest rate described below. The remaining borrowings available under the Wells Fargo Credit Facility as of December 31, 2011 were $9.7 million after consideration of loan covenant restrictions. At the Company's option, amounts borrowed under the Wells Fargo Credit Facility will bear interest at a fluctuating rate per annum determined by Wells Fargo to be (3.75%) above the Daily One Month LIBOR Rate in effect from time to time. The Company's Credit Facility requires the Company to maintain certain financial covenants as of the end of each calendar quarter, including the following: “Total Liabilities” is defined as the aggregate of current liabilities and non-current liabilities. “Tangible Net Worth” is defined as the aggregate of total stockholders' equity less any intangible assets and less any loans or advances to, or investments in, any related entities or individuals. “Fixed Charge Coverage Ratio” is determined on a rolling four-quarter basis and is defined as EBITDA minus cash taxes, divided by interest expense, plus the current maturity of long-term debt, where EBITDA is net income, plus interest expense, plus income taxes, plus depreciation and amortization, plus stock compensation expense. The Company was not in compliance with one covenant (Fixed Charge Ratio) under the Wells Fargo Credit Facility as of December 31, 2011 ; however, Wells Fargo has granted a waiver for the breach of this covenant. For the quarterly 44 • Total Liabilities to Tangible Net Worth Ratio not greater than 2.25 to 1.00 ; and • Fixed Charge Coverage Ratio not less than 1.75 to 1.00 . ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) period ended December 31, 2011 , our Total Liabilities to Tangible Net Worth Ratio ranged from 1.45 to 1.00 ; and our Fixed Charge Coverage Ratio ranged from .54 to 1.00 . During the 12-month period ended December 31, 2011 we expended or committed approximately 19% , or $0.7 million , of the $3.5 million fiscal year covenant limitation on capital expenditures. The balance of our capital expenditures for the 12-month period has been for normal operating requirements including office furniture, computers, software and vehicles. The Wells Fargo Credit Facility also contains covenants that place certain limitations on the Company including limits on capital expenditures, other indebtedness, mergers, asset sales, investments, guaranties, and restrictions on certain distributions and pledges of assets. The Wells Fargo Credit Facility has been extended, with an increased interest rate, to May 31, 2012 and we are currently in the due diligence phase to secure a new, long term credit facility from an different lender. We presently have competitive proposals from two major financial institutions to provide long-term financing on terms that are better than our existing Wells Fargo Credit Facility and we are working toward entering into a new credit facility with a multi-year term before the May 31, 2012 extension date on our Wells Fargo Credit Facility. If we are unable to do so, we believe alternative forms of financing are available to us. Letters of Credit In July 2011, with the support of Wells Fargo's Global Banking Group, ENGlobal and the Export-Import Bank of the United States (“Ex-Im Bank”) entered into a $9.5 million letter of credit facility (the “Ex-Im Bank Facility”) to support the Company's Caspian Pipeline Consortium (CPC) project. Under the terms of this agreement, the Company may issue letters of credit to CPC for its performance under the CPC project. The Company is required to collateralize letters of credit outstanding under the Ex-Im Bank Facility with cash or eligible receivables resulting from the CPC project. As of April 12, 2012 , $9.1 million in letters of credit was outstanding under this facility. As part of an Ex-Im Bank requirement, this letter of credit is collateralized by $2.3 million in cash, designated as Restricted Cash in the Company's Consolidated Balance Sheet, only until sufficient accounts receivables are credited as part of the Russian portion of the CPC project. As of December 31, 2011 , the Company had other outstanding letters of credit totaling $4,374,000 primarily for additional performance support to our CPC project and to cover self-insured deductibles under both our general liability and our workers' compensation insurance policies. Contractual Obligations Our total long-term debt outstanding on December 31, 2011 was $16.6 million (see Note 10 to Consolidated Financial Statements), a decrease from $19.3 million as of December 31, 2010 . The following table summarizes our contractual obligations as of December 31, 2011 : 45 Payments Due by Period 2012 2013 2014 2015 2016 and thereafter Total (in thousands) Long-term debt $ 16,602 $ — $ — $ — $ — $ 16,602 Equipment Lease 534 494 475 307 80 1,890 Contractual interest and discount on certain notes 1 260 — — — — 260 Subtotal long-term debt 17,396 494 475 307 80 18,752 Short-Term Notes — — — — — — Purchase Order Obligations — — — — — — Operating leases 3,453 3,033 2,626 2,601 4,724 16,437 Total contractual cash obligations $ 20,849 $ 3,527 $ 3,101 $ 2,908 $ 4,804 $ 35,189 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 1 Future interest consists primarily of interest on the line of credit under the Wells Fargo Credit Facility. The rate applicable to debt outstanding at December 31, 2011 was 4% and fluctuates with the prime rate. Interest and discount rates on the remaining note payable is 5.00% at December 31, 2011 . Non-Cash Transactions In 2011 , there were no non-cash transactions. In 2010 , non-cash transactions included $0.8 million in connection with financing insurance policy premiums and $0.5 million in discounted notes payable in connection with the acquisition of CDI 's operations. In 2009 , non-cash transactions included $0.2 million in discounted notes payable issued in connection with the acquisition of PCI . 46 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Derivative Financial Instruments We do not hold any derivative financial instruments for trading purposes or otherwise. Furthermore, we have not engaged in energy or commodity trading activities and do not anticipate doing so in the future, nor do we have any transactions involving unconsolidated entities or special purpose entities. Long-term Notes Receivable In June 2008, ENGlobal filed an action in the United States District Court for the Eastern District of Louisiana; against South Louisiana Ethanol LLC (“SLE”) to enforce collection of $15.8 million owed to ENGlobal and its affiliates for services performed on an ethanol plant in Louisiana. $12.3 million of the amount due had been documented in the form of a “Hand Note.” In August 2009, SLE filed for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of Louisiana, Case Number 09-12676. In connection with the bankruptcy proceedings, the plant assets were sold and the court issued an order allocating proceeds from the sale and authorizing their distribution. ENGlobal received $209,017 and may receive an additional $845,500 depending on the outcome of a dispute with subcontractor. On March 13, 2009, the Company entered into a letter agreement (the “letter agreement”) with Alon resolving the payment of accounts receivable invoices in the aggregate amount of $6.8 million, payable in monthly installments with the final payment in December 2009. The $6.8 million payment plan included $4.6 million in subcontractor obligations which were included in our Accounts Payable balances until April 2010 when they were then reclassified to a long-term note payable. Alon made timely payments under the letter agreement until October 2009, when it failed to pay the full amount due. This receivable was reclassed to a short-term note receivable as of December 31, 2010 and paid in full in April 2011. In 2010, the Company reclassified the accounts receivable balance of $3.0 million related to the Bigler litigation and subsequent bankruptcy filing to long-term claims receivable. In June 2010, the Company wrote off the long-term claims receivable. Contingent Liabilities and Commitments To our knowledge, the Company is not exposed to any environmental liability. The Company does not have any product liability issues. Lease commitments are included in Footnote 11 of the consolidated financial statements. The Company leases all of its office and fabrication space. The Company has no off-balance sheet financing arrangements. Income Tax Provision We recognize interest related to uncertain tax positions in interest expense and penalties related to uncertain tax positions in governmental penalties. As of December 31, 2011 , we have not recognized interest or penalties relating to any uncertain tax positions. The Company is subject to federal and state income tax audits from time to time that could result in proposed assessments. The Company cannot predict with certainty the timing of such audits, how these audits would be resolved and whether the Company would be required to make additional tax payments, which may or may not include penalties and interest. The Company is not currently the subject of any examination by the Internal Revenue Service, and the open years subject to audit are tax years 2008-2010 . For most states where the Company conducts business, the Company is subject to examination for the preceding three to six years. Asset Management 47 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) We typically sell our products and services on short-term credit and seek to minimize our credit risk by performing credit checks and conducting our own collection efforts. Our trade accounts receivable increased to $54.0 million as of December 31, 2011 from $52.5 million as of December 31, 2010 . The number of days sales outstanding for trade accounts receivable increased from 56 days at December 31, 2010 , to 70 days at December 31, 2011 . Bad debt expense was approximately 0.3% and 3.5% of revenue for the years ended December 31, 2011 and 2010 , respectively. We decreased our allowance for doubtful accounts from $2.1 million to $1.8 million or 4.0% and 3.3% of trade accounts receivable balance for each of the years 2010 and 2011 , respectively. We continue to manage this portion of our business very carefully. Risk Management In performing services for our clients, we could potentially face liability for breach of contract, personal injury, property damage or negligence, including professional errors and omissions. We often agree to indemnify our clients for losses and expenses incurred as a result of our negligence and, in certain cases, the sole or concurrent negligence of our clients. Our quality control and assurance program includes a control function to establish standards and procedures for performance and for documentation of project tasks, and an assurance function to audit and to monitor compliance with procedures and quality standards. We maintain liability insurance for bodily injury and third party property damage, professional errors and omissions, and workers' compensation coverage, which we consider sufficient to insure against these risks, subject to self-insured amounts. Seasonality Our revenues are generated by services, and therefore holidays and employee vacations during our fourth quarter exert downward pressure on revenues for that quarter, which is only partially offset by the year-end efforts on the part of many clients to spend any remaining funds budgeted for services and capital expenditures during the year. Our clients' annual budget process is normally completed in the first quarter of each calendar year, which can slow the award of new work at the beginning of the year. Principally due to these factors, our first and fourth quarters are typically less robust than our second and third quarters. Critical Accounting Policies Revenue Recognition A large portion of the Company's revenue is recognized under time-and-material contracts. Significant estimates are generally not involved in determining revenue recognition for these types of contracts. Significant estimates are involved in determining revenue recognition for fixed-price contracts. Most of our contracts are with Fortune 500 companies. As a result, collection risk is generally not a relevant factor in the recognition of revenue. However, timing of accounts receivable collections could have a serious impact in the Company's liquidity. We have instituted policies to determine the creditworthiness of new customers. Adverse changes in the economy are likely to impact smaller companies' ability to undertake and finance projects. Our revenue is largely composed of engineering service revenue and product sales. The majority of our services are provided through time-and-material contracts (also referred to as cost-plus contracts). Some contracts have not-to-exceed provisions that place a cap on the revenue that we may receive under a particular contract. The contract is awarded with the maximum aggregate revenue, referred to as the not-to-exceed amount. The Company does not earn revenue over the not-to-exceed amount unless we obtain a change order. The current amount of revenue deferred for these reasons is $0.3 million . The Company is not obligated to complete the contract once the not-to-exceed amount has been reached. However, if the Company performs work over the not-to-exceed amount prior to obtaining a valid change order, our gross profit margins are negatively impacted. Billings on time-and-material contracts are produced every two weeks. On occasion, we serve as purchasing agent by procuring subcontractors, material and equipment on behalf of a client and passing the cost on to the client with no mark-up or profit. Revenue and cost for these types of purchases are not included in total revenue and cost. For financial reporting, this “pass-through” type of transaction is reported net. We 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) had $3.6 million and $1.0 million of pass-through transactions in 2011 and 2010 , respectively. We had no pass-through transactions in 2009 . Revenue on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Under this method, revenue on long-term contracts is recognized in the ratio that contract costs incurred bear to total estimated contract costs. Revenue and gross margin on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. To manage unknown risks, management uses contingency amounts to increase the estimated costs, therefore, lowering the earned revenues until the risks are better identified and quantified or have been mitigated. We currently have $5.5 million in contingency. Losses on contracts are recorded in full as they are identified. The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenue recognized in excess of amounts billed on fixed-price contracts. The Company's inability to manage significant levels or increases in “costs and estimated earnings in excess of billings on uncompleted contracts” could have a serious impact on the Company's cash flow. The liability “billings in excess of costs and estimated profits on uncompleted contracts” represents amounts billed in excess of revenue recognized on fixed-price contracts. Change Orders Change orders are modifications of an original contract that effectively change deliverables under a contract without adding new provisions. We can request change orders, and our clients may initiate them. Change orders may include changes in specifications or design, manner of performance, equipment, materials, scope of work and/or the period of completion of the project. Change orders occur when changes are experienced once a contract is begun. Change orders are sometimes documented and in most cases the terms of change orders are agreed upon with the client before the work is performed. Other times, circumstances may require that work progress without the client's written agreement before the work is performed. In those cases, we are taking a risk that the customer will not sign a change order or at a later time the customer will seek to negotiate the pricing of the additional work. Costs related to change orders are recognized when they are incurred. Change orders are included in the total estimated contract revenue when it is more likely than not that the change orders will result in a bona fide addition to value that can be reliably estimated. We have a favorable history of negotiating and collecting for work performed under change orders and our bi-weekly billing cycle has proven to be timely enough to properly account for change orders. 49 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Goodwill Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Goodwill is not amortized and is tested at least annually for impairment. We perform our annual analysis as of the fourth quarter of each fiscal year and in any period in which indicators of impairment warrant an additional analysis. Reporting units for the purpose of goodwill impairment calculations are components one level below our reportable operating segments for which discreet financial information is available and reviewed by segment management. Goodwill is tested for impairment using a two-step process. In step 1 of the goodwill impairment test, the fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. In step 2, if the fair value of the reporting unit is less than the carrying value, including goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense. Management utilizes a discounted cash flow analysis to determine the estimated fair value of our reporting units. Significant judgments and assumptions, including determination of an appropriate discount rate, projecting revenue growth and gross margins, estimating operating and interest expense and projecting capital expenditure levels, are involved in making these fair value estimates, with the most critical estimates being projected growth rate and discount rate. The projected growth rate incorporates the Company's 2012 budget and management's estimate of the long-term growth rate of the Company based on certain internal estimates and external data. The discount rate utilized in the analysis was a weighted average cost of capital (WACC). WACC is an estimate of the overall after-tax rate of return required by equity and debt market participants of a business enterprise, with the weighting of returns based on the capitalization of comparable companies. While we use the best available information to prepare our cash flow projections and WACC assumptions, actual future cash flows, costs of capital or market conditions could differ significantly resulting in future impairment and charges related to recorded goodwill balances. During 2010, the Company realigned its reporting into three business segments. In addition, during the fourth quarter of 2010, the Company further consolidated its legal entities and internal reporting and renamed the reportable segments as Engineering and Construction, Automation and Field Solutions. As a result, goodwill that was previously reported in the Construction segment (which no longer exists as a separate segment) was reallocated to Engineering and Construction and Field Solutions. Other than the change in reporting segments and reporting units, our methodologies for performing our goodwill impairment analysis have not changed from the prior year. However, the WACC assumption decreased approximately 6 percentage points for the current year analysis. The fair value of each of our reporting units exceeded their carrying value in excess of 45%. Deterioration in our expected operating results or increases in our cost of capital could have a negative effect on fair value and lead to an impairment charge in the future. A 20% decrease in our budgeted short-term growth rate (holding all other assumptions constant) would have the following impact on the estimated fair value of our reporting units, summarized by segment: These hypothetical changes would not cause step 2 of the goodwill impairment test to be required for any of our reporting units. A 20% decrease in our projected long-term growth rate (holding all other assumptions constant) would have the following impact on the estimated fair value of our reporting units, summarized by segment: These hypothetical changes would not cause step 2 of the goodwill impairment test to be required for any of our reporting units. 50 Engineering and Construction ($2.0 million) Automation ($1.4 million) Field Solutions ($3.9 million) Engineering and Construction ($2.6 million) Automation ($2.3 million) Field Solutions ($2.3 million) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) A 20% increase in our assumed discount rate (holding all other assumptions constant) would have the following impact on the estimated fair value of our reporting units, summarized by segment: These hypothetical changes would not cause step 2 of the goodwill impairment test to be required for the reporting units within any of our segments. Deferred Tax The Company had net deferred tax asset balances of $5.2 million and $4.0 million as of December 31, 2011 and December 31, 2010 , respectively. These net deferred tax assets are identified in Footnote 16 to the financial statements. The Company had a federal net operating loss carry-forward at December 31, 2011 of approximately $3.8 million . Earlier utilization of the net operating loss on the Company's 2002 and 2003 consolidated tax returns was disallowed by the IRS which resulted in a reinstated carry-forward. The current year net operating loss of approximately $3.8 million will be available for carry back to 2009 and 2010 and for carry forward through 2031. The Company also has a foreign net operating loss carry-forward at December 31, 2011 of approximately $1.1 million . This loss is available for utilization from 2008 through 2017; however, application of the net operating loss is restricted to the income of ENGlobal Canada. The Company is unsure of its ability to fully utilize the foreign net operating loss. Therefore, the Company has set up a valuation allowance of $0.4 million against the net operating loss. Recent Accounting Pronouncements In June 2011, the FASB issued guidance which revises the manner in which entities present comprehensive income in their financial statements. The new guidance eliminates the presentation option to report other comprehensive income and its components in the statement of changes in stockholders' equity and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or in two separate, but consecutive, statements. In December 2011, the FASB deferred indefinitely the effective date for a portion of this guidance relating to the presentation of reclassification adjustments. The remainder of this guidance is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt this guidance on January 1, 2012 and the adoption of this standard will not have a material effect on its financial position or results of operations. In September 2011, the FASB issued guidance which gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, in some cases, bypass the two-step impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods beginning after December 15, 2011. The Company will adopt this guidance on January 1, 2012 and the adoption of this standard will not have a material effect on its financial position or operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 2011 and 2010 , the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required. There are no material investments at December 31, 2011 . Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. The Company's primary interest rate risk relates to its variable-rate line of credit debt obligation, which totaled $16.4 million and $18.7 million as of December 31, 2011 and 2010 , respectively. Assuming a 10% increase in the interest rate on this variable-rate debt obligation i.e., an increase from the actual average interest rate of 4.00% as of December 31, 2011 , to an average interest rate of 4.40% , annual interest expense would have been approximately 51 Engineering and Construction ($8.2 million) Automation ($7.3 million) Field Solutions ($7.1 million) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK $65,000 higher in 2011 based on our annual average line of credit obligation. Due to the current credit market, a greater concern is the impact of a material violation of certain financial covenants in our Credit Agreement resulting in a re-pricing of that agreement. This could not only result in the increased annual interest expense but also a renewal or origination fee of equal proportion on a similar Credit Agreement. The Company does not have any interest rate swap or exchange agreements. The Company has no market risk exposure in the areas of interest rate risk from investments because the Company did not have an investment portfolio as of December 31, 2011 . 52 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Currently, the Company does not engage in foreign currency hedging activities. Transactions in Canadian dollars in our former Canadian subsidiary have been translated into U.S. dollars using the current rate method, such that assets and liabilities are translated at the rates of exchange in effect at the balance sheet date and revenue and expenses are translated at the average rates of exchange during the appropriate fiscal period. As a result, the carrying value of the Company's investments in Canada was subject to the risk of foreign currency fluctuations. Additionally, any revenue received from the Company's international operations in other than U.S. dollars will be subject to foreign exchange risk. The percentage of revenue received from foreign customers is identified in the discussion of segment revenue. Most revenue received from foreign customers is paid to the Company in U. S. currency, except for revenue collected by our former Canadian subsidiaries. The Canadian dollar is not subject to volatile price fluctuations compared to the U.S. dollar. 53  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited consolidated balance sheets for ENGlobal Corporation, as of December 31, 2011 and 2010 and statements of operations, cash flows and stockholders' equity for the three-year period ended December 31, 2011 , are attached hereto and made part hereof. INDEX 54 PAGE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS 55 CONSOLIDATED BALANCE SHEETS December 31, 2011 and 20 10 56 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2011, 2010 and 200 9 57 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2011, 2010 and 200 9 58 CONSOLIDATED STATEMENTS OF CASH FLOW Years Ended December 31, 2011, 2010 and 200 9 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 60 SCHEDULE II Valuation and Qualifying Accounts 86  Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements Board of Directors ENGlobal Corporation Houston, Texas We have audited the accompanying consolidated balance sheets of ENGlobal Corporation and subsidiaries (the “Company”) as of December 31, 2011 and 2010 , and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2011 . We have also audited the schedule listed in the accompanying Item 8. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ENGlobal Corporation and subsidiaries as of December 31, 2011 and 2010 , and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth, therein in relation to the financial statements taken as a whole. /s/ Hein & Associates LLP Hein & Associates LLP Houston, Texas April 12, 2012 55 ENGLOBAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2011 AND 2010 (dollars in thousands) ASSETS Current Assets: 2011 2010 Cash and cash equivalents $ 26 $ 49 Restricted cash 2,275 — Trade receivables, net of allowances of $1,792 and $2,130 54,020 52,465 Prepaid expenses and other current assets 880 1,802 Notes Receivable 514 2,579 Costs and estimated earnings in excess of billings on uncompleted contracts 6,790 3,146 Assets held for sale 3,757 5,669 Federal and state income taxes receivable 103 6,841 Deferred tax asset 3,989 2,619 Total Current Assets 72,354 75,170 Property and equipment, net 3,384 4,416 Goodwill 22,614 22,614 Other intangible assets, net 2,835 4,975 Long-term trade and notes receivable, net of current portion and allowances 899 1,361 Deferred tax asset, non-current 1,206 1,424 Other assets 887 364 Total Assets $ 104,179 $ 110,324 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 8,363 $ 8,624 Accrued compensation and benefits 11,210 11,045 Notes payable — 2,070 Current portion of long-term debt and leases 16,602 19,093 Deferred rent 671 629 Billings in excess of costs and estimated earnings on uncompleted contracts 4,421 947 Liabilities held for sale 1,340 1,268 Other current liabilities 3,072 1,294 Total Current Liabilities 45,679 44,970 Long-Term Debt, net of current portion — 252 Total liabilities 45,679 45,222 Commitments and Contingencies (Notes 3, 11, 12, and 19) Stockholders' Equity: Common stock - $0.001 par value; 75,000,000 shares authorized; 26,822,518 and 26,676,279 shares outstanding and 27,803,617 and 27,657,378 shares issued at December 31, 2011 and 2010, respectively 28 28 Additional paid-in capital 38,081 37,608 Retained earnings 22,822 29,920 Treasury stock at cost - 981,099 shares at December 2011 and 2010 respectively (2,362 ) (2,362 ) Accumulated other comprehensive income (loss) (69 ) (92 ) Total Stockholders' Equity 58,500 65,102 Total Liabilities and Stockholders' Equity $ 104,179 $ 110,324  See accompanying notes to these consolidated financial statements. 56 ENGLOBAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS See accompanying notes to these consolidated financial statements. 57 Years Ended December 31, (dollars in thousands) 2011 2010 2009 Operating revenues $ 312,747 $ 306,239 $ 343,462 Operating costs and expenses: Operating costs 285,468 284,282 312,409 Selling, general, and administrative expenses 31,263 39,975 28,027 Total operating costs and expenses 316,731 324,257 340,436 Operating income (loss) (3,984 ) (18,018 ) 3,026 Interest (expense), net (1,028 ) (442 ) (573 ) Other income (expense), net (61 ) (319 ) 174 Income (loss) before income taxes (5,073 ) (18,779 ) 2,627 Provision (benefit) for federal and state income taxes (831 ) (6,553 ) 1,394 Income (loss) from continuing operations (4,242 ) (12,226 ) 1,233 Income (loss) from discontinued operations, net of taxes (2,834 ) 474 — Net Income (Loss) $ (7,076 ) $ (11,752 ) $ 1,233 Earnings (loss) per common share - Basic and Diluted Income (loss) from continuing operations $ (0.16 ) $ (0.45 ) $ 0.05 Income (loss) from discontinued operations $ (0.11 ) $ 0.02 $ — Net Income (loss) $ (0.27 ) $ (0.43 ) $ 0.05 Weighted average shares used in computing earnings (loss) per share (in thousands): Basic 26,722 27,151 27,330 Diluted 26,722 27,151 27,567 ENGLOBAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31, 2011 , 2010 AND 2009 (dollars in thousands) See accompanying notes to these consolidated financial statements. 58 2011 2010 2009 Common Stock Balance at beginning of year $ 28 $ 27 $ 27 Common stock issued — 1 — Balance at end of year 28 28 27 Paid-in Capital Balance at beginning of year 37,608 37,108 36,415 Common stock issued 23 58 136 Stock based compensation 450 438 557 Deferred tax adjustment — 4 — Balance at end of year 38,081 37,608 37,108 Retained Earnings Balance at beginning of year 29,920 41,672 40,439 WRCC dissolution (22 ) — — Net income (loss) (7,076 ) (11,752 ) 1,233 Balance at end of year 22,822 29,920 41,672 Treasury Stock Balance at beginning of year (2,362 ) — — Purchase of treasury stock — (2,362 ) — Balance at end of year (2,362 ) (2,362 ) — Accumulated Other Comprehensive Income (Loss), net of taxes Balance at beginning of year (92 ) (96 ) (115 ) Foreign currency translation adjustment 1 4 19 WRCC dissolution 22 — — Balance at end of year (69 ) (92 ) (96 ) Total Stockholders' Equity $ 58,500 $ 65,102 $ 78,711 ENGLOBAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW Years Ended December 31, (dollars in thousands) 2011 2010 2009 Cash Flows from Operating Activities: Net income (loss) $ (7,076 ) $ (11,752 ) $ 1,233 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,564 4,341 4,795 Share-based compensation expense 450 438 683 Deferred income tax expense (benefit) (2,745 ) (180 ) 577 (Gain)/Loss on disposal of property, plant and equipment 21 106 47 Changes in current assets and liabilities, net of acquisitions: Trade receivables (347 ) (8,057 ) 48,307 Notes receivable 2,527 11,402 (3,013 ) Allowance on notes receivable (3,709 ) — Costs and estimated earnings in excess of billings on uncompleted contracts (1,799 ) 1,432 356 Prepaid expenses and other assets 456 1,808 (127 ) Long-term trade receivables — 2,988 (2,988 ) Accounts payable (636 ) 969 (10,578 ) Accrued compensation and benefits (103 ) (732 ) (12,921 ) Billings in excess of costs and estimated earnings on uncompleted contracts 3,345 (2,372 ) 3,393 Short-term trade payables (1,474 ) 1,491 — Other liabilities 2,658 296 (2,069 ) Income taxes receivable/(payable) 6,738 (4,620 ) (4,693 ) Net cash provided by (used in) operating activities 5,579 (6,151 ) 23,002 Cash Flows from Investing Activities: Property and equipment acquired (664 ) (1,174 ) (3,217 ) Business acquisitions, net of cash acquired — (1,896 ) (1,050 ) Proceeds from sale of other assets 65 29 4 Restricted cash (2,275 ) — — Proceeds from note receivable — 15 58 Net cash used in investing activities (2,874 ) (3,026 ) (4,205 ) Cash Flows from Financing Activities: Borrowings on line of credit 159,865 121,406 98,827 Payments on line of credit (162,212 ) (108,708 ) (115,357 ) Purchase of treasury stock — (2,362 ) — Proceeds from issuance of common stock 23 58 72 Borrowings (repayments) under capital lease (51 ) (192 ) (175 ) Other long-term debt repayments (354 ) (1,123 ) (3,040 ) Net cash provided by (used in) financing activities (2,729 ) 9,079 (19,673 ) Effect of Exchange Rate Changes on Cash 1 4 19 Net change in cash (23 ) (94 ) (857 ) Cash and cash equivalents, at beginning of year 49 143 1,000 Cash and cash equivalents, at end of year $ 26 $ 49 $ 143  See accompanying notes to these consolidated financial statements. 59 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION Organization and Operations ENGlobal Corporation is a Nevada corporation formed in 1994. Unless the context requires otherwise, references to “we”, “us”, “our”, “the Company” or “ENGlobal” are intended to mean the consolidated business and operations of ENGlobal Corporation. Our business operations consist of providing engineering and other professional project services related to design, fabrication, procurement, maintenance, environmental and other governmental compliance and construction management, primarily with respect to energy sector infrastructure facilities throughout the United States. Please see “Note 18-Segment Information” for a description of our segments and segment operations. Basis of Presentation The accompanying consolidated financial statements and related notes present our consolidated financial position as of December 31, 2011 and 2010 , and the results of our operations, cash flows and changes in stockholders' equity for the years ended December 31, 2011 , 2010 and 2009 . They are prepared in accordance with accounting principles generally accepted in the United States of America. Certain amounts for prior periods have been reclassified to conform to the current presentation. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management reviews its estimates, including those related to percentage-of-completion contracts in progress, litigation, income taxes, impairment of long-lived assets and fair values. Changes in facts and circumstances or discovery of new information may result in revised estimates. Actual results could differ from these estimates. Certain reclassifications have been made to the 2010 consolidated financial statements to conform to the 2011 presentation to report discontinued operations. Refer to Note 4. NOTE 2 - ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS Cash and cash equivalents Cash and cash equivalents include all cash on hand, demand deposits and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. The Company is required to collateralize letters of credit outstanding under the Ex-Im Bank Facility with cash or eligible receivables resulting from the Caspian Pipeline Consortium (CPC) project. As of the date of this filing, these letters of credit were collateralized by $2.3 million in cash, designated as Restricted Cash in the Company's Consolidated Balance Sheet. Refer to Note 10. The Company utilizes a cash management system whereby bank accounts are swept daily to reduce outstanding balances on the Company's line of credit. Major operating bank accounts are automatically replenished daily to meet check-clearing requirements. Outstanding checks are recorded as a reduction of cash when they are issued. Our checks that have not yet been paid by banks at a reporting date are reclassified to accounts payable in the financial statements. Amounts reclassified to accounts payable for outstanding checks were $1.9 million and $1.9 million as of December 31, 2011 and 2010 respectively. Consolidation Policy Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries in which we have a controlling interest after the elimination of all material inter-company accounts and transactions. Currently, all of our subsidiaries are wholly-owned. We also consolidate other entities and ventures in which we possess a controlling interest. We evaluate our financial interests in business enterprises to determine if they represent variable interest entities where we are the primary beneficiary. If such criteria are met, we consolidate the financial statements of such businesses with those of our own. We do not currently hold such interests. 60 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS While we do not currently own any significant equity interests in unconsolidated affiliates and do not frequently conduct our business through such entities, it is our policy to follow the equity method of accounting if our ownership interest is between 20% and 50% and we exercise significant influence over the operating and financial policies of an entity. Our proportionate share of profits and losses from transactions with equity method unconsolidated affiliates is eliminated in consolidation to the extent such amounts are material and remain on our equity method investees' balance sheet in inventory or similar accounts. If our ownership interest in an investee does not provide us with either control or significant influence over the investee, we account for the investment using the cost method. 61 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Comprehensive Income Comprehensive income includes net income and other comprehensive income. Currently our other comprehensive income is comprised of unrealized foreign exchange gains and losses. Comprehensive income is as follows: Concentration of Credit Risk Financial instruments which potentially subject ENGlobal to concentrations of credit risk consist primarily of trade accounts and notes receivable. Although our services are provided largely to the energy sector, management believes the risk due to this concentration is limited because a significant portion of our services are provided under contracts with major integrated oil and gas companies and other industry leaders. When the Company enters into contracts with smaller customers, it incurs an increased credit risk. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including initial credit approvals, credit limits and terms, letters of credit, and occasionally through rights of offset. We also use prepayments and guarantees to limit credit risk to ensure that our established credit criteria are met. Our most significant exposure to credit risks relates to situations under which we provide services early in the life of a project that is dependent on financing. Certain of these development projects are susceptible to unforeseen delays and other issues that expose us to reduced margins and possible losses. Risks increase in times of general economic downturns and under conditions that threaten project feasibility. Estimated losses on accounts receivable are provided through an allowance for doubtful accounts. In evaluating the level of established allowances, we make judgments regarding each party's ability to make required payments, economic events and other factors. As the financial condition of any party changes, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. Earnings per share The Company's basic earnings per share (EPS) amounts have been computed based on the average number of shares of common stock outstanding for the period. Diluted EPS amounts include the effect of our outstanding stock options, restricted stock awards and restricted stock units under the treasury stock method, if including such potential shares of common stock is dilutive. Refer to Note 5. Debt Issue Costs Costs incurred in connection with the issuance of long-term debt are capitalized and charged to interest expense over the term of the related debt on a straight-line basis, which approximates the interest method. The total amount of debt issue costs capitalized was $0 and $22,000 in 2011 and 2010, respectively. Goodwill and other intangible assets Goodwill represents the excess of the purchase price of acquisitions over the fair value of the assets acquired and liabilities assumed. Goodwill is not amortized and is tested at least annually for impairment. We perform a test for impairment as of the fourth quarter of each fiscal year and in any period in which impairment indicators arise. The impairment test requires allocating goodwill and all other assets and liabilities to business units referred to as reporting units. Reporting units for the purpose of goodwill impairment calculations are components one level below our reportable operating segments for which discreet financial information is available and reviewed by segment management. The fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value, including goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense. 62 2011 2010 2009 (in thousands) Net income (loss) $ (7,076 ) $ (11,752 ) $ 1,233 Cumulative translation adjustment (91 ) (92 ) (96 ) WRCC Dissolution $ 22 — — Comprehensive income (loss) $ (7,145 ) $ (11,844 ) $ 1,137 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible assets are comprised primarily of non-competition covenants, customer relationships and developed technology acquired through acquisitions and are amortized using the straight-line method based on the estimated useful life of the intangible assets. We review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This review consists of comparing the carrying value of the asset with the asset's expected future undiscounted cash flows. Estimates of expected future cash flows represent management's best estimate based on reasonable and supportable assumptions. If such a review should indicate that the carrying amount of intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated service lives of our asset groups are as follows: Leasehold improvements are amortized over the term of the related lease. See Note 7 for details related to property and equipment and related depreciation. Expenditures for maintenance and repairs are expensed as incurred. Upon disposition or retirement of property and equipment, any gain or loss is charged to operations. The Company reviews property and equipment and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition is less than its carrying amount. Pre-Contract Costs The Company expenses pre-contract costs, also referred to as proposal costs, as they are incurred. Pre-contract costs incurred for a specific anticipated contract and that will result in no future benefits, unless the contract is obtained, should not be included in contract costs or inventory before the receipt of the contract. Costs related to anticipated contracts are charged to expenses as incurred because recovery is not considered probable and such expenses are not reinstated by a credit to income on the subsequent receipt of the contract. Income Taxes The Company accounts for deferred income taxes in accordance with the asset and liability method, whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the respective tax basis of its assets and liabilities. The provision for income taxes represents the current taxes payable or refundable for the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities during the period. Valuation allowances are provided for deferred tax assets when their recovery is doubtful. The Company files income tax returns in federal, state and foreign jurisdictions as more fully described in Note 16. It has not taken an uncertain tax position as defined by authoritative accounting literature and does not expect to take such a position on a tax return not yet filed. 63 Asset Group Range of Years Shop equipment 7-10 Furniture and fixtures 5-7 Computer equipment; Autos and trucks 3-5 Software 3-5 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition Our revenue is comprised of engineering, construction management and procurement service fees and sales of control systems that we design and fabricate. In general, we recognize revenues when all of the following criteria are met: (1) persuasive evidence of an exchange arrangement exists, if applicable, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable, and (4) collection is reasonably assured. The Company recognizes service revenue as the services are performed. The majority of the Company's engineering services are provided under time-and-material contracts. Some time-and-material contracts may have upper limits referred to as "not-to-exceed" amounts. Revenue is not recognized over these amounts until a change order or authorization by the client has been given. A majority of sales of fabricated systems are under fixed-price contracts that may also include a service element covered under that contract price. We also sometimes serve as purchasing agent by procuring subcontractors, materials and equipment on behalf of a client and pass the cost on to the client with no mark-up or profit. Revenues and costs for these types of “pass-through” transactions are reported net. In 2011, we had $3.6 million of pass-through transactions. We had $1.0 million of pass-through transactions in 2010 and 2009 . Profits and losses on our fixed-price contracts are recognized on the percentage-of-completion method of accounting, measured by the percentage-of-contract cost incurred to date relative to estimated total contract cost. Contract costs used for estimating percentage-of-completion factors include professional compensation and related benefits, materials, subcontractor services and other direct cost of projects. Freight charges and inspection costs are charged directly to the projects to which they relate. Costs recognized for labor include all actual employee compensation plus a burden factor to cover estimated variable labor expenses. These variable labor expenses consist of payroll taxes, self-insured medical plan expenses, workers' compensation insurance, general liability insurance and paid time off. These estimated amounts are adjusted to actual costs incurred at the end of each quarter. Under the percentage-of-completion method, revenue recognition is dependent upon the accuracy of a variety of estimates, including the progress of engineering and design efforts, material installation, labor productivity, cost estimates and others. These estimates are based on various professional judgments and are difficult to accurately determine until projects are significantly underway. Due to uncertainties inherent to the estimation process, it is possible that actual percentage-of-completion may vary materially from our estimates. Estimating errors may cause errors in revenue recognition on uncompleted contracts and may even result in losses on the contracts. Anticipated losses on uncompleted contracts are charged to operations as soon as such losses can be estimated. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Occasionally, it is appropriate for us to combine or segment contracts. Contracts are combined in those limited circumstances when they are negotiated as a package in the same economic environment with an overall profit margin objective and constitute, in essence, an agreement to do a single project. In such cases, we recognize revenue and cost over the performance period of the combined contracts as if they were one. Contracts may be segmented if the customer has the right to accept separate elements of a contract and the total economic returns and risks of the separate contract elements are similar to the economic returns and risks of the overall contract. For segmented contracts, we recognize revenue as if they were separate contracts over the performance periods of the individual elements or phases. Receivables Our components of trade receivables includes amounts billed, amounts unbilled, retainage and allowance for doubtful accounts. Subject to our allowance for uncollectible accounts, all amounts are believed to be collectible within a year. There are no amounts unbilled representing claims or other similar items subject to uncertainty concerning their determination or ultimate realization. In estimating the allowance for uncollectible accounts, we consider the length of time receivable balances have been outstanding, historical collection experience, current economic conditions and customer specific information. When we ultimately conclude that a receivable is uncollectible, the balance is charged against the allowance for uncollectible accounts. 64 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Software Development Costs ENGlobal capitalizes costs associated with software developed or acquired for internal use when these criteria are met: the preliminary project stage is completed, management authorizes funding for the project and the project is deemed probable of completion. Capitalized costs include external costs of materials and services incurred in obtaining and developing the software and payroll and payroll related costs for employees in proportion to time devoted to the project. Capitalization of these costs ceases no later than the point at which the project is substantially complete and the software is ready for its intended use. Software development costs are included in property and equipment and are amortized on the straight-line basis over five years. Significant Commercial Relationships In 2009 and 2010, BASF Corporation accounted for 16% and 11% , respectively, of our consolidated revenues. In 2011, no customer accounted for 10% or more of our consolidated revenues. Impairment of Long-Lived Assets Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The carrying amount is deemed not recoverable if it exceeds the undiscounted sum of the cash flows expected to result from the use and eventual disposition of the asset. Estimates of expected future cash flows represent management's best estimate based on reasonable and supportable assumptions. If the carrying amount is not recoverable, the impairment loss is measured as the excess of the asset's carrying value over its fair value. Management assesses the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales, internally developed discounted cash flow analysis and analysis from outside advisors. Recent Accounting Pronouncements In June 2011, the FASB issued guidance which revises the manner in which entities present comprehensive income in their financial statements. The new guidance eliminates the presentation option to report other comprehensive income and its components in the statement of changes in stockholders' equity and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or in two separate, but consecutive, statements. In December 2011, the FASB deferred indefinitely the effective date for a portion of this guidance relating to the presentation of reclassification adjustments. The remainder of this guidance is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt this guidance on January 1, 2012 and the adoption of this standard will not have a material effect on its financial position or results of operations. In September 2011, the FASB issued guidance which gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, in some cases, bypass the two-step impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods beginning after December 15, 2011. The Company will adopt this guidance on January 1, 2012 and the adoption of this standard will not have a material effect on its financial position or operations. 65 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - ACQUISITIONS Control Dynamics International, LP In April 2010, a subsidiary of the Company acquired selected assets of Control Dynamics International (“CDI”), a privately-held automation firm based in Houston, Texas. CDI designs and manufactures industrial automation control systems primarily for the upstream industry. CDI complements the services performed by the Automation segment and has allowed ENGlobal to expand further into the upstream market. For accounting purposes, the acquisition was an immaterial business combination. Total consideration approximated $3.1 million comprised of $1.9 million in cash, a $0.5 million two-year installment note and $0.7 million in contingent payments related to first year earnings performance and sales of specific technology related projects during the three years following the acquisition. The estimated fair value of the contingent payments is the acquisition date present value of management's estimate of the payments that will ultimately be made. While the actual contingent payment amounts may vary from management's estimate, they may not exceed $1.5 million. Under the terms of the agreement, ENGlobal did not assume any CDI debt, nor was it required to issue any stock as consideration for the acquired assets. A key member of CDI's management team entered into an employment agreement with the Company. The acquisition was structured as a taxable transaction. The Company recognized customer relationships, covenants not to compete and developed technology as identifiable finite-lived intangible assets. The intangible assets were recognized at their fair values on the acquisition date. The customer relations and covenants not to compete intangible assets are being amortized over 5 years while the developed technology intangible asset is being amortized over 7.5 years beginning April 2010. The fair values were determined by management using an income approach methodology that is consistent with previous similar acquisitions. Results of CDI operations are included in the Automation segment beginning April 1, 2010. The $0.3 million residual portion of consideration was recognized as goodwill in our Automation segment, all of which is deductible for income tax purposes. Goodwill represents management's estimate of the cost associated with acquiring CDI's power consulting reputation, technical expertise, assembled workforce and the potential synergies with our other energy infrastructure consulting businesses. Acquisition cost of $104,000 was incurred and expensed as general and administrative expenses in the Automation segment during the six months ended June 30, 2010. Total consideration was allocated to assets and liabilities acquired as follows: Quarterly, the Company performs fair value assessments of the contingent liabilities. It was determined that the contingent liability that was based on earnings performance had no fair value as the minimum levels required to meet the earn-out provision would not be reached. The Company reversed the contingent liability of $0.3 million as a credit against amortization expense in the Automation segment during the three and nine months ended September 30, 2010. As of December 31, 2011 , the contingent liability, relating to the sales of specific technology related projects, fair value was $0.4 million. 66 (in thousands) Current assets $ 320 Property and equipment 37 Current liabilities (238 ) Intangibles Customer relationships 1,514 Technology 908 Covenants not to compete 229 Goodwill 323 Total consideration $ 3,093 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PCI Management and Consulting Company A subsidiary of the Company acquired the operations of PCI Management and Consulting Company (“PCI”), a private Illinois based power consulting business on August 14, 2009. For accounting purposes, the acquisition was an immaterial business combination. Consideration approximated $1,050,000 in cash and $200,000 in the form of a note. PCI provides engineering, consulting and project management services, specializing in projects related to the generation, transmission and distribution of energy. PCI's services complement the services historically provided by our Engineering and Construction segment. Results of operations are included in the Engineering and Construction segment beginning August 15, 2009. The acquisition was structured as a taxable transaction that excluded all monetary assets and liabilities and all contingencies of the acquired business. The Company recognized customer relationships and non-competition covenants as intangible assets. The intangible assets were recognized at their fair values on the acquisition date of $353,000 and $177,000 respectively, and are being amortized over five years. The fair values were determined using an income approach methodology that is consistent with previous similar acquisitions. The residual portion of consideration $702,000 was recognized as goodwill, all of which is deductible for income tax purposes. Goodwill represents management's estimate of the cost associated with acquiring PCI's power consulting reputation, technical expertise, workforce and the potential synergies with our other energy infrastructure consulting businesses. Acquisition cost of $6,000 was incurred and expensed as general and administrative expenses during the nine months ended September 30, 2009. NOTE 4 - DISCONTINUED OPERATIONS During the third quarter of 2011, as part of its strategic evaluation of operations, the Company determined that the anticipated future performance of the Electrical Services group did not warrant maintaining it as part of the ENGlobal suite of services. As a result, effective July 1, 2011, the Company initiated a plan to sell or, if necessary, ultimately shut down the operations of its Electrical Services group. These assets and their related operations have been classified as discontinued operations and are presented as such in the Company's re-casted consolidated financial statements. The net assets and liabilities related to the discontinued operations are shown on the Consolidated Balance Sheet as Assets held for sale and Liabilities held for sale, respectively. The results of the discontinued operations are shown on the Consolidated Statements of Operations as a loss from discontinued operations, net of taxes. The Company expects to complete the disposal of its discontinued operations by June 30, 2012. However, we are unable at this time to determine the gain or loss upon the ultimate disposal of the discontinued operations. Gain or loss from the disposal, when ascertained, will be properly disclosed in the notes to the financial statements. The Company will have no continuing involvement with these operations after their disposal. Summarized financial information for discontinued operations is shown below. 67 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 68 For the Quarters Ended - 2011 March June September December (dollars in thousands) Revenues $ 8,160 $ 6,511 $ 2,292 $ 444 Costs 7,733 7,167 3,905 2,919 Operating income (loss) $ 427 $ (656 ) $ (1,613 ) $ (2,475 ) Other income (expense) 1 — — — Tax expense (benefit) 166 (227 ) (577 ) (844 ) Net income (loss) $ 262 $ (429 ) $ (1,036 ) $ (1,631 ) For the Quarters Ended - 2010 March June September December (dollars in thousands) Revenues $ — $ 2,490 $ 3,942 $ 7,944 Costs — 2,295 3,836 7,483 Operating income (loss) $ — $ 195 $ 106 $ 461 Other income (expense) — — — — Tax expense (benefit) — 74 44 170 Net income (loss) $ — $ 121 $ 62 $ 291 December 31, 2011 December 31, 2010 (dollars in thousands) Assets: Trade receivables $ 2,391 $ 3,599 Prepaid expenses and other current assets 4 (1 ) Cost and estimated earnings in excess of billings on uncompleted contracts 138 $ 1,983 Deferred Tax Asset 971 $ — Property and equipment, net 248 $ 87 Other assets 5 $ 1 Total Assets held for sale $ 3,757 $ 5,669 Liabilities: Accounts payable $ 430 806 Accrued compensation and benefits (50 ) 176 Deferred rent 17 — Billings in excess of costs and estimated earnings on uncompleted contracts 158 286 Other current liabilities 785 — Total Liabilities held for sale $ 1,340 $ 1,268 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - EARNINGS PER SHARE Earnings per share were computed as follows: Diluted earnings per share are computed including the impact of all potentially dilutive securities. The following table sets forth the shares outstanding for the earnings per share calculations for the years ended December 31, 2011 , 2010 and 2009 . The Company excluded potentially issuable shares of 668,000 and 693,000 from the computation of diluted EPS, as the effect of including the shares would have been anti-dilutive for the years ended December 31, 2011 and 2010 , respectively. NOTE 6 - STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION The following table presents a listing of the Company's significant non-cash transactions and amounts of cash paid for interest and income taxes, net of refunds received. 69 Reconciliation of Earnings per Share Calculation 2011 2010 2009 Basic Diluted Basic Diluted Basic Diluted (in thousands, except per share amounts) Net Income (Loss) $ (7,076 ) $ (7,076 ) $ (11,752 ) $ (11,752 ) $ 1,233 $ 1,233 Weighted average number of shares outstanding for basic 26,722 — 27,151 — 27,330 — Weighted average number of shares outstanding for diluted — 26,722 — 27,151 — 27,567 Net income (loss) per share available for common stock $ (0.27 ) $ (0.27 ) $ (0.43 ) $ (0.43 ) $ 0.05 $ 0.04 2011 2010 2009 (in thousands) Common stock issued - beginning of year 26,676 27,407 27,295 Weighted average common stock issued (repurchased) 46 (256 ) 35 Shares used in computing basic earnings per share 26,722 27,151 27,330 Assumed conversion of dilutive stock options — — 237 Shares used in computing diluted earnings per share 26,722 27,151 27,567 Years Ended December 31, 2011 2010 2009 (in thousands) Non-Cash Transactions: Issuance of note for insurance $ — $ 828 $ — Issuance of notes in connection with acquisitions- PCI — — 182 CDI — 500 — Cash paid: Interest $ 785 $ 297 $ 958 State and federal income taxes (6,005 ) 673 5,474 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31, 2011 and 2010 : Depreciation expense has been approximately $1,389,000 , $2,541,000 and $2,996,000 for the three years ended December 31, 2011 , 2010 and 2009 , respectively. NOTE 8 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS The components of trade receivables as of December 31, 2011 and 2010 are as follows: Subject to our allowance for uncollectible accounts, all amounts listed are believed to be collectible within a year. The billed accounts receivable amount includes $693,000 in claims subject to uncertainty concerning their determination or ultimate realization due to bankruptcy issues. These claims are fully accounted for in our allowance for uncollectible accounts. There are no amounts unbilled representing claims or other similar items subject to uncertainty concerning their determination or ultimate realization. In estimating the allowance for uncollectible accounts, we consider the length of time receivable balances have been outstanding, historical collection experience, current economic conditions and customer specific information. When we ultimately conclude that a receivable is uncollectible, the balance is charged against the allowance for uncollectible accounts. A note receivable from South Louisiana Ethanol ("SLE") is the only component of our long-term receivables balances of $0.9 million and $1.4 million as of December 31, 2011 and 2010, respectively. In June 2008, ENGlobal filed an action in the United States District Court for the Eastern District of Louisiana; Case Number 08-3601, against South Louisiana Ethanol LLC (“SLE”) entitled ENGlobal Engineering, Inc. and ENGlobal Construction Resources, Inc. vs. South Louisiana Ethanol, LLC. The lawsuit sought to enforce collection of $15.8 million owed to ENGlobal and its affiliates for services performed on an ethanol plant in Louisiana. In August 2009, SLE filed for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of Louisiana, Case Number 09-12676. In connection with the bankruptcy proceedings, the plant assets were sold and the court issued an order allocating proceeds from the sale and authorizing their distribution. ENGlobal received 70 2011 2010 (in thousands) Computer equipment and software $ 8,632 $ 9,116 Shop equipment 1,688 1,735 Furniture and fixtures 1,462 1,480 Building and leasehold improvements 2,926 2,771 Autos and trucks 450 696 $ 15,158 $ 15,798 Accumulated depreciation and amortization (11,917 ) (11,577 ) $ 3,241 $ 4,221 Leasehold improvements and software implementations in process 143 195 Property and equipment, net $ 3,384 $ 4,416 2011 2010 (in thousands) Amounts billed $ 40,203 $ 41,496 Amounts unbilled 15,195 12,209 Retainage 414 890 Less: Allowance for uncollectible accounts (1,792 ) (2,130 ) Trade receivables, net $ 54,020 $ 52,465 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $209,017 and may receive an additional $845,500 depending on the outcome of a dispute with subcontractors. The components of other current liabilities as of December 31, 2011 and 2010 are as follows: Our reserve for known contingencies consists primarily of litigation accruals and related legal fees and earn-out amounts that may become due under the terms of acquisition agreements. 71 2011 2010 (in thousands) Accrual for known contingencies $ 2,061 $ 831 Customer prepayments 655 309 Accrued interest 86 73 Other 270 81 Other current liabilities $ 3,072 $ 1,294 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - CONTRACTS Costs, estimated earnings and billings on uncompleted contracts consisted of the following at December 31, 2011 and 2010 : Revenue on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Under this method, revenue on long-term contracts is recognized in the ratio that contract costs incurred bear to total estimated contract costs. Revenue and gross margin on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. To manage unknown risks, management may use contingency amounts to increase the estimated costs, therefore, lowering the earned revenues until the risks are better identified and quantified or have been mitigated. We currently have $5.5 million in contingency as of December 31, 2011 compared to $0.8 million as of December 31, 2010 . Losses on contracts are recorded in full as they are identified. The Company recognizes service revenue as soon as the services are performed. For clients that we consider higher risk, due to past payment history or history of not providing written work authorizations, we have deferred revenue recognition until we receive either a written authorization or a payment. The current amount of revenue deferred for these reasons is $0.3 million as of December 31, 2011 compared to $0.5 million as of December 31, 2010 . NOTE 10 - LINE OF CREDIT AND DEBT In December 2009, the Company entered into a new credit agreement with Wells Fargo Bank, which provided a 28-month, $25 million senior secured revolving credit facility (“Wells Fargo Credit Facility”). The Wells Fargo Credit Facility expires on May 31, 2012 and the Company is in the process of obtaining replacement financing. The Wells Fargo Credit Facility is guaranteed by substantially all of the Company's subsidiaries, is secured by substantially all of the Company's assets, and positions Wells Fargo as senior to all other debt. On September 30, 2010, the Company entered into an amendment to the credit agreement with Wells Fargo Bank which converted our borrowings from a revolving credit facility to an asset based lending agreement. On August 1, 2011, the Company entered into an Amended and Restated Credit Agreement with Wells Fargo Bank which allows a maximum available principal amount of $35 million under the Credit Facility. The Amended and Restated Credit Agreement allows for borrowings limited to an aggregate of 80% of our current eligible accounts receivable. The Wells Fargo Credit Facility is additionally limited by deductions from accounts receivable for items such as invoices past due over 90 days, fixed price work, foreign receivables and government work. These accounts receivable exclusions under the Credit Facility totaled $8.9 million at December 31, 2011. The Amended and Restated Credit Agreement contains an unused commitment fee of fifty basis points (0.50%) per annum and allows for other indebtedness of up to $10 million to cover the Ex-Im Bank credit facility, described below, and up to $1.0 million in any 12-month period for the unsecured financing of insurance premiums. The outstanding balance on the Wells Fargo Credit Facility as of December 31, 2011 was $16.4 million 72 2011 2010 (in thousands) Costs incurred on uncompleted contracts $ 43,455 $ 58,829 Estimated earnings on uncompleted contracts 5,591 8,731 Earned revenues 49,046 67,560 Less: billings to date 46,677 65,361 Net costs and estimated earnings in excess of billings on uncompleted contracts $ 2,369 $ 2,199 Costs and estimated earnings in excess of billings on uncompleted contracts $ 6,790 $ 3,146 Billings in excess of costs and estimated earnings on uncompleted contracts (4,421 ) (947 ) Net costs and estimated earnings in excess of billings on uncompleted contracts $ 2,369 $ 2,199 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and this amount was subject to a fluctuating rate, described below. The remaining borrowings available under the Wells Fargo Credit Facility as of December 31, 2011 were $9.7 million after consideration of loan covenant restrictions. The Amended and Restated Credit Agreement provided for interest at a fluctuating rate per annum determined by Wells Fargo to be 3.75% above the Daily One Month LIBOR Rate in effect from time to time. The Company's Credit Facility requires the Company to maintain certain financial covenants as of the end of each calendar quarter, including the following: “Total Liabilities” is defined as the aggregate of current liabilities and non-current liabilities. “Tangible Net Worth” is defined as the aggregate of total stockholders' equity less any intangible assets and less any loans or advances to, or investments in, any related entities or individuals. “Fixed Charge Coverage Ratio” is determined on a rolling four-quarter basis and is defined as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) minus cash taxes, divided by interest expense, plus the current maturity of long-term debt, where EBITDA is net income, plus interest expense, plus income taxes, plus depreciation and amortization, plus stock compensation expense. The Company was not in compliance with one covenant (Fixed Charge Ratio) under the Wells Fargo Credit Facility as of December 31, 2011 , however, Wells Fargo granted a waiver for the breach of this covenant. For the quarterly period ended December 31, 2011 our Total Liabilities to Tangible Net Worth Ratio was 1.45 to 1.00 ; and our Fixed Charge Coverage Ratio was .54 to 1.00 . During the 12-month period ended December 31, 2011 we expended or committed approximately 19% , or $0.7 million , of the $3.5 million fiscal year covenant limitation on capital expenditures. The $0.7 million balance of our capital expenditures for the 12-month period has been for normal operating requirements including office furniture, computers, software and vehicles. The Wells Fargo Credit Facility also contains covenants that place certain limitations on the Company including limits on capital expenditures, other indebtedness, mergers, asset sales, investments, guarantees, restrictions on dividends and certain distributions and pledges of assets. The Wells Fargo Credit Facility has been extended, with an increased interest rate, to May 31, 2012. We are currently in the due diligence phase to secure a new, long-term credit facility from a different lender. We presently have competitive proposals from two major financial institutions to provide long-term financing on terms that are better than our existing Wells Fargo Credit Facility and we are working toward entering into a new credit facility with a multi-year term before the May 31, 2012 extension date on our Wells Fargo Credit Facility. If we are unable to do so, we believe alternative forms of financing are available to us. In July 2011, with the support of Wells Fargo's Global Banking Group, ENGlobal and the Export-Import Bank of the United States (“Ex-Im Bank”) entered into a $9.5 million letter of credit facility (the “Ex-Im Bank Facility”) to support the Company's Caspian Pipeline Consortium (CPC) project. Under the terms of this agreement, the Company may issue letters of credit to CPC for its performance under the CPC project. The Company is required to collateralize letters of credit outstanding under the Ex-Im Bank Facility with cash or eligible receivables resulting from the CPC project. As of the date of this filing, there were $9.1 million in letters of credit outstanding under this facility. This letter of credit is collateralized by $2.3 million in cash, designated as Restricted Cash in the Company's Consolidated Balance Sheet, per an Ex-Im Bank restriction, until sufficient accounts receivables are created on the Russian portion of the project. As of December 31, 2011 , the Company had other outstanding letters of credit totaling $4,374,000 primarily to cover self-insured deductibles under both our general liability and our workers' compensation insurance policies. 73 • Total Liabilities to Tangible Net Worth Ratio not greater than 2.25 to 1.00 ; • Fixed Charge Coverage Ratio not less than 1.75 to 1.00 ; ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-term debt consisted of the following at December 31, 2011 and 2010 : The rate applicable to the Wells Fargo Credit Facility line of credit outstanding at December 31, 2011 and 2010 was 4% and 4.125% , respectively, and fluctuates with the prime rate. Interest and discount rates on the remaining note payable is 5.00% at December 31, 2011 . Interest and discount rates on the remainder of the Company's notes payable varied from 5.00% to 6.25% , with the weighted average being 5.63% at December 31, 2010 . Maturities of long-term debt as of December 31, 2011 , are as follows: NOTE 11 -OPERATING LEASES The Company leases equipment and office space under long-term operating lease agreements. The future minimum lease payments on leases (with initial or remaining non-cancelable terms in excess of one year) as of December 31, 2011 are as follows: Rent expense for the years ended December 31, 2011 , 2010 and 2009 was $4.8 million , $5.8 million and $5.9 million , respectively. Certain of our lease agreements may include items such as abated lease payments, capital improvement funding, step rent provisions and escalation clauses that affect the lease payment schedule and do not qualify as contingent rentals. These items have been included in the minimum lease payment amount on a straight-line basis over the minimum lease term. Any lease payments that are dependent on a factor related to the future use of the property have been excluded from the minimum lease payment amount and are recognized as incurred. 2011 2010 (in thousands) Wells Fargo Credit Facility $ 16,352 $ 18,698 The following notes are subordinate to the credit facility and are unsecured: ICP Transco, Inc. — 96 Control Dynamics International, L.P. 250 500 Total long-term debt 16,602 19,294 Less: current maturities of long-term debt (16,602 ) (19,042 ) Long-term debt, net of current portion — 252 Borrowings under capital lease — 51 Less: current maturities of capital lease — (51 ) Total long-term debt and leases, net of current portion $ — $ 252 Maturities (in thousands) Years Ending December 31, 2012 $ 16,602 Total long-term debt $ 16,602 Operating (in thousands) Years Ending December 31, 2012 $ 3,453 2013 3,033 2014 2,626 2015 2,601 2016 and after 4,724 Total minimum lease payments $ 16,437  74 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - EMPLOYEE BENEFIT PLANS ENGlobal sponsors a 401(k) profit sharing plan for its employees. Until January 2009, the Company made matching contributions equal to 66.66% of employee contributions up to 6% of employee compensation for regular (as distinguished from project or contract) employees. All other employees except our pipeline inspectors were matched at 50% of employee contributions up to 6% of compensation, as defined by the plan. The Company, at the direction of the Board of Directors, may make other discretionary contributions. Our employees may elect to make contributions pursuant to a salary reduction agreement upon meeting age and length-of-service requirements. On January 1, 2009 due to economic conditions, the Company elected to reduce its match on regular employees to 50% and all other employees except our pipeline inspectors to 33.33% of employee contributions up to 6% of employee compensation. On April 4, 2009, the Company elected to eliminate its match on all employees. Effective October 21, 2011, the Company reinstated the employer match to 25% of employee contributions up to 6% of employee compensation for all employees. The Company made contributions of $186,519 , $0 and $981,768 , respectively, for the years ended December 31, 2011 , 2010 and 2009 . NOTE 13 - STOCK COMPENSATION PLANS The Company's 1998 Incentive Plan (“Option Plan”) that provided for the issuance of options to acquire up to 3,250,000 shares of common stock expired in June 2008. The Option Plan provided for grants of non-statutory options, incentive stock options, restricted stock awards and stock appreciation rights. All stock option grants were for a ten-year term. Stock options issued to executives and management generally vested over a four-year period, one-fifth at grant date and one-fifth at December 31 of each year until they are fully vested. Stock options issued to directors under the Option Plan vested quarterly over a one-year period. In 2007, no stock options were granted to employees. At the 2007 Annual Meeting of Directors, grants of stock options were approved for 50,000 shares to each non-employee director. In 2008, options were granted to employees to acquire 140,000 shares. All stock options granted had a strike price equal to the market value of the Company's stock on the date of the grant by the Compensation Committee of the Board of Directors. In June 2009, the Company's stockholders approved a new 2009 Equity Incentive Plan (“Equity Plan”) that provides for the issuance of up to 480,000 shares of common stock. The Equity Plan provides for grants of non-statutory options, incentive stock options, restricted stock awards, performance shares, performance units, restricted stock units and other stock-based awards. Grants to employees will generally vest over a four-year period, one-fourth at December 31 of each year until they are fully vested. Grants to non-employee directors will vest quarterly over a one-year period coinciding with their service term. Stock Options The Company recognizes stock compensation expense relating to share-based payments in net income using the fair-value measurement method. Under the fair value method, the estimated fair value of awards is charged to expense over the requisite service period, which is generally the vesting period. The Company did not grant any stock options in 2010 or 2011. We estimate the volatility of our stock price by using historical volatility looking back 156 weeks. We have considered using a combination of historical and implied volatility derived from traded options on our stock but do not believe that it would materially impact the Company's estimates of future volatility over the expected life of the options. The expected term of options granted has been derived from the simplified method, due to changes in vesting terms and contractual lives of current options compared to our historical grants. We base the estimate of the risk-free interest rate on the United States Treasury zero-coupon yield curve in effect at the time of grant. We have never paid cash dividends and do not currently intend to pay cash dividends; accordingly, we have assumed a 0% dividend yield. The following table summarizes total aggregate stock option activity for the period December 31, 2008 through December 31, 2011 : 75 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information concerning outstanding and exercisable Company common stock options at December 31, 2011 . 1 The exercise price indicates the market value at grant date and is the strike price at exercise. For each series, the exercise price is the weighted average exercise price of the series. Vested & Exercisable Balance Number of Shares Outstanding Weighted Average Exercise Price Balance at December 31, 2008 1,050,606 1,173,206 6.82 Granted — — Exercised (55,000 ) 1.32 Canceled or expired (27,102 ) 6.07 Balance at December 31, 2009 1,043,104 1,091,104 7.12 Granted — — Exercised (54,614 ) 1.03 Canceled or expired (121,490 ) 10.10 Balance at December 31, 2010 891,000 915,000 7.14 Granted — — Exercised (20,000 ) 1.13 Canceled or expired (125,000 ) 9.69 Balance at December 31, 2011 750,000 770,000 6.81 Average Options Exercise Options Remaining Fully-Vested Unvested Options Prices 1 Outstanding at Contractual And Exercisable at Balance at (series) December 31, 2011 Life December 31, 2011 December 31, 2011 $ 1.81 40,000 2.5 40,000 — $ 1.87 20,000 1.3 20,000 — $ 2.05 2,000 2.2 2,000 — $ 2.32 40,000 1.4 40,000 — $ 2.50 75,000 3.2 75,000 — $ 3.75 150,000 3.5 150,000 — $ 6.83 25,000 4.9 25,000 — $ 9.15 150,000 4.4 150,000 — $ 11.97 18,000 4.3 18,000 — $ 10.93 150,000 5.5 150,000 — $ 9.44 100,000 6.2 80,000 20,000 770,000 750,000 20,000 At December 31, 2011 2010 2009 (dollars in thousands) Total intrinsic value of options: Outstanding $ 325 $ 145 $ 737 Exercisable 325 145 737 Exercised during the year 24 76 107 Available for grant at December 31, 2011 111,281  76 Weighted-average remaining life of all options outstanding at December 31, 2011 4.2 years ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock Units On August 8, 2008, the Company granted restricted stock units equivalent to 6,420 shares of common stock to each of its three non-employee directors. These restricted stock units, granted outside of the Option Plan, were intended to compensate and retain the directors over the one-year service period commencing July 1, 2008. The fair value of the awards was $93,411 per director based on the market price of $14.55 per share on the date granted. Upon vesting, which was equally at quarterly intervals, the units became convertible into cash based on the then market price of the Company's shares at each respective vesting date. Each director's vested units were settled for the cash value of $41,698 on or before July 17, 2009. 77 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock Awards Restricted stock awards granted to directors are intended to compensate and retain the directors over the one-year service period commencing July 1 of the year of service. These awards will vest in quarterly installments beginning September 30 of the year of service, so long as the grantee continues to serve as a director of the Company. Restricted stock awards granted to employees will vest in four equal annual installments beginning December 31 in the year granted, so long as the grantee remains employed full-time with the Company as of each vesting date. During 2010 and 2011 , the Company granted restricted stock awards per the following table. The following is a summary of the Company's restricted stock awards for the years ended December 31, 2010 and 2011 : The total fair value of the restricted stock that vested in the years ended December 31, 2010 and 2011 was $299,000 and $346,000 , respectively. The weighted-average remaining life of restricted stock awards outstanding at December 31, 2011 was 2.0 years. Compensation Expense The Company recognized non-cash compensation expense related to its stock compensation plans of $0.5 million , $0.4 million and $0.7 million for the fiscal years ended December 31, 2011 , 2010 and 2009 , respectively. As of December 31, 2011 , unrecognized compensation expense was approximately $376,000 . The weighted average period over which total compensation related to stock options and restricted stock awards is expected to be recognized is 24 months . 78 Date Issued Issued to Number of Individuals Number of Shares Market Price Fair Value January 27, 2010 Employee 2 37,500 $ 3.09 $ 115,875 June 17, 2010 Employee 1 40,323 $ 2.48 $ 100,000 June 17, 2010 Director 3 96,774 $ 2.48 $ 240,000 September 10, 2010 Employee 2 21,008 $ 2.38 $ 50,000 June 16, 2011 Employee 1 22,866 $ 3.28 $ 75,000 June 16, 2011 Director 3 73,170 $ 3.28 $ 240,000 November 7, 2011 Employee 9 48,953 $ 2.86 $ 140,000 Number of restricted shares Weighted- average fair value Unvested restricted shares at December 31, 2009 23,439 $ 5.12 Granted in 2010 195,605 $ 2.59 Vested in 2010 (96,537 ) $ 3.10 Forfeited in 2010 — $ — Unvested restricted shares at December 31, 2010 122,507 $ 2.60 Granted in 2011 144,989 $ 3.14 Vested in 2011 (102,927 ) $ 3.36 Forfeited in 2011 (18,750 ) $ 3.09 Unvested restricted shares at December 31, 2011 145,819 $ 2.90 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 -REDEEMABLE PREFERRED STOCK AUTHORIZED The Company is authorized to issue 2,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”). The Board of Directors has the authority to approve the issuance of all or any of these shares of Preferred Stock in one or more series, to determine the number of shares constituting any series and to determine any voting powers, conversion rights, dividend rights and other designations, preferences, limitations, restrictions and rights relating to such shares without any further action by the stockholders. While there are no current plans to issue the Preferred Stock, it was authorized in order to provide the Company with flexibility to take advantage of contingencies such as favorable acquisition opportunities. NOTE 15 - STOCK REPURCHASE PROGRAM Effective May 14, 2010, our Board of Directors authorized a total expenditure of $2.5 million to repurchase shares of the Company's common stock. Through open market purchases under this authorization, we purchased 981,099 shares at an average cost of $2.41 per share during the twelve months ended December 31, 2010 . No shares were purchased during the twelve months ended December 31, 2011 . At December 31, 2011 , approximately $0.1 million remains authorized in the stock repurchase program. The program does not have an expiration date. Restrictions contained in our loan agreements governing our Wells Fargo Bank Credit Facility limit the amount of our common stock that we can repurchase and in accordance with the terms of the Credit Facility, the Company does not currently intend to purchase additional shares under this program. NOTE 16 - FEDERAL AND STATE INCOME TAXES The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2011 , 2010 and 2009 were as follows: 79 2011 2010 2009 (in thousands) Current Federal $ 824 $ (7,018 ) $ (91 ) Foreign — (42 ) 70 State 573 687 838 1,397 (6,373 ) 817 Deferred Federal (2,165 ) 359 524 Foreign — (3 ) (3 ) State (63 ) (536 ) 56 (2,228 ) (180 ) 577 Total tax provision $ (831 ) $ (6,553 ) $ 1,394 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the deferred tax asset (liability) consisted of the following at December 31, 2011 and 2010 : The following is a reconciliation of expected to actual income tax expense from continuing operations: The Company had a federal net operating loss carry-forward at December 31, 2011 of approximately $3.8 million . Earlier utilization of the net operating loss on the Company's 2002 and 2003 consolidated tax returns was disallowed by the IRS which resulted in a reinstated carry-forward. The prior year net operating loss of approximately $18.9 million will be available through 2021. The current year net operating loss of approximately $3.8 million will be available for carry back to 2009 and 2010 and for carry forward through 2031. The Company also has a foreign net operating loss carry-forward at December 31, 2011 of approximately $1.1 million . This loss is available for utilization from 2008 through 2017; however, application of the net operating loss is restricted to the income of ENGlobal Canada. The Company is unsure of its ability to fully utilize the foreign net operating loss. Therefore, the Company has set up a valuation allowance of $0.4 million against the net operating loss. At December 31, 2011 and 2010, the Company did not identify any material uncertain tax positions for the Company or its subsidiaries. We recognize interest related to uncertain tax positions in interest expense and penalties related to uncertain tax positions in 2011 2010 (in thousands) Deferred tax asset Allowance for doubtful accounts $ 688 $ 889 Net operating loss carry-forward 1,204 820 Accruals not yet deductible for tax purposes 2,962 2,396 Stock options 1,054 1,020 Deferred tax assets 5,908 5,125 Less: Valuation allowance (461 ) (564 ) Deferred tax assets 5,447 4,561 Deferred tax liabilities Depreciation (150 ) (4 ) Prepaid expenses — (543 ) Goodwill (102 ) 29 Deferred tax liability (252 ) (518 ) Deferred tax asset, net $ 5,195 $ 4,043 2011 2010 2009 (in thousands) Federal income tax expense at 35% for 2011, 35% for 2010 and 35% for 2009, respectively $ (1,717 ) $ (6,594 ) $ 891 State and foreign taxes, net of federal income tax effect 318 148 585 Nondeductible expenses 95 98 122 Stock compensation expense 38 46 116 Foreign investment — (18 ) 21 Valuation allowance — (3 ) 14 Prior year provision to return 417 — (302 ) Domestic production activity deduction — (8 ) — Other, net 18 (222 ) (53 ) Total tax provision $ (831 ) $ (6,553 ) $ 1,394 governmental penalties. For the years ended December 31, 2011, 2010 and 2009, the Company did not recognize 80 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS any interest and penalties related to uncertain tax positions. The Company is currently not the subject of any examination by the Internal Revenue Service, and the open years subject to audit are currently tax years 2008-2010 . In most states where the Company conducts business, the Company is subject to examination for the preceding three to six years. NOTE 17 - GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Our annual goodwill impairment analysis for the years ended December 31, 2011 and 2010 indicated that the fair value of all of our reporting units exceeded their carrying value in excess of 45%; therefore, no goodwill impairment charges were required for any of our reporting units for the period. Our methodologies for performing our goodwill impairment analysis have not changed from the prior year. However, the weighted average cost of capital utilized in the analysis decreased approximately 6 percentage points for the current year analysis. Intangible Assets The Company recognized $2.7 million of intangible assets during 2010 in connection with the acquisition of Control Dynamics International, LP. The Company recognized $530,000 of intangible assets during 2009 in connection with the acquisition of PCI Management and Consulting Company. Our identifiable intangible assets are comprised primarily of non-competition covenants, customer relationships and developed technology acquired through acquisitions. All are being amortized. The following table summarizes the cost and accumulated amortization for each of our identifiable intangible asset groups as of December 31, 2011 and 2010 . See Note 18 for the reportable segments to which intangible assets are assigned. Intangible assets are amortized using the straight-line method based on their estimated useful lives. Expected amortization expense related to our amortizable intangible assets is as follows: Non-competition Covenants Customer Relationships Developed Technology Total (in thousands) As of December 31, 2011 Intangible assets $ 4,420 $ 6,347 $ 909 $ 11,676 Less: accumulated amortization 4,010 4,619 212 8,841 Intangible assets, net $ 410 $ 1,728 $ 697 $ 2,835 As of December 31, 2010 Intangible assets $ 4,404 $ 6,347 $ 909 $ 11,660 Less: accumulated amortization 3,162 3,432 91 6,685 Intangible assets, net $ 1,242 $ 2,915 $ 818 $ 4,975 Years Ending December 31, Non-competition Covenants Customer Relationships Developed Technology Total (dollars in thousands) 2012 $ 175 $ 687 $ 121 $ 983 2013 152 609 121 882 2014 72 356 122 550 2015 11 76 333 420 2016 and thereafter — $ 410 $ 1,728 $ 697 $ 2,835 Weighted average amortization period remaining at December 31, 2011 (years) 2.5 2.9 6.7 81 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization expense was approximately $1,976,000 , $1,786,000 and $1,779,000 for the three years 2011 , 2010 and 2009 , respectively. NOTE 18 - SEGMENT INFORMATION The Engineering and Construction segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the midstream and downstream sectors throughout the United States. Services provided by the Engineering and Construction segment include feasibility studies, engineering, design, procurement and construction management. The Engineering segment includes the government services group, which provides engineering, design, installation and operation and maintenance of various government, public sector and international facilities. The Automation segment provides services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation, information technology, electrical and heat tracing projects primarily to the upstream and downstream sectors throughout the United States as well as specific projects in the Middle East and Central Asia. The Field Solutions segment provides land management, right-of-way, inspection, environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to the midstream sector, including pipeline, utility and telecommunications companies and other owner/operators of infrastructure facilities throughout the United States. Sales, operating income, identifiable assets, capital expenditures and depreciation 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 include costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments. The Corporate function supports all business segments and therefore cannot be specifically assigned to any specific segment. A significant portion of corporate costs are allocated to each segment based on each segment's revenue and subsequently eliminated in consolidation. Financial information about geographic areas Revenue from the Company's non-U.S. operations is currently not material. However, we expect them to become material as the Caspian project’s schedule progresses. Long-lived assets (principally leasehold improvements and computer equipment) formerly located in Canada were transferred to a U.S. office or disposed of during the three months ended September 30, 2010. Segment information for 2011 , 2010 and 2009 is as follows: 82 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 83 Engineering and Construction Automation Field Solutions Corporate Total (in thousands) 2011 Net sales from external customers $ 175,387 $ 62,216 $ 75,144 $ — $ 312,747 Inter-segment sales — — — — — Operating profit (loss) 7,835 2,037 160 (14,016 ) (3,984 ) Depreciation and amortization 1,561 1,411 79 314 3,365 Tangible assets 36,853 22,237 10,056 9,584 78,730 Goodwill 15,288 2,086 5,240 — 22,614 Other intangible assets 292 2,543 — — 2,835 Total assets 54,464 23,247 15,344 9,584 102,639 Capital expenditures 387 33 23 221 664 2010 Net sales from external customers $ 161,101 $ 49,657 $ 95,481 $ — $ 306,239 Inter-segment sales 48 1,363 — — 1,411 Operating profit (loss) (5,672 ) (1,925 ) 3,673 (14,094 ) (18,018 ) Depreciation and amortization 1,497 1,593 695 542 4,327 Tangible assets 37,647 18,819 13,863 12,406 82,735 Goodwill 15,288 2,086 5,240 — 22,614 Other intangible assets 398 3,978 599 — 4,975 Total assets 53,333 24,883 19,702 12,406 110,324 Capital expenditures 196 610 38 330 1,174 2009 Net sales from external customers $ 153,675 $ 72,322 $ 117,465 $ — $ 343,462 Inter-segment sales 1,132 96 865 — 2,093 Operating profit (loss) 4,597 4,568 7,475 (13,614 ) 3,026 Depreciation and amortization 1,910 1,208 840 817 4,775 Tangible assets 37,849 19,273 18,270 8,714 84,106 Goodwill 15,288 1,763 5,240 — 22,291 Other intangible assets 552 2,488 1,198 — 4,238 Total assets 53,689 23,524 24,708 8,714 110,635 Capital expenditures 1,109 1,797 94 217 3,217 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - COMMITMENTS AND CONTINGENCIES Employment Agreements The Company has employment agreements with certain of its executive officers and certain other officers, the terms of which expire on or before May 2013, with the severance terms ranging from six to twelve months. Such agreements provide for minimum salary levels. If employment is terminated for any reason other than 1) termination for cause, 2) voluntary resignation or 3) the employee's death, the Company is obligated to provide a severance benefit equal to six months of the employee's salary, and, at its option, an additional six months at 50% of the employee's salary in exchange for an extension of a non-competition agreement. Some of these agreements are renewable for an additional one-year term at the Company's option. No liability is recorded for the Company's obligations under employment agreements as the amounts that will ultimately be paid cannot be reasonably estimated, if any. Litigation From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or are 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. As of the date of this filing, all such active proceedings and claims of substance that have been raised against any subsidiary business entity have been adequately allowed for, or are covered by insurance, such that, if determined adversely to the Company, individually or in the aggregate, they would not have a material adverse effect on our results of operations or financial position. In June 2008, ENGlobal filed an action in the United States District Court for the Eastern District of Louisiana; Case Number 08-3601, against South Louisiana Ethanol LLC (“SLE”) entitled ENGlobal Engineering, Inc. and ENGlobal Construction Resources, Inc. vs. South Louisiana Ethanol, LLC. The lawsuit sought to enforce collection of $15.8 million owed to ENGlobal and its affiliates for services performed on an ethanol plant in Louisiana. In August 2009, SLE filed for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of Louisiana, Case Number 09-12676. In connection with the bankruptcy proceedings, the plant assets were sold and the court issued an order allocating proceeds from the sale and authorizing their distribution. ENGlobal received $209,017 and may receive an additional $845,500 depending on the outcome of an on-going dispute with a subcontractor. On July 7, 2010, a class action lawsuit was filed in the United States District Court for the Southern District of Texas, Houston Division entitled “Michael Phillips, on behalf of Himself and Others Similarly Situated, v. ENGlobal Corporation.” The lawsuit was filed on behalf of approximately 200 welding inspectors seeking damages for violations of the Fair Labor Standards Act. The plaintiffs sought unpaid overtime, liquidated damages, attorneys’ fees, costs and expenses. While ENGlobal settled the wage and hour portion of the lawsuit and modified its pay practices, the suit was amended to include a retaliation claim involving approximately five of the class members. That portion of the claim is still pending but it is not expected to have a material adverse effect on our results of operations or financial position. Insurance The Company carries 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. The Company is not aware of any claims in excess of insurance recoveries. ENGlobal is partially self-funded for health insurance claims. Provisions for expected future payments are accrued based on the Company's experience. Specific stop loss levels provide protection for the Company with $200,000 per occurrence. The self-insurance liability, which is included in the Accrued Compensation and Benefits line of the balance sheet, was $1.2 million as of December 31, 2011 and $1.2 million as of December 31, 2010 . NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for 2011 and 2010 is as follows: 84 ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 85 For the Quarters Ended - 2011 March June September December (dollars in thousands, except per share amounts) Net Sales $ 77,250 $ 79,612 $ 79,788 $ 76,097 Gross Profit 5,721 7,466 8,461 5,631 Net income (loss) (1,973 ) 142 (1,273 ) (3,972 ) Earnings per share - basic $ (0.07 ) $ 0.01 $ (0.05 ) $ (0.15 ) Earnings per share - diluted $ (0.07 ) $ 0.01 $ (0.05 ) $ (0.15 ) For the Quarters Ended - 2010 March June September December (dollars in thousands, except per share amounts) Net Sales $ 67,984 $ 71,215 $ 81,810 $ 85,230 Gross Profit 4,872 3,835 6,358 6,892 Net income (loss) (1,538 ) (4,517 ) (5,201 ) (496 ) Earnings per share - basic $ (0.06 ) $ (0.16 ) $ (0.19 ) $ (0.02 ) Earnings per share - diluted $ (0.06 ) $ (0.16 ) $ (0.19 ) $ (0.02 ) ENGLOBAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 - SUBSEQUENT EVENTS On March 2nd, 2012 Shelly Leedy resigned from her position as Executive Vice President – Automation. Effective immediately, William Coskey, ENGlobal’s Founder and Chairman, will be assuming the Executive Vice President-Automation role on an interim basis while a search is conducted for a replacement. The Company believes that Mr. Coskey is well-suited to provide a smooth transition to the leadership of the Automation segment because he is a Registered Electrical Engineer who has spent much of his professional career on automation-related work. The Wells Fargo Credit Facility has been extended, with an increased interest rate, to May 31, 2012 and we are currently in the due diligence phase to secure a new, long term credit facility from an different lender. We presently have competitive proposals from two major financial institutions to provide long-term financing on terms that are better than our existing Wells Fargo Credit Facility and we are working toward entering into a new credit facility with a multi-year term before the May 31, 2012 extension date on our Wells Fargo Credit Facility. If we are unable to do so, we believe alternative forms of financing are available to us. The Company has evaluated subsequent events through April 12, 2012, which is the date of filing. Schedule II ENGlobal Corporation VALUATION AND QUALIFYING ACCOUNTS ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES a) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (“SEC”) rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. 86 Description Balance - Beginning of Period Additions Deductions - Write offs Balance - End of Period (dollars in thousands) Allowance for doubtful accounts For year ended December 31, 2011 $ 2,130 1,381 (1,719 ) $ 1,792 For year ended December 31, 2010 $ 1,868 3,908 (3,646 ) $ 2,130 For year ended December 31, 2009 $ 2,288 728 (1,148 ) $ 1,868 Allowance on current notes receivable for the year ended December 31, 2011 $ — — — $ — Allowance on long-term notes receivable for the year ended December 31, 2011 $ — $ — ITEM 9A. CONTROLS AND PROCEDURES (continued) We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011 , as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2011 , our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. b) Changes in Internal Control Over Financial Reporting No changes in our internal control over financial reporting occurred during the twelve months ended December 31, 2011 , that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with generally accepted accounting principles (“GAAP”). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards into the process to reduce, although not eliminate, this risk. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2011 , as required by Section 404 of the Sarbanes-Oxley Act of 2002, our management conducted an assessment, including testing, based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected. In assessing the effectiveness of our internal control over financial reporting, management did not identify a material weakness in internal control over financial reporting as of December 31, 2011 . We have concluded that our internal control over financial reporting at December 31, 2011 , was effective. 87  PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will appear under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 10, the 2011 Proxy Statement is incorporated herein by this reference. We have adopted a written code of conduct that applies to our directors, officers and employees. In addition, we have a code of ethics specific for our chief executive officer, chief financial officer and senior accounting officers or persons performing similar functions. Both codes can be found on our web site, which is located at www.englobal.com, and are also exhibits to this report. We intend to make all required disclosures concerning any amendments to, or waivers from, our code of ethics on our web site. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 and paragraphs (e)(4) and (e)(5) of Item 407 of Regulation S-K will appear under the captions “Director Compensation” and “Executive Compensation Tables” including “Compensation Discussion and Analysis,”“Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 11, the 2011 Proxy Statement is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Items 201(d) and 403 of Regulation S-K will appear under the headings “Beneficial Ownership of Common Stock” and “Securities Authorized for Issuance under Equity Compensation Plans” in our 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 12, the 2011 Proxy Statement is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by Items 404 and 407(a) of Regulation S-K will appear under the captions “Certain Relationships and Related Transactions” and “Director Independence” in our 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 13, the 2011 Proxy Statement is incorporated herein by this reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES This information required by Item 9(e) of Schedule 14A will appear under the caption “Principal Auditor Fees and Services” in our 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 14, the 2011 Proxy Statement is incorporated herein by this reference. 88  PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES (a)(1) Financial Statements The consolidated financial statements filed as part of this Form 10-K are listed and indexed in Part II, Item 8. (a)(2) Schedules All schedules have been omitted since the information required by the schedule is not applicable, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (a)(3) Exhibits 89  EXHIBIT INDEX 90 Incorporated by Reference to: Exhibit No. Description Form or Schedule Exhibit No. Filing Date with SEC SEC File Number 3.1 Restated Articles of Incorporation of Registrant dated August 8, 2002 10-Q 3.1 11/14/2002 001-14217 3.2 Amendment to the Restated Articles of Incorporation of the Registrant, filed with the Nevada Secretary of State on June 2, 2006 8-A12B 3.1 12/17/2007 001-14217 3.3 Amended and Restated Bylaws of Registrant dated November 6, 2007 10-K 3.3 3/28/2008 001-14217 3.4 Amendments to Amended and Restated Bylaws of Registrant dated April 29, 2008 10-Q 3.2 5/7/2008 001-14217 4.1 Registrant's specimen common stock certificate S-3 4.1 10/31/2005 333-129336 4.2 Registration Rights Agreement by and among Registrant and Certain Investors named therein dated September 29, 2005 S-3 4.2 10/31/2005 333-129336 4.3 Securities Purchase Agreement by and between Tontine Capital Partners, L.P. and Registrant dated September 29, 2005 S-3 4.5 10/31/2005 333-129336 4.4 Form of Subscription Agreement by and among Registrant, Michael L. Burrow, Alliance 2000, Ltd. and certain subscribers S-3 4.6 10/31/2005 333-129336 10.1 Option Pool Agreement by and between Industrial Data Systems Corporation and Alliance 2000, Ltd. dated December 21, 2001 10-KSB 10.48 4/1/2002 001-14217 10.2 Amended and Restated Alliance Stock Option Pool Agreement effective December 20, 2006 10-K 10.2 3/28/2008 001-14217 10.3 Second Amended and Restated Alliance Stock Option Agreement dated December 20, 2006 8-K 10.2 5/23/2007 001-14217 10.4 ENGlobal Corporation Incentive Bonus Plan Dated effective July 1, 2009 8-K 10.1 8/17/2009 001-14217 10.5 First Amendment and Restated ENGlobal Corporation Incentive Bonus Plan effective January 1, 2010 10-Q 10.1 5/5/2010 001-14217 10.6 Purchase Agreement by and between ENGlobal and Advanced Control Engineering, LLC dated September 25, 2008 10-Q 10.1 11/7/2008 001-14217 10.7 Promissory Note Payable between Registrant and Frank H McIlwain dated September 30, 2008 10-Q 10.2 11/7/2008 001-14217 10.8 Promissory Note Payable between Registrant and James A Walters dated September 30, 2008 10-Q 10.3 11/7/2008 001-14217  91 Incorporated by Reference to: Exhibit No. Description Form or Schedule Exhibit No. Filing Date with SEC SEC File Number 10.9 Promissory Note Payable between Registrant and William M Bosarge dated September 30, 2008 10-Q 10.4 11/7/2008 001-14217 10.10 Promissory Note Payable between Registrant and Matthew R Burton dated September 30, 2008 10-Q 10.5 11/7/2008 001-14217 10.11 Asset Purchase Agreement between ENGlobal Automation Group, Inc. and Control Dynamics International, L.P. dated April 6, 2010 10-Q 10.1 8/5/2010 001-14217 10.12 Promissory Note between ENGlobal Automation Group, Inc. and Control Dynamics International, L.P. 10-Q 10.2 8/5/2010 001-14217 10.13 Second Amended and Restated Lease Agreement between Petrocon Engineering, Inc. and Corporate Property Associates dated February 28, 2002 (Exec I) 10-Q 10.63 8/12/2002 001-14217 10.14 Guaranty and Suretyship Agreement between Industrial Data Systems Corporation and Corporate Property Associates dated April 26, 2002 (Exec I) 10-Q 10.64 8/12/2002 001-14217 10.15 Amended and Restated 1998 Incentive Plan of Registrant dated June 8, 2006 10-K 10.6 3/28/2008 001-14217 10.16 First Amendment to the Amended and Restated 1998 Incentive Plan of Registrant dated June 14, 2007 10-K 10.7 3/28/2008 001-14217 10.17 Form of Incentive Stock Option Award Agreement of 1998 Incentive Plan of Registrant 10-K 10.8 3/28/2008 001-14217 10.18 Form of Non-qualified Stock Option Agreement Granted Outside of 1998 Incentive Plan of Registrant S-8 10.80 8/24/2005 333-127803 10.19 Form of Restricted Stock Unit Award Agreement between Registrant and its Independent Non-employee Directors 10-Q 10.2 8/11/2008 001-14217 10.20 Form of Restricted Stock Award Agreement of 2009 Equity Incentive Plan between Registrant and its independent directors 10-Q 10.1 8/10/2009 001-14217 10.21 Stock Repurchse Program of Registrant effective June 7, 2010 8-K 99.1 6/7/2010 001-14217 10.22 Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated January 27, 2005 10-K 10.11 3/28/2008 001-14217 10.23 First Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated April 5, 2005 10-K/A 10.26 3/29/2007 001-14217 10.24 Second Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated June 15, 2005 10-K/A 10.27 3/29/2007 001-14217  92 Incorporated by Reference to: Exhibit No. Description Form or Schedule Exhibit No. Filing Date with SEC SEC File Number 10.25 Third Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated December 28, 2005 10-K/A 10.28 3/29/2007 001-14217 10.26 Fourth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated February 27, 2006 10-K/A 10.29 3/29/2007 001-14217 10.27 Fifth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated July 28, 2006 10-K/A 10.30 3/29/2007 001-14217 10.28 Sixth Amendment to the Lease agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated June 20, 2007 10-K 10.17 3/28/2008 001-14217 10.29 Build-to-Suit Lease Agreement between Clay Real Estate Development, L.P. and ENGlobal Corporate Services, Inc., executed March 6, 2008 10-Q 10.1 5/7/2008 001-14217 10.30 First Amendment to the Lease Agreement between Clay Real Estate Development, L.P. and ENGlobal Corporate Services, Inc. executed January 15, 2009 10-K 10.26 3/8/2010 001-14217 10.31 Fourth Amendment to the Lease Agreement between YPI North Belt Portfolio, LLC and ENGlobal Corporate Services, Inc. dated March 1, 2010 10-Q 10.2 5/5/2010 001-14217 10.32 Credit agreement by and between Wells Fargo Bank and Registrant and its subsidiaries dated December 29, 2009 8-K 10.1 1/11/2010 001-14217 10.33 Hand Note between South Louisiana Ethanol LLC and ENGlobal Engineering, Inc dated October 22, 2007 10-Q 10.2 11/9/2007 001-14217 10.34 Collateral Mortgage between South Louisiana Ethanol LLC and ENGlobal Engineering, Inc. dated August 26, 2007 10-Q 10.3 11/9/2007 001-14217 10.35 Collateral Mortgage between South Louisiana Ethanol LLC and ENGlobal Engineering, Inc. dated August 31, 2007 10-Q 10.4 6/14/2007 001-14217 10.36 Amended and Restated ENGlobal 401(k) Plan effective October 1, 2005 10-K/A 10.22 3/29/2007 001-14217 10.37 First Amendment of the ENGlobal 401(k) Plan effective December 21, 2001 10-K/A 10.21 3/29/2007 001-14217 10.38 Second Amendment to the ENGlobal 401(k) Plan effective April 1, 2006 10-K/A 10.23 3/29/2007 001-14217 10.39 Third Amendment to the ENGlobal 401(k) Plan effective July 1, 2006 10-K/A 10.24 3/29/2007 001-14217 10.40 Fourth Amendment to the ENGlobal 401(k) Plan effective July 1, 2008 10-K 10.33 3/16/2009 001-14217  93 Incorporated by Reference to: Exhibit No. Description Form or Schedule Exhibit No. Filing Date with SEC SEC File Number 10.41 Fifth Amendment to the ENGlobal 401(k) Plan effective January 1, 2009 10-Q 10.1 5/11/2009 001-14217 10.42 Regulations Amendment to the ENGlobal 401(k) Plan effective January 1, 2006 10-K 10.21 3/16/2007 001-14217 *10.43 First Amendment to the ENGlobal 401(k) Plan effective January 1, 2010 *10.44 Second Amendment to the ENGlobal 401(k) Plan effective August 2. 2010 10.45 Key Managers Incentive Plan of Registrant effective January 1, 2007 8-K 10.43 4/10/2007 001-14217 10.46 Key Executive Employment Agreement between Registrant and William A. Coskey effective January 1, 2006 10-K/A 10.39 3/29/2007 001-14217 10.47 Key executive Employment Agreement between Registrant and Robert W. Raiford effective August 9, 2008 10-K 10.37 3/16/2009 001-14217 10.48 Key Executive Employment Agreement between Registrant and Michael M. Patton effective October 13, 2009 10-K 10.41 3/8/2010 001-14217 10.49 Key executive Employment Agreement between Registrant and R. David Kelley effective August 9, 2008 10-K 10.39 3/16/2009 001-14217 10.50 Key executive Employment Agreement between Registrant and Edward L. Pagano effective May 3, 2010 8-K 99.1 6/14/2010 001-14217 10.51 Form of Indemnification Agreement between Registrant and its Directors and Executive Officers 10-Q 10.1 8/11/2008 001-14217 10.52 Security Agreement by and between Wells Fargo Bank and ENGlobal Corporation and its subsidiaries dated December 29, 2009 8-K 10.2 1/11/2010 001-14217 10.53 Security Interest Agreement and Acknowledgment by and between Wells Fargo Bank and ENGlobal Corporation and its subsidiaries dated December 29, 2009 8-K 10.3 1/11/2010 001-14217 10.54 Letter of Waiver by and between Wells Fargo Bank, N.A. and Registrant and its subsidiaries dated August 3, 2010 10-Q 10.3 8/5/2010 001-14217 10.55 First Amendment to Credit Agreement and Waiver of Default by and between Wells Fargo Bank, N.A. and Registrant and its subsidiaries entered into as of September 30, 2010 10-Q 10.1 11/5/2010 001-14217 10.56 Revolving Line of Credit Note by and between Wells Fargo Bank, N.A. and Registrant and its subsidiaries dated September 30, 2010 10-Q 10.2 11/5/2010 001-14217  * Filed herewith 94 Incorporated by Reference to: Exhibit No. Description Form or Schedule Exhibit No. Filing Date with SEC SEC File Number *10.57 Letter of Waiver by and between Wells Fargo Bank, N.A. and Registrant and its subsidiaries dated February 28, 2011 10.58 Letter of Termination by and between Comerica Bank and ENGlobal Corporation and its subsidiaries dated December 30, 2009 8-K 10.4 1/11/2010 001-14217 11.1 Statement Regarding Computation of Per Share Earnings is included as Note 2 to the Notes to Consolidated Financial Statements 10-K 11.1 3/28/2008 001-14217 *14.1 Code of Business Conduct and Ethics of Registrant dated June 17, 2010 *14.2 Code of Ethics for Chief Executive Officer and Senior Financial Officers of Registrant dated June 17, 2010 *21.1 Subsidiaries of the Registrant *31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14 *31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14 *32.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350 *32.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C. Section 1350  SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ENGlobal Corporation Dated: April 12, 2012 By: //s// Edward L. Pagano Edward L. Pagano Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: By: //s// Edward L. Pagano Edward L. Pagano Chief Executive Officer By: //s// John R. Beall John R. Beall Chief Financial Officer, Treasurer By: //s// William A. Coskey William A. Coskey, P.E. Chairman of the Board, Director By: //s// David W. Gent David W. Gent, P.E., Director By: //s// Randall B. Hale Randall B. Hale, Director By: //s// David C. Roussel David C. Roussel, Director 95  Effective Date: January 1, 2011 ENGlobal Corporation, a Nevada Corporation (the “Corporation), hereby adopts this incentive Bonus Plan (this “Plan”), effective as of January 1, 2011 to promote and advance the interest of the Corporation and its stockholders by enabling the Corporation and its Affiliates to attract, retain and reward certain valued employees (the “Participants”). Plan Year: Fiscal Year This plan is reviewed annually by the Chief Executive Officer (CEO) and the Compensation Committee with final approval of the plan by the Compensation Committee of the Board. Overview : The purpose of the ENGlobal Short Term Incentive Plan (“STI Plan” or “Plan”) is to reward exceptional performance that leads to achievement of financial, company and individual goals. The Plan, Personal Key Performance Indicators (“KPI’s”) and measurement using a Balanced Scorecard (“Scorecard”) ensure a direct link between our reward system and company performance and shareholder return. Eligibility : Eligibility to participate in the Plan shall be determined by the CEO of ENGlobal at the beginning of each fiscal year with final approval by the Compensation Committee of the Board. Any participant that is hired and approved to participate after the start of the calendar year may be included on a pro-rata basis as long as they complete at least six months of service during the plan year. Annual Incentive Pool: The STI Plan is “self-funding” and financial KPI’s must be structured to encourage stretch but achievable financial growth and NOI performance growth. Overall company financial performance must be at least 90% of budget for any incentives to be paid. Unless otherwise determined by the committee, the maximum aggregate annual Bonuses payable under this plan cannot exceed 15% of consolidated pre-tax net income after consideration of the Bonus expense. The Incentive Pool is determined during the annual budgeting and forecasting process. A centralized review will be undertaken by the CEO and CFO to determine suitability as measures for the STI plan. The CEO and CFO will review performance against budget and forecasts at the end of the first quarter. The CEO will determine whether any matters identified require an amendment to the financial measures adopted for the STI Plan. Any changes will be appropriately communicated. In the discretion of the CEO , an amount up to 15% of the Total Bonus Pool may be allocated to a Discretionary Bonus Pool. This pool is to reward employees not covered by this plan as participants but who deliver significant activities, above and beyond requirements of their position, that assist the Company in achieving its annual objectives. Target Incentive Opportunity : Each participant's Target Incentive ("Target") is based on specific company KPI’s established during the annual strategic planning and budgeting process and are approved by the CEO. Targets are comprised of Overall Company Financial Performance, Financial Performance in Area of Responsibility and Individual Performance Goals and KPI Score, weighted appropriately based on level and ability to impact results . KPI’s must align with annual financial targets and strategic goals. KPI’s will be determined individually. KPI’s will include factors such as financial performance of group under management, human capital development and leadership, strategic planning, customer service / retention activities and operational improvements. Given the critical nature of HSE, each scorecard must include an HSE KPI based on our measures of recordable incidents, lost time due to injuries and environmental harm. The failure to meet acceptable HSE standards could result in non-payment of STI even in instances where other KPI’s have fully been met. In the case of a work related fatality, all members in the segment in which the event occurs and the Corporate executive team will forfeit their STI payment for that year. The CEO may award discretionary incentives in exceptional circumstances when financial targets have not been met with • Plan Participants – Attachment A  approval of the Board. Performance : The actual incentive earned is determined by annual performance against KPI’s recorded and tracked in the individual’s Scorecard. All managers must complete a Scorecard for each participant in order to be eligible. Scorecard must be agreed upon with and signed by participant and forwarded to Corporate VP, Human Resources for approval by February 15 of the financial year in question. Calculation and Payment of Earned Incentive Award : Awards are determined and paid after the end of the quarter 30 days after release of the audited financials . Awards are subject to personal taxation as per the jurisdiction in which the individual resides. All payments are gross amounts and taxation will be withheld to the extent required by law. Employees on Leave of Absence : Bonus Awards for employees on approved leave will be prorated to exclude the time away from work. A description of approved leaves of absence is available from human resources. Termination, Death or Disability : Bonus Awards will be paid to participants who are actually employed and on the payroll on the date of payment. A participant whose employment terminates prior to payment shall forfeit any and all rights to a bonus from the Annual Plan except for approved special circumstances. Specifically those participants who terminate employment (with at least six months in the plan year) due to death, disability, or normal retirement will be paid a pro rata portion of any incentive bonus earned based on the amount of time worked during the Plan Year (through the date of termination). Such prorated payments will be made at the time and in the form received by all Participants or as soon as practical after ENGlobal has received a legal notice of eligibility from the beneficiary. “Disability” shall mean a mental or physical condition resulting from an injury or illness that renders the Participant incapable of performing the essential functions of his position with the Company with reasonable accommodation for a period of 120 or more consecutive days or for a total period of 180 days out of any twelve (12) month period. Other Plan Design Considerations : The Annual Plan will be administered by the Corporate Vice President Human Resources. All reported financial results will be confirmed by the Chief Financial Officer upon completion of the audited financial report of independent accountants. Bonus Awards will be approved by the CEO. Communication of all awards will be provided only upon written confirmation of all required approvals. No participant shall have the right to anticipate, alienate, sell, transfer, assign, pledge or encumber his or her right to receive any Award made under the Plan. No participant shall have any lien on any assets of the Company by reason of any Award made under the Plan. The adoption of the Plan or any modification or amendment hereof does not imply any commitment to continue or adopt the same plan, or any modification thereof, or any other plan for incentive compensation for any succeeding year, provided that no such modification or amendment shall adversely affect rights to receive any amount to which any Participant has become entitled prior to such modifications and amendments. The Company specifically reserves the right to amend, modify, or terminate the Plan at any time for any reason. Neither the Annual Plan nor any Award made under the Plan shall create any employment contract or imply any relationship between the Company and the participant, other than employment terminable by either party at will. No one may participate in the Plan or have any components of it changed after initial notification of participation, without the expressed written notice of approval by the CEO as appropriate. Every participant and proposed additional participant is reviewed for eligibility on an annual basis. No one participating in another incentive plan may participate concurrently in the Annual Plan, except where approved in writing by the Board of Directors. Eligible participants must have a "successful" performance rating throughout the year to be eligible for payment of an award regardless of the Company's performance against the financial measures. Glossary of Terms: EBIT Earnings Before Interest and Tax FY Financial Year HR Human Resources HSE Health, Safety and Environment • Sample Scorecard – Attachment B  KPI Key Performance Indicators NOI Net Operating Income O/H Over Head STI Short Term Incentive CEO Discretion: It is the responsibility of the CEO to ensure that fair and competitive STI awards result from the plan. The CEO will review all STI recommendations before they are submitted to the Board to ensure that all payments are in the best interest of ENGlobal and accurately reward the contribution of the participant. The Board has final approval and discretion for all compensation issues including the STI Plan.  Supersedure: This plan supersedes all of the currently effective bonus plans of the Corporation unless the Corporation has delivered written notice after issuance of this plan to the contrary to the person entitled to benefits under such bonus plans. However, this Plan does not supersede any other agreements between the Corporation and any participant, including, without limitation, any stock option or other equity compensation agreements, and the portions of any agreements relating to protection of the Corporation’s confidential and proprietary information, non-competition, non-disparagement or non-solicitation. Dispute Resolution Process: Any dispute or disagreement as to the interpretation of the STI Plan, assessment of performance against KPI’s or the calculation of the STI should be referred in the first instance to the Corporate VP of Human Resources. Disputes not resolved will be passed to the CEO for review and decision. The decision of the CEO is final and binding. Approved: ____________________________________ Date: _____________________________  EXHIBIT 10.43 FIRST AMENDMENT TO THE ENGLOBAL 401(K) PLAN WHEREAS , ENGlobal Engineering, Inc. (the "Employer") adopted a restatement of the ENGlobal 401(k) Plan (the "Plan"), effective as of January 1, 2010; and WHEREAS , the Employer has the ability to amend the Plan pursuant to Article 11.1; and WHEREAS , the Employer now desires to amend the Plan to recognize prior service with Control Dynamics International, LP (CDI). NOW, THEREFORE, RESOLVED , that the Company hereby amends the Plan in the following respects, effective as of April 1, 2010: RESOLVED FURTHER , that Section 2.2 of the Adoption Agreement is amended as follows: 2.2 Predecessor Service. Service with the following entity or entities will be credited as: (a) Elective Deferrals, QMACs and QNECs. Service with an entity listed above will be given for eligibility purposes under Section 3.2(a) of the Adoption Agreement. (d) Non-Safe Harbor Matching Contributions. Service with an entity listed above will be credited for: Eligibility purposes under Section 3.2(d) of the Adoption Agreement Vesting purposes under Section 10.4 of the Adoption Agreement RESOLVED FURTHER , that in all other respects, the terms of the Plan are hereby ratified and confirmed. RESOLVED FURTHER , that any action taken by any of the officers of the Company prior to the adoption of these resolutions that is within the authority conferred herein be, and it hereby is, ratified, confirmed and approved. 1 • Triangle Engineers & Constructors, Inc.; • RPM Engineering, Inc.; • Petrocon of Louisiana, Inc.; • Constant Power Manufacturing, Inc.; • IDS Engineering, Inc.; • Alliance Engineering Associates, Inc.; • Advanced Control Engineering, Inc.; • ESD&C; • ATI; • Control Dynamics International, LP (CDI)  EXHIBIT 10.44 SECOND AMENDMENT TO THE ENGLOBAL 401(k) PLAN WHEREAS , ENGlobal Engineering, Inc. (hereinafter, the "Employer") maintains the ENGlobal 401(k) Plan; WHEREAS , the Employer has the right to amend the Plan pursuant to Section 11.1 of the Basic Plan Document; and WHEREAS , the Employer now desires to amend the Plan, in connection with the merger of the Control Dynamics International, LP 401(k) Plan and the ENGlobal 401(k) Plan, to preserve protected benefits. NOW, THEREFORE , effective as of August 2, 2010, the Employer hereby amends the ENGlobal 401(k) Plan in the following respects: 1. The following Item 3 is added to the Protected Benefits Addendum to the Adoption Agreement: 3. Employer contribution accounts transferred from the Control Dynamics International, LP 401(k) Plan shall be subject to a 2-year cliff vesting schedule. However, the employer contribution accounts of Participants who terminated employment prior to the merger of the Control Dynamics International, LP 401(k) Plan and the ENGlobal 401(k) Plan are subject to the following vesting schedule: 1 year of service-0%, 2 years-20%, 3 years-40%, 4 years-60%, 5 years-80%, 6 years-100%. Also, a Participant may take an in-service withdrawal from any employer contribution account transferred from the Control Dynamics International, LP 401(k) Plan upon the attainment of age 40 and the completion of 5 years of participation. 2. In all other respects, the terms of this Plan are hereby ratified and confirmed. IN WITNESS WHEREOF , the Employer has caused this Second Amendment to be executed in duplicate counterparts, each of which shall be considered as an original, as of the date set forth below. 1 ENGLOBAL ENGINEERING, INC. /s/ Jean Whitaker By: /s/ Natalie S. Hairston Witness Title: Secretary Date: August 4, 2010  EXHIBIT 10.57 SECOND AMENDMENT TO CREDIT AGREEMENT AND WAIVER OF DEFAULT THIS AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of February 28, 2011, by and between ENGLOBAL CORPORATION, a Nevada corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS , Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of December 29, 2009, as amended from time to time ("Credit Agreement"). WHEREAS , Borrower is in default of certain provisions of the Credit Agreement. WHEREAS , Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Section 1.1. (c) is hereby deleted in its entirety, and the following substituted therefor: "(c) Letter of Credit Subfeature . As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue or cause an affiliate to issue standby letters of credit for the account of Borrower (each, a “Letter of Credit”and collectively, “Letters of Credit”): provided however, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Two Million Dollars ($2,000,000.00). The form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion. The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit agreements, applications and any related documents required by Bank in connection with the issuance thereof. Each drawing paid under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any drawing is paid, then Borrower shall immediately pay to Bank the full amount drawn, together with interest thereon from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any account maintained by Borrower with Bank for the amount of any such drawing. If Borrower should request that any Letter of Credit be issued for which the expiry date of the Letter of Credit is later than the maturity date of the Line of Credit, then on or before maturity of the Line of Credit, Borrower shall deposit, or cause to be deposited into a Cash Collateral Account, cash, cash equivalents and/or publicly traded/quoted marketable securities (acceptable to Bank in its sole discretion) with an aggregate fair market value (determined by Bank in its sole discretion) not at any time less than the amount of the Unpaid and Undrawn Balance (as defined below), if any. If Borrower shall fail to collateralize the Letters of Credit in this manner, then Bank may in its discretion, at or after maturity of the Line, advance funds under the Line of Credit in an amount approximately equal to the Unpaid and Undrawn Balance, and deposit such funds into a Cash Collateral Account established by Bank, which shall secure such Letters of Credit. " Unpaid and Undrawn Balance " means, at any time, the entire amount that has not been paid by Bank under all the Letters of Credit issued for Borrower's account, including, without limitation, the amount of each draft on which Bank has not yet effected payment as well as the amount undrawn under all such Letters of Credit. 1  Each drawing paid under a Letter of Credit after maturity of the Line of Credit shall be reimbursed to Bank by a draw under the Line of Credit or by a debit to the Cash Collateral Account, unless Borrower immediately pays such amount to Bank by other means. Bank is authorized to debit the Cash Collateral Account and apply such funds to repay to Bank amounts drawn under Letters of Credit and any related fees, if such amounts are not otherwise paid to Bank. Bank shall release portions of the Cash Collateral to Borrower as Letters of Credit expire and the Unpaid and Undrawn Balance diminishes, unless for any reason any indebtedness to Bank remains unpaid or any potential liability of Bank relating to Letters of Credit issued in connection with the Line of Credit remains outstanding, in which case Bank may continue to hold such funds and the Cash Collateral Account to secure such indebtedness and liabilities." 2. Section 1.4 is hereby deleted in its entirety, and the following substituted therefor: “SECTION 1.4. COLLATERAL. As security for all indebtedness and other obligations of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivable and other rights to payment, general intangibles, inventory and equipment. As security for all indebtedness and other obligations of Borrower to Bank subject hereto, Borrower shall cause ENGlobal U.S., Inc., ENGlobal Government Services, Inc. and ENGlobal Emerging Markets, Inc. to grant to Bank security interests of first priority in all accounts receivable and other rights to payment, general intangibles, inventory and equipment. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds or mortgages, and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall pay to Bank immediately upon demand the full amount of all charges, costs and expenses (to include fees paid to third parties and all allocated costs of Bank personnel), expended or incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance.” 3. Section 1.5. is hereby deleted in its entirety, and the following substituted therefor: “SECTION 1.5. GUARANTIES. The payment and performance of all indebtedness and other obligations of Borrower to Bank shall be guaranteed jointly and severally by ENGlobal U.S., Inc. a Texas corporation, ENGlobal Government Services, Inc. a Texas corporation and ENGlobal Emerging Markets, Inc. a Texas corporation, as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank.” 4. Section 4.3. is hereby deleted in its entirety, and the following substituted therefor: “SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 90 days after and as of the end of each fiscal year form 10K as filed with S.E.C; (b) not later than 45 days after and as of the end of each fiscal quarter form 10Q as filed with S.E.C.; (c) not later than 45 days after and as of the end of each fiscal quarter, a consolidating financial statement of Borrower, prepared by Borrower, to include balance sheet, income statement and cash flow statement; 2  (d) not later than 45 days after and as of the end of each fiscal quarter, a financial statement of ENGlobal Emerging Markets, Inc., prepared by Borrower or ENGlobal Emerging Markets, Inc, to include to include balance sheet, income statement and cash flow statement; (e) not later than 30 days after and as of the end of each month, a borrowing base certificate, an aged listing of accounts receivable and accounts payable, and a reconciliation of accounts, and immediately upon each request from Bank, a list of the names and addresses of all Borrower's account debtors; (f) Borrower will provide on a quarterly basis a certificate of compliance signed by Senior Financial Officer showing compliance with all financial covenants. Within 30 days of the end of each fiscal year end a financial projection for at least the next fiscal year consisting of income statement, balance sheet, and cash flow statement broken down by quarter; (g) from time to time such other information as Bank may reasonably request.” 5. (a) Borrower has notified Bank of the following breach of the terms of the Credit Agreement: Failure to maintain the Fixed Charge Coverage Ratio required by Section 4.9(c) of the Credit Agreement for the period ending December 31, 2010. Subject to the terms and conditions set forth herein, Bank has decided to waive its default rights with respect to (A) the breach described in (i) above for the period ending December 31, 2010. This waiver applies only to the specific instances described above. This is not a waiver of any subsequent breach of the same provisions of the Credit Agreement, nor is it a waiver of any breach of any other provision of the Credit Agreement. (b) Borrower has notified the Bank of a reorganization of Borrower and its subsidiaries, as more fully detailed in The letter dated March 7, 2011 sent to the Bank (the Transaction). The Transaction may violate Section 5.4 and Section 6.1 of the Credit Agreement. Subject to the following conditions, Bank consents to the Transaction. • At the time of the Transaction, no Event of Default as defined in the Credit Agreement, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing. • Borrower shall do all acts and things and execute and deliver, or cause any of its subsidiaries to execute and deliver, any additional documents, such as guaranties, security agreements, and financing statements, deemed by Bank as necessary, proper or convenient in connection with the preservation, perfection or enforcement of its rights under the Loan Documents. • Borrower shall provide documentation satisfactory to Bank, in its sole discretion, evidencing the assumption by the surviving entities of all assets and liabilities of the merged entities. (c) Except as expressly stated in this Amendment, Bank reserves all of the rights, powers and remedies available to Bank under the Credit Agreement and any other contracts or instruments signed by Borrower, including the right to cease making advances to and the right to accelerate any indebtedness, if any subsequent breaches of the same provisions or any other provisions of the Credit Agreement should occur. 6. In consideration of the changes set forth herein and as a condition to the effectiveness hereof, immediately upon signing this Amendment Borrower shall pay to Bank a non-refundable fee of $15,000.00. If Bank has not received payment in full of said fee upon signing of this Amendment, this waiver shall immediately terminate without further notice and Bank may exercise any and all rights, powers and remedies available under the Credit Agreement and any other contracts or instruments signed by Borrower. 3  7. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 8. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS. IN WITNESS WHEREOF , the parties hereto have caused this Amendment to be executed as of the day and year first written above. ENGLOBAL CORPORATION By: /s/ R.W. Raiford R.W. Raiford, Chief Financial Officer WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ David Jones David Jones, Senior Relationship Manager 4  EXHIBIT 14.1 ENGLOBAL CORPORATION CODE OF BUSINESS CONDUCT AND ETHICS Introduction Our Corporation's reputation for honesty and integrity is the sum of the personal reputations of our directors, officers and employees. To protect this reputation and to promote compliance with laws, rules and regulations, this Code of Business Conduct and Ethics has been adopted by our Board of Directors. This Code of Conduct is only one aspect of our commitment to ethical conduct, and should be read in conjunction with the policies contained in our Employee Handbook (the “ Employee Handbook ”). This Code sets out the basic standards of ethics and conduct to which we hold all of our directors, officers and employees. These standards are designed to deter wrongdoing and to promote honest and ethical conduct, but will not cover all situations. If a law conflicts with a policy in this Code, you must comply with the law; however, if a local custom or policy conflicts with this Code, you must comply with the Code. If you feel that a provision of the Code conflicts with policies contained in the Employee Handbook, you should direct your concern immediately to the Corporation's Chief Executive Officer. If, you would like to resolve a concern unanimously, you should follow the anonymous reporting procedure set forth in the Employee Complaint Procedures and Non-Retaliation Policy, a copy of which is available under “Governance” on the investor relations portion of the Corporation's web site. The designated Corporation official will then review the situation and take appropriate action in keeping with this Code, the Employee Handbook, our other corporate policies and applicable law. If your concern relates to that individual, you should submit your concern to the Chair of the Audit Committee of the Corporation or to the Corporation's outside general counsel. The mailing address of each of those individuals is included at the end of this Code. Those who violate the standards set out in this Code will be subject to disciplinary action. 1. Scope If you are a director, officer or employee of the Corporation or any of its subsidiaries or controlled entities, you are subject to this Code. 2. Honest and Ethical Conduct We, as a Corporation, require honest and ethical conduct from everyone who is subject to this Code. Each of you has a responsibility to all other directors, officers and employees of our Corporation, to our shareholders, and to our Corporation itself, to act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing your independent judgment to be subordinated, and otherwise to conduct yourself in a manner that meets with our ethical and legal standards. 3. Compliance with Laws, Rules and Regulations You are required to comply with all applicable governmental laws, rules and regulations, both in letter and in spirit. Although you are not expected to know the details of all the applicable laws, rules and regulations, we expect you to seek advice from our Corporation (or if for any reason that is not practical, from our Corporation's Chief Governance Officer) if you have any questions about whether the requirement applies to the situation or what conduct may be required to comply with any law, rule or regulation. The Employee Handbook addresses in further detail the Corporation's policies and reporting procedures for specific types of violations (e.g., Equal Employment, Sexual and Other Unlawful Harassment). 1  4. Conflicts of Interest You must handle in an ethical manner any actual or apparent conflict of interest between your personal and business relationships. Conflicts of interest are prohibited as a matter of policy. A "conflict of interest" exists when a person's private interest interferes in any way with the interests of our Corporation. For example, a conflict situation arises if you take actions or have interests that may make it difficult to perform your work for our Corporation objectively and effectively. Conflicts of interest also arise if you, or a member of your family, receive an improper personal benefit as a result of your position with our Corporation. Loans to, or guarantees of obligations of such persons are of special concern. The Employee Handbook contains policies addressing specific types of conflicts of interest, including, but not limited to, gifts, and financial interests in other organizations. If you become aware of any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest, you should report it promptly pursuant to the procedure described in Section 12 of this Policy. 5. Corporate Opportunities You are prohibited from taking for yourself personally, opportunities that are discovered through the use of corporate property, information or position, unless the Board of Directors has declined to pursue the opportunity. You may not use corporate property, information, or position for personal gain, or to compete with our Corporation directly or indirectly. You owe a duty to our Corporation to advance its legitimate interests whenever the opportunity to do so arises. 6. Fair Dealing You should endeavor to deal fairly with our Corporation's customers, suppliers, competitors and employees and with other persons with whom our Corporation does business. You should not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair-dealing practice. 7. Public Disclosures It is our Corporation's policy to provide full, fair, accurate, timely, and understandable disclosure in all reports and documents that we file with, or submit to, the Securities and Exchange Commission and in all other public communications made by our Corporation. If you become aware of any matter that you believe should be disclosed, please contact our Vice President - Investor Relation, Audit Committee Chairman or outside general counsel. 8. Confidentiality You should maintain the confidentiality of all confidential information entrusted to you by our Corporation and by persons with whom our Corporation does business, except when disclosure is authorized or legally mandated. Confidential information includes all non-public information that, if disclosed, might be of use to competitors of, or harmful to, our Corporation or persons with whom our Corporation does business. Should you have any questions about the Corporation's policy regarding confidentiality, please contact Human Resources. 2  9. Insider Trading If you have access to material, non-public information concerning our Corporation, you are not permitted to use or share that information for stock trading purposes, or for any other purpose except the conduct of our Corporation's business. All non-public information about our Corporation should be considered confidential information. Insider trading, which is the use of material, non-public information for personal financial benefit, or tipping others who might make an investment decision on the basis of this information, is not only unethical but is also illegal. The prohibition on insider trading applies not only to our Corporation's securities, but also to securities of other companies if you learn of material non-public information about these companies in the course of your duties to the Corporation. Violations of this prohibition against "insider trading" may subject you to criminal or civil liability, in addition to disciplinary action by our Corporation. The Employee Handbook and Insider Trading Policy included in the Handbook provide further information regarding the Corporation's insider trading policy. 10. Protection and Proper Use of Corporation Assets You should protect our Corporation's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on our Corporation's profitability. All corporate assets should be used for legitimate business purposes. The obligation of employees to protect the Corporation's assets includes its intellectual property and proprietary information. Proprietary information and Intellectual Property includes trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information, terms of customer contracts, and any unpublished financial data and reports. Unauthorized use or distribution of this information violates Corporation policy. It could also be illegal and result in civil or criminal penalties. The Employee Handbook contains specific policies and procedures employees must follow regarding the protection of Corporation resources. 11. Interpretations and Waivers of the Code of Business Conduct and Ethics If you are uncertain whether a particular activity or relationship is improper under this Code or requires a waiver of this Code, you should disclose it to our Chief Executive Officer (or to the Chair of the Audit Committee), who will make a determination first, whether a waiver of this Code is required and second, if required, whether a waiver will be granted. You may be required to agree to conditions before a waiver or a continuing waiver is granted. However, any waiver of this Code for an executive officer or director may be made only by the Corporation's Board of Directors and will be promptly disclosed to the extent required by applicable law, rule (including any rule of any applicable stock exchange) or regulation. 12. Reporting any Illegal or Unethical Behavior Our Corporation desires to pro-actively promote ethical behavior. Employees are encouraged to talk to supervisors, managers or other appropriate personnel when in doubt about the best course of action in a particular situation. Additionally, employees should promptly report violations of laws, rules, regulations or this Code pursuant to the procedures set forth in the Employee Handbook and appendices to the Handbook. Any report or allegation of a violation of applicable laws, rules, regulations or this Code need not be signed and may be sent anonymously. All reports of violations of this Code, including reports sent anonymously, will be promptly investigated and, if found to be accurate, acted upon in a timely manner. If any report of wrongdoing relates to accounting or financial reporting matters, or relates to persons involved in the development or implementation of our Corporation's system of internal controls or disclosure controls, a copy of the report will be promptly provided to the Chair of the Audit Committee of the Board of Directors, which may participate in the investigation and resolution of the matter. It is the policy of our Corporation not to allow actual or threatened retaliation, harassment or discrimination due to reports of misconduct by others made in good faith by employees. Employees are expected to cooperate fully in internal investigations of misconduct. Please see the Employee Complaint Procedures and Non-Retaliation Policy for details on reporting illegal or unethical conduct and the protections our Corporation provides. 3  13. Compliance Standards and Procedures This Code is intended as a statement of basic principles and standards and does not include specific rules that apply to every situation. Its contents have to be viewed within the framework of our Corporation's other policies, practices, instructions and the requirements of the law. This Code is in addition to other policies, practices or instructions of our Corporation that must be observed. Moreover, the absence of a specific corporate policy, practice or instruction covering a particular situation does not relieve you of the responsibility for exercising the highest ethical standards applicable to the circumstances. In some situations, it is difficult to know right from wrong. Because this Code does not anticipate every situation that will arise, it is important that each of you approach a new question or problem in a deliberate fashion: (a) Determine if you know all the facts. (b) Identify exactly what it is that concerns you. (c) Discuss the problem with a supervisor or, if the problem relates to a supervisor, with the Chief Executive Officer, Audit Committee Chair or outside legal counsel. (d) Seek help from other resources such as other management personnel or our Corporation's outside general counsel. (e) Seek guidance before taking any action that you believe may be unethical, illegal, or dishonest. You will be governed by the following compliance standards: Violation of any of the standards contained in this Code, or in any other policy, practice or instruction of our Corporation, can result in disciplinary actions, including dismiss and in civil or criminal action against the violator. This Code should not be construed as a contract of employment and does not change any person's status as an at-will employee. This Code is for the benefit of our Corporation, and no other person is entitled to enforce this Code. This Code does not, and should not be construed to, create any private cause of action or remedy in any other person for a violation of the Code. 4 • You are personally responsible for your own conduct and for complying with all provisions of this Code and for properly reporting known or suspected violations; • If you are a supervisor, manager, director or officer, you must use your best efforts to ensure that employees understand and comply with this Code; • No one has the authority or right to order, request or even influence you to violate this Code or the law; a request or order from another person will not be an excuse for your violation of this Code; • Any attempt by you to induce another director, officer or employee of our Corporation to violate this Code, whether successful or not, is itself a violation of this Code and may be a violation of law; • Any retaliation or threat of retaliation against any director, officer or employee of our Corporation for refusing to violate this Code, or for reporting in good faith the violation or suspected violation of this Code, is itself a violation of this Code and our Whistleblower Policy and may be a violation of law; and • Our Corporation will investigate every reported violation of this Code.  The names, addresses, telephone numbers, facsimile numbers and e-mail addresses of the Corporation's Chief Executive Officer, the Chair of the Audit Committee and the Corporation's outside corporate counsel are set forth below: Ratified by Resolution of the Board of Directors June 17, 2010 5 Chief Executive Officer Audit Committee Chair Outside Corporate Counsel Edward L. Pagano 654 N. Sam Houston Parkway E. Suite 400 Houston, Texas 77060 281.878.1020 edd.pagano@englobal.com Randall B. Hale Rock Hill Capital Group 2777 Allen Parkway Suite 850 Houston, TX 77019 713.353.2820 rhale@rockhillcap.com Winstead P.C. 401 Congress Avenue Suite 2100 Austin, Texas 78701 Attn: J. Rowland Cook or Kathryn K. Lindauer 512.370-2800 rcook@winstead.com or klindauer@winstead.com  EXHIBIT 14.2 ENGLOBAL CORPORATION CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS ENGlobal Corporation (the “Corporation”) has a Code of Business Conduct and Ethics applicable to all directors and employees of the Corporation. The CEO and all senior financial officers, including the CFO and principal accounting officer, are bound by the provisions set forth therein relating to ethical conduct, conflicts of interest and compliance with law. In addition to the Code of Business Conduct and Ethics, the CEO and senior financial officers are subject to the following additional specific policies: 1. The CEO and all senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Corporation with the SEC. Accordingly, it is the responsibility of the CEO and each senior financial officer promptly to bring to the attention of the Audit Committee any material information of which he or she may become aware that affects the disclosures made by the Corporation in its public filings. 2. The CEO and each senior financial officer shall promptly bring to the attention of the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the Corporation's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Corporation's financial reporting, disclosures or internal controls. 3. The CEO and each senior financial officer shall promptly bring to the attention of the CEO and to the Audit Committee any information he or she may have concerning any violation of the Corporation's Code of Business Conduct and Ethics, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Corporation's financial reporting, disclosures or internal controls. 4. The CEO and each senior financial officer shall promptly bring to the attention of the CEO and to the Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Corporation and the operation of its business, by the Corporation or any agent thereof, or of violation of the Code of Business Conduct and Ethics or of these additional procedures. 5. The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of the Code of Business Conduct and Ethics or of these additional procedures by the CEO and the Corporation's senior financial officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code of Business Conduct and Ethics and to these additional procedures, and shall include written notices to the individual involved that the Board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the Board) and termination of the individual's employment. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past. Ratified by Resolution of the Board of Directors June 17, 2010  EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT 1 ENGlobal U.S., Inc. Incorporated in the State of Texas ENGlobal Government Services, Inc. Incorporated in the State of Texas ENGlobal Canada, ULC Incorporated under the Companies Act of Nova Scotia as an Unlimited Liability Company ENGlobal International, Inc. Incorporated in British Virgin Islands under the BVI Business Companies Act of 2004 ENGlobal Emerging Markets, Inc. Incorporated in the State of Texas  EXHIBIT 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Edward L. Pagano, certify that: 1. I have reviewed this report on Form 10-K of ENGlobal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 1 Date: April 12, 2012 //s// Edward L. Pagano Edward L. Pagano Chief Executive Officer  EXHIBIT 31.2 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Robert W. Raiford, certify that: 1. I have reviewed this report on Form 10-K of ENGlobal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 1 Date: April 12, 2012 //s// Robert W. Raiford Robert W. Raiford Chief Financial Officer  EXHIBIT 32.1 Certification by the Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U. S. C. Section 1350, I, Edward L. Pagano, hereby certify that, to the best of my knowledge, the Annual Report on Form 10-K of ENGlobal Corporation for the fiscal year ended December 31, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of ENGlobal Corporation. This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. 1 Date: April 12, 2012 //s// Edward L. Pagano Edward L. Pagano Chief Executive Officer  EXHIBIT 32.2 Certification by the Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U. S. C. Section 1350, I, Robert W. Raiford, hereby certify that, to the best of my knowledge, the Annual Report on Form 10-K of ENGlobal Corporation for the fiscal year ended December 31, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of ENGlobal Corporation. This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. 1 Date: April 12, 2012 //s// Robert W. Raiford Robert W. Raiford Chief Financial Officer 

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