Edgar Filing: FULLER H B CO

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-09225

H.B. FULLER COMPANY

(Exact name of registrant as specified in its charter)


Minnesota		41-0268370
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1200 Willow Lake Boulevard, St. Paul, Minnesota		55110-5101
(Address of principal executive offices)		(Zip Code)

(651) 236-5900

(Registrant’s telephone number, including area code)

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 shorter 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 50,215,987 as of June 19, 2014.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)


	13 Weeks Ended						26 Weeks Ended
	May 31,			June 1,			May 31,			June 1,
	2014			2013			2014			2013
Net revenue	$	544,034		$	519,016		$	1,030,015		$	998,858
Cost of sales		(401,379	)		(372,400	)		(754,315	)		(718,866	)

Gross profit		142,655			146,616			275,700			279,992
Selling, general and administrative expenses		(96,372	)		(93,806	)		(193,171	)		(191,446	)
Special charges, net		(13,538	)		(10,843	)		(25,272	)		(16,176	)
Other income (expense), net		(204	)		(1,814	)		(1,254	)		(1,436	)
Interest expense		(4,760	)		(4,884	)		(8,886	)		(10,211	)

Income before income taxes and income from equity method investments		27,781			35,269			47,117			60,723
Income taxes		(8,838	)		(10,864	)		(15,379	)		(17,984	)
Income from equity method investments		1,683			1,643			3,537			4,083

Net income including non-controlling interests		20,626			26,048			35,275			46,822
Net income attributable to non-controlling interests		(89	)		(119	)		(167	)		(216	)

Net income attributable to H.B. Fuller	$	20,537		$	25,929		$	35,108		$	46,606

Earnings per share attributable to H.B. Fuller common stockholders:
Basic	$	0.41		$	0.52		$	0.70		$	0.93
Diluted	$	0.40		$	0.51		$	0.69		$	0.91
Weighted-average common shares outstanding:
Basic		49,956			49,935			49,933			49,876
Diluted		51,175			51,152			51,215			51,090
Dividends declared per common share	$	0.120		$	0.100		$	0.220		$	0.185

See accompanying Notes to Condensed Consolidated Financial Statements.

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)


	13 Weeks Ended						26 Weeks Ended
	May 31,			June 1,			May 31,			June 1,
	2014			2013			2014			2013
Net income including non-controlling interests	$	20,626		$	26,048		$	35,275		$	46,822
Other comprehensive income (loss)
Foreign currency translation		(1,377	)		(5,647	)		(830	)		(9,109	)
Defined benefit pension plans adjustment, net of tax		1,021			1,965			2,039			3,941
Interest rate swaps, net of tax		10			10			20			20
Cash-flow hedges, net of tax		29			(21	)		32			189

Other comprehensive income (loss)		(317	)		(3,693	)		1,261			(4,959	)

Comprehensive income		20,309			22,355			36,536			41,863
Less: Comprehensive income attributable to non-controlling interests		97			73			164			177

Comprehensive income attributable to H.B. Fuller	$	20,212		$	22,282		$	36,372		$	41,686

See accompanying Notes to Condensed Consolidated Financial Statements.

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)


	May 31,			November 30,
	2014			2013
Assets
Current assets:
Cash and cash equivalents	$	95,044		$	155,121
Trade receivables (net of allowances—$8,951 and $8,539, for May 31, 2014 and November 30, 2013, respectively)		354,436			331,125
Inventories		281,914			221,537
Other current assets		99,272			85,046
Current assets of discontinued operations		1,865			1,865

Total current assets		832,531			794,694

Property, plant and equipment		1,100,261			1,032,792
Accumulated depreciation		(615,213	)		(598,405	)

Property, plant and equipment, net		485,048			434,387

Goodwill		264,389			263,103
Other intangibles, net		208,200			219,401
Other assets		170,647			161,443

Total assets	$	1,960,815		$	1,873,028

Liabilities, redeemable non-controlling interest and total equity
Current liabilities:
Notes payable	$	29,466		$	20,589
Trade payables		222,284			201,575
Accrued compensation		51,431			76,218
Income taxes payable		8,233			10,830
Other accrued expenses		52,330			46,566
Current liabilities of discontinued operations		5,000			5,000

Total current liabilities		368,744			360,778

Long-term debt, excluding current maturities		536,584			472,315
Accrued pension liabilities		45,988			52,922
Other liabilities		49,755			51,835

Total liabilities		1,001,071			937,850

Commitments and contingencies		—			—
Redeemable non-controlling interest		4,886			4,717
Equity:
H.B. Fuller stockholders’ equity:
Preferred stock (no shares outstanding) Shares authorized – 10,045,900		—			—
Common stock, par value $1.00 per share, Shares authorized – 160,000,000, Shares outstanding – 50,193,237 and 50,228,543, for May 31, 2014 and November 30, 2013, respectively		50,193			50,229
Additional paid-in capital		43,647			44,490
Retained earnings		931,311			907,308
Accumulated other comprehensive income (loss)		(70,698	)		(71,962	)

Total H.B. Fuller stockholders’ equity		954,453			930,065

Non-controlling interests		405			396

Total equity		954,858			930,461

Total liabilities, redeemable non-controlling interest and total equity	$	1,960,815		$	1,873,028

See accompanying Notes to Condensed Consolidated Financial Statements.

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Total Equity

(In thousands)

(Unaudited)


	H.B. Fuller Company Shareholders
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total
Balance at December 1, 2012	$	49,903		$	37,965		$	830,031		$	(139,626	)	$	425		$	778,698
Comprehensive income								96,761			67,664			370			164,795
Dividends								(19,484	)								(19,484	)
Stock option exercises		462			8,429												8,891
Share-based compensation plans other, net		301			12,621												12,922
Excess tax benefit on share-based compensation					2,676												2,676
Repurchases of common stock		(437	)		(17,201	)											(17,638	)
Redeemable non-controlling interest														(399	)		(399	)

Balance at November 30, 2013		50,229			44,490			907,308			(71,962	)		396			930,461
Comprehensive income								35,108			1,264			164			36,536
Dividends								(11,105	)								(11,105	)
Stock option exercises		216			4,435												4,651
Share-based compensation plans other, net		64			7,405												7,469
Excess tax benefit on share-based compensation					2,450												2,450
Repurchases of common stock		(316	)		(15,133	)											(15,449	)
Redeemable non-controlling interest														(155	)		(155	)

Balance at May 31, 2014	$	50,193		$	43,647		$	931,311		$	(70,698	)	$	405		$	954,858

See accompanying Notes to Condensed Consolidated Financial Statements.

H.B. FULLER COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	26 Weeks Ended
	May 31, 2014			June 1, 2013
Cash flows from operating activities from continuing operations:
Net income including non-controlling interests	$	35,275		$	46,822
Adjustments to reconcile net income including non-controlling interests to net cash provided by (used in) operating activities from continuing operations:
Depreciation		22,073			18,887
Amortization		11,578			11,101
Deferred income taxes		(586	)		(428	)
(Income) from equity method investments, net of dividends received		(3,537	)		4,984
Share-based compensation		7,148			6,215
Excess tax benefit from share-based compensation		(2,450	)		(2,029	)
Change in assets and liabilities, net of effects of acquisitions and discontinued operations:
Trade receivables, net		(23,847	)		1,152
Inventories		(60,635	)		(16,950	)
Other assets		(12,569	)		(8,959	)
Trade payables		27,122			1,046
Accrued compensation		(24,921	)		(11,951	)
Other accrued expenses		5,601			(1,888	)
Income taxes payable		(3,990	)		(8,231	)
Accrued / prepaid pensions		(9,071	)		(1,499	)
Other liabilities		(3,211	)		(4,280	)
Other		2,180			6,719

Net cash provided by (used in) operating activities from continuing operations		(33,840	)		40,711
Cash flows from investing activities from continuing operations:
Purchased property, plant and equipment		(82,142	)		(48,039	)
Purchased businesses		(151	)		1,625
Purchased technology		—			(2,387	)
Proceeds from sale of property, plant and equipment		1,797			353

Net cash used in investing activities from continuing operations		(80,496	)		(48,448	)
Cash flows from financing activities from continuing operations:
Proceeds from long-term debt		175,000			95,000
Repayment of long-term debt		(110,000	)		(110,000	)
Net proceeds (repayments) from notes payable		9,039			(5,807	)
Dividends paid		(11,024	)		(9,294	)
Distribution to redeemable non-controlling interest		—			(244	)
Proceeds from stock options exercised		4,651			4,371
Excess tax benefit from share-based compensation		2,450			2,029
Repurchases of common stock		(15,449	)		(7,104	)

Net cash provided by (used in) financing activities from continuing operations		54,667			(31,049	)
Effect of exchange rate changes		(408	)		(391	)

Net change in cash and cash equivalents from continuing operations		(60,077	)		(39,177	)
Cash used in operating activities of discontinued operations		—			(74	)

Net change in cash and cash equivalents		(60,077	)		(39,251	)
Cash and cash equivalents at beginning of period		155,121			200,436

Cash and cash equivalents at end of period	$	95,044		$	161,185

Supplemental disclosure of cash flow information:
Dividends paid with company stock	$	81		$	73
Cash paid for interest, net of amount capitalized of $1,950 and $443 for the periods ended May 31, 2014 and June 1, 2013, respectively	$	11,844		$	11,999
Cash paid for income taxes, net of refunds	$	9,493		$	20,406

See accompanying Notes to Condensed Consolidated Financial Statements.

H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts)

(Unaudited)

Note 1: Accounting Policies

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial position, and cash flows in conformity with U.S. generally accepted accounting principles. In our opinion, the unaudited interim Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary for the fair presentation of the results for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended November 30, 2013 as filed with the Securities and Exchange Commission.

Cash and Cash Equivalents: We review cash and cash equivalent balances on a bank by bank basis to identify book overdrafts. Book overdrafts occur when the amount of outstanding checks exceed the cash deposited at a given bank. Book overdrafts, if any, are included in trade payables in our Condensed Consolidated Balance Sheets and in operating activities from continuing operations in our Condensed Consolidated Statement of Cash Flows.

Recently Adopted Accounting Pronouncements:

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified out of AOCI” which further amended the disclosure requirements for comprehensive income. The update requires entities to disclose items reclassified out of accumulated other comprehensive income (AOCI) and into net income in a single location either in the notes to the Condensed Consolidated Financial Statements or parenthetically on the face of the Condensed Consolidated Statements of Income. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012 and is to be applied prospectively. We adopted the new requirements in the first quarter of our 2014 fiscal year. Since this update impacts disclosure requirements only, the adoption of this update did not have an impact on our condensed consolidated results of operations or financial condition.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” which requires that an unrecognized tax benefit should be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the law. This guidance is effective for fiscal years and interim periods beginning after December 15, 2013 which is our fiscal 2015 and will be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date. We adopted the new requirements in the first quarter of our 2014 fiscal year as early adoption was permitted. The adoption of this update did not have a material impact on our condensed consolidated financial condition.

New Accounting Pronouncements:

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years and interim periods beginning after December 15, 2016 which is our fiscal year beginning on December 3, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU No. 2014-09 will have on our condensed consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Note 2: Acquisitions and Divestitures

Acquisitions

Plexbond Quimica, S.A.: On June 6, 2013 we acquired Plexbond Quimica, S.A., a provider of chemical urethane adhesives and polyester resins based in Curitiba, Brazil. The acquisition was a stock purchase and encompassed all of Plexbond Quimica, S.A. business operations. The purchase price of $10,390 was funded through existing cash and was recorded in our Americas Adhesives operating segment.

The following table summarizes the final fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:


	Preliminary Valuation			Final Purchase		Final Valuation
	November 30, 2013			Price Adjustment		May 31, 2014
Current assets	$	5,179		$		$	5,179
Property, plant and equipment		2,275					2,275
Goodwill		3,626			151		3,777
Other intangibles
Customer relationships		3,529					3,529
Noncompetition agreements		565					565
Other assets		608					608
Current liabilities		(3,684	)				(3,684	)
Other liabilities		(1,859	)				(1,859	)

Total purchase price	$	10,239		$	151	$	10,390

Divestitures

Central America Paints: On August 6, 2012 we completed the sale of our Central America Paints business to Compania Global de Pinturas S.A., a company of Inversiones Mundial S.A. The assets and liabilities of this business are presented on the Condensed Consolidated Balance Sheets as assets and liabilities of discontinued operations. A portion of the cash proceeds was determined to be contingent consideration, pending resolution of purchase agreement contingencies. The contingent consideration was valued at fair value based on level 3 inputs. The contingent consideration was included in current liabilities of discontinued operations in the Condensed Consolidated Balance Sheets at May 31, 2014 and November 30, 2013 as we expect the purchase agreement contingencies to be resolved in 2014.

The major classes of assets and liabilities of discontinued operations as of May 31, 2014 and November 30, 2013 were as follows:


	May 31, 2014		November 30, 2013
Current assets of discontinued operations	$	1,865	$	1,865
Current liabilities of discontinued operations	$	5,000	$	5,000

Note 3: Accounting for Share-Based Compensation

Overview: We have various share-based compensation programs, which provide for equity awards including stock options, restricted stock shares, restricted stock units and deferred compensation. These equity awards fall under several plans and are described in detail in our Annual Report on Form 10-K for the year ended November 30, 2013. Starting in 2014 we will no longer grant restricted stock shares.

Grant-Date Fair Value: We use the Black-Scholes option-pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the 13 weeks and 26 weeks ended May 31, 2014 and June 1, 2013 were calculated using the following weighted average assumptions:


	13 Weeks Ended		26 Weeks Ended
	May 31, 2014	June 1, 2013	May 31, 2014	June 1, 2013
Expected life (in years)	4.75	4.75	4.75	4.75
Weighted-average expected volatility	32.70%	47.65%	34.17%	48.00%
Expected volatility	32.70%	47.65%	32.70% – 37.06%	47.65% – 48.02%
Risk-free interest rate	1.64%	0.69%	1.51%	0.73%
Expected dividend yield	0.84%	1.04%	0.82%	0.87%
Weighted-average fair value of grants	$13.33	$14.27	$14.21	$15.09

Expected life – We use historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. We believe that this historical data is currently the best estimate of the expected term of a new option. We use a weighted-average expected life for all awards.

Expected volatility – Volatility is calculated using our historical volatility for the same period of time as the expected life. We have no reason to believe that our future volatility will differ materially from the past.

Risk-free interest rate – The rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life.

Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price.

Expense Recognition: We use the straight-line attribution method to recognize share-based compensation expense for option awards with graded vesting and restricted stock share and restricted stock units with graded and cliff vesting. The amount of share-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.

Total share-based compensation expense of $3,163 and $2,895 was included in our Condensed Consolidated Statements of Income for the 13 weeks ended May 31, 2014 and June 1, 2013, respectively. Total share-based compensation expense of $7,148 and $6,215 was included in our Condensed Consolidated Statements of Income for the 26 weeks ended May 31, 2014 and June 1, 2013, respectively. All share-based compensation expense was recorded as selling, general and administrative expense. For the 13 weeks ended May 31, 2014 and June 1, 2013 there was $837 and $225 of excess tax benefit recognized, respectively. For the 26 weeks ended May 31, 2014 and June 1, 2013 there was $2,450 and $2,029 of excess tax benefit recognized, respectively.

As of May 31, 2014, there was $9,717 of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 1.3 years. Unrecognized compensation costs related to unvested restricted stock shares was $5,164 which is expected to be recognized over a weighted-average period of 1.5 years. Unrecognized compensation costs related to unvested restricted stock units was $6,249 which is expected to be recognized over a weighted-average period of 1.4 years.

Share-based Activity

A summary of option activity as of May 31, 2014 and changes during the 26 weeks then ended is presented below:


				Weighted-
				Average
	Options			Exercise Price
Outstanding at November 30, 2013		2,429,961		$	25.74
Granted		415,079			48.90
Exercised		(215,641	)		21.57
Forfeited or cancelled		(19,025	)		33.81

Outstanding at May 31, 2014		2,610,374		$	29.71

The total fair values of options granted during the 13 weeks ended May 31, 2014 and June 1, 2013 were $106 and $277, respectively. Total intrinsic values of options exercised during the 13 weeks ended May 31, 2014 and June 1, 2013 were $3,119 and $533, respectively. Intrinsic value is the difference between our closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The total fair values of options granted during the 26 weeks ended May 31, 2014 and June 1, 2013 were $5,899 and $6,823, respectively. Total intrinsic values of options exercised during the 26 weeks ended May 31, 2014 and June 1, 2013 were $5,792 and $4,770, respectively. Proceeds received from option exercises during the 13 weeks ended May 31, 2014 and June 1, 2013 were $2,646 and $597, respectively and $4,651 and $4,371 during the 26 weeks ended May 31, 2014 and June 1, 2013, respectively.

A summary of nonvested restricted stock as of May 31, 2014 and changes during the 26 weeks then ended is presented below:


												Weighted-
										Weighted-		Average
										Average		Remaining
										Grant		Contractual
										Date Fair		Life
	Units			Shares			Total			Value		(in Years)
Nonvested at November 30, 2013		135,231			312,445			447,676		$	33.76		1.2
Granted		124,387			—			124,387			48.89		1.7
Vested		(65,911	)		(111,291	)		(177,202	)		48.20		—
Forfeited		(335	)		(6,161	)		(6,496	)		35.43		1.3

Nonvested at May 31, 2014		193,372			194,993			388,365		$	40.49		1.4

Total fair values of restricted stock vested during the 13 weeks ended May 31, 2014 and June 1, 2013 were $251 and $278, respectively. Total fair values of restricted stock vested during the 26 weeks ended May 31, 2014 and June 1, 2013 were $8,541 and $6,550, respectively. The total fair value of nonvested restricted stock at May 31, 2014 was $11,413.

We repurchased 2,249 and 1,972 restricted stock shares during the 13 weeks ended May 31, 2014 and June 1, 2013, respectively and 66,312 and 61,624 during the 26 weeks ended May 31, 2014 and June 1, 2013, respectively The repurchases relate to statutory minimum tax withholding.

We have a Directors’ Deferred Compensation plan that allows non-employee directors to defer all or a portion of their directors’ compensation in a number of investment choices, including units representing shares of our common stock. We also have a Key Employee Deferred Compensation Plan that allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of our common stock. We provide a 10 percent match on deferred compensation invested into units, representing shares of our common stock. A summary of deferred compensation units as of May 31, 2014, and changes during the 26 weeks then ended is presented below:


	Non-employee
	Directors			Employees			Total
Units outstanding November 30, 2013		312,680			61,288			373,968
Participant contributions		6,556			1,212			7,768
Company match contributions		656			121			777
Payouts		(298	)		(7,257	)		(7,555	)

Units outstanding May 31, 2014		319,594			55,364			374,958

Deferred compensation units are fully vested at the date of contribution.

Note 4: Earnings Per Share

A reconciliation of the common share components for the basic and diluted earnings per share calculations follows:

13 Weeks Ended

26 Weeks Ended

May 31,

June 1,

May 31,

June 1,

(Shares in thousands)

2014

2013

2014

2013

Weighted-average common shares—basic

49,956

49,935

49,933

49,876

Equivalent shares from share-based compensations plans

1,219

1,217

1,282

1,214

Weighted-average common and common equivalent shares—diluted

51,175

51,152

51,215

51,090

Basic earnings per share is calculated by dividing net income attributable to H.B. Fuller by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is based upon the weighted-average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to share-based compensation awards. We use the treasury stock method to calculate the effect of outstanding shares, which computes total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.

Options to purchase 407,145 shares of common stock at a weighted-average exercise price of $48.93 for the 13 weeks and 26 weeks ended May 31, 2014, were excluded from the diluted earnings per share calculations because they were antidilutive. Our 2013 first and second quarter-end stock prices were higher than any of our stock option grant prices at that time, therefore no option shares were excluded from the diluted earnings per share calculations for the second quarter and first six months of 2013.

Note 5: Accumulated Other Comprehensive Income (Loss)

The following table provides details of total comprehensive income (loss):


	13 Weeks Ended May 31, 2014											13 Weeks Ended June 1, 2013
	H.B. Fuller Stockholders									Non- controlling Interests		H.B. Fuller Stockholders									Non- controlling Interests
	Pretax			Tax			Net			Net		Pretax			Tax			Net			Net
Net income including non-controlling interests							$	20,537		$	89							$	25,929		$	119
Other comprehensive income (loss)
Foreign currency translation adjustment¹	$	(1,385	)		—			(1,385	)		8	$	(5,601	)		—			(5,601	)		(46	)
Reclassification to earnings:
Defined benefit pension plans adjustment²		1,670			(649	)		1,021					3,026			(1,061	)		1,965
Interest rate swap³		14			(4	)		10					14			(4	)		10
Cash-flow hedges³		47			(18	)		29					(34	)		13			(21	)

Other comprehensive income (loss)	$	346		$	(671	)		(325	)		8	$	(2,595	)	$	(1,052	)		(3,647	)		(46	)

Comprehensive income							$	20,212		$	97							$	22,282		$	73


	26 Weeks Ended May 31, 2014												26 Weeks Ended June 1, 2013
	H.B. Fuller Stockholders									Non- controlling Interests			H.B. Fuller Stockholders									Non- controlling Interests
	Pretax			Tax			Net			Net			Pretax			Tax			Net			Net
Net income including non-controlling interests							$	35,108		$	167								$	46,606		$	216
Other comprehensive income (loss)
Foreign currency translation adjustment¹	$	(827	)		—			(827	)		(3	)	$	(9,070	)		—			(9,070	)		(39	)
Reclassification to earnings:
Defined benefit pension plans adjustment²		3,326			(1,287	)		2,039						6,067			(2,126	)		3,941
Interest rate swap³		28			(8	)		20						28			(8	)		20
Cash-flow hedges³		53			(21	)		32						308			(119	)		189

Other comprehensive income (loss)	$	2,580		$	(1,316	)		1,264			(3	)	$	(2,667	)	$	(2,253	)		(4,920	)		(39	)

Comprehensive income							$	36,372		$	164								$	41,686		$	177

¹	Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries.

²	Loss reclassified from AOCI into earnings as part of net periodic cost related to pension and other postretirement benefit plans is reported in cost of sales, SG&A and special charges.

³	Loss reclassified from AOCI into earnings is reported in other income (expense), net.

The components of accumulated other comprehensive income (loss) follow:


	May 31, 2014
	Total			H.B. Fuller Stockholders			Non-controlling Interests
Foreign currency translation adjustment	$	49,041		$	49,051		$	(10	)
Defined benefit pension plans adjustment, net of taxes of $63,923		(119,616	)		(119,616	)		—
Interest rate swap, net of taxes of $28		(74	)		(74	)		—
Cash-flow hedges, net of taxes of $36		(59	)		(59	)		—

Accumulated other comprehensive income (loss)	$	(70,708	)	$	(70,698	)	$	(10	)


	November 30, 2013
	Total			H.B. Fuller Stockholders			Non-controlling Interests
Foreign currency translation adjustment	$	49,871		$	49,878		$	(7	)
Defined benefit pension plans adjustment, net of taxes of $65,210		(121,655	)		(121,655	)		—
Interest rate swap, net of taxes of $36		(94	)		(94	)		—
Cash-flow hedges, net of taxes of $57		(91	)		(91	)		—

Accumulated other comprehensive income (loss)	$	(71,969	)	$	(71,962	)	$	(7	)

Note 6: Special Charges, net

The integration of the Forbo industrial adhesives business we acquired in March 2012 involves a significant amount of restructuring and capital investment to optimize the new combined entity. In addition, we are taking a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We have combined these two initiatives into a single project which we refer to as the “Business Integration Project”. During the 13 weeks ended May 31, 2014 and June 1, 2013, we incurred special charges, net of $13,538 and $10,843, respectively and $25,272 and $16,176 for the 26 weeks ended May 31, 2014 and June 1, 2013, respectively for costs related to the Business Integration Project.

The following table provides detail of special charges, net:


	13 Weeks Ended				26 Weeks Ended
	May 31, 2014		June 1, 2013		May 31, 2014		June 1, 2013
Acquisition and transformation related costs	$	2,578	$	1,884	$	4,286	$	4,166
Workforce reduction costs		899		3,697		2,958		4,181
Facility exit costs		7,326		3,267		12,452		5,056
Other related costs		2,735		1,995		5,576		2,773

Special charges, net	$	13,538	$	10,843	$	25,272	$	16,176

Acquisition and transformation related costs of $2,578 for the 13 weeks ended May 31, 2014 and $1,884 for the 13 weeks ended June 1, 2013 include costs related to organization consulting, financial advisory and legal services necessary to integrate the Forbo industrial adhesives business into our existing operating segments. For the 26 weeks ended May 31, 2014 and June 1, 2013 we incurred acquisition and transformation related costs of $4,286 and $4,166, respectively. During the 13 weeks ended May 31, 2014, we incurred workforce reduction costs of $899, cash facility exit costs of $5,708 and non-cash facility exit costs of $1,618 and other incremental transformation related costs of $2,735 including the cost of personnel directly working on the integration. During the 26 weeks ended May 31, 2014, we incurred workforce reduction costs of $2,958, cash facility exit costs of $9,282 and non-cash facility exit costs of $3,170 and other incremental transformation related costs of $5,576 including the cost of personnel directly working on the integration. During the 13 weeks and 26 weeks ended June 1, 2013, we incurred workforce reduction costs of $3,697 and 4,181, respectively, cash facility exit costs of $2,316 and $3,714, respectively, non-cash facility exit costs of $951 and $1,342, respectively and other incremental transformation related costs of $1,995 and $2,773, respectively including the cost of personnel directly working on the integration.

For the 26 weeks ended May 31, 2014, the activity in accrued compensation associated with the Business Integration Project, is as follows:


	Workforce Reduction Costs
Balance at November 30, 2013	$	18,057
Workforce reduction costs		2,958
Cash payments		(13,433	)
Foreign currency translation adjustment		(53	)

Balance at May 31, 2014	$	7,529

Of the $7,529 in accrued workforce reduction costs at May 31, 2014, $6,654 was included in accrued compensation and $875 was included in other liabilities on our Condensed Consolidated Balance Sheets as this portion was not expected to be paid within the next year. The benefits were accrued based primarily on the formal severance plans in place for the various locations. The special charges are not allocated to our operating segments.

Note 7: Components of Net Periodic Cost (Benefit) related to Pension and Other Postretirement Benefit Plans


	13 Weeks Ended May 31, 2014 and June 1, 2013
													Other
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
Net periodic cost (benefit):	2014			2013			2014			2013			2014			2013
Service cost	$	24		$	27		$	438		$	416		$	109		$	156
Interest cost		4,021			3,680			1,924			1,820			536			533
Expected return on assets		(5,967	)		(5,680	)		(2,736	)		(2,318	)		(1,185	)		(931	)
Amortization:
Prior service cost		7			12			(1	)		(1	)		(943	)		(1,034	)
Actuarial (gain)/ loss		1,144			1,685			784			935			678			1,429

Net periodic cost (benefit)	$	(771	)	$	(276	)	$	409		$	852		$	(805	)	$	153


	26 Weeks Ended May 31, 2014 and June 1, 2013
													Other
	Pension Benefits												Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
Net periodic cost (benefit):	2014			2013			2014			2013			2014			2013
Service cost	$	47		$	54		$	868		$	839		$	217		$	312
Interest cost		8,043			7,360			3,817			3,689			1,072			1,066
Expected return on assets		(11,933	)		(11,360	)		(5,426	)		(4,700	)		(2,371	)		(1,862	)
Amortization:
Prior service cost		14			24			(2	)		(2	)		(1,886	)		(2,068	)
Actuarial (gain)/ loss		2,288			3,370			1,556			1,886			1,355			2,858

Net periodic cost (benefit)	$	(1,541	)	$	(552	)	$	813		$	1,712		$	(1,613	)	$	306

Note 8: Inventories

The composition of inventories follows:


	May 31, 2014			November 30, 2013
Raw materials	$	148,625		$	119,536
Finished goods		153,919			122,584
LIFO reserve		(20,630	)		(20,583	)

Total inventories	$	281,914		$	221,537

Note 9: Financial Instruments

As a result of being a global enterprise, our earnings, cash flows and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables. These items are denominated in various foreign currencies, including the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Argentine peso, Brazilian real, Colombian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee and Malaysian ringgit.

Our objective is to balance, where possible, local currency denominated assets to local currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. We take steps to minimize risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. We do not enter into any speculative positions with regard to derivative instruments.

We enter into derivative contracts with a group of investment grade multinational commercial banks. We evaluate the credit quality of each of these banks on a periodic basis as warranted.

Effective March 5, 2012, we entered into a cross-currency swap agreement to convert a notional amount of $98,738 of foreign currency denominated intercompany loans into US dollars. The swap matures in 2015. As of May 31, 2014, the fair value of the swap was a liability of $3,594 and was included in other liabilities in the Condensed Consolidated Balance Sheets. The swap was designated as cash-flow hedges for accounting treatment. The lesser amount between the cumulative change in the fair value of the actual swap and the cumulative change in the fair value of hypothetical swap is recorded in accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets. The difference between the cumulative change in the fair value of the actual swap and the cumulative change in the fair value of hypothetical swap is recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The ineffectiveness calculations as of May 31, 2014 resulted in additional pre-tax loss of $23 year-to-date as the change in fair value of the cross-currency swap was less than the change in the fair value of the hypothetical swap. The amount in accumulated other comprehensive income (loss) related to cross-currency swap was a loss of $59 at May 31, 2014. The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) at May 31, 2014 that is expected to be reclassified into earnings within the next twelve months is $59. At May 31, 2014, we believe the original forecasted transactions will occur, therefore, we do not believe any gains or losses will be reclassified into earnings as a result of the discontinuance of this cash flow hedge.

The following table summarizes the cross-currency swap outstanding as of May 31, 2014:


	Fiscal Year of Expiration		Interest Rate			Notional Value		Fair Value
Pay EUR		2015		4.30	%	$	98,738	$	(3,594	)
Receive USD				4.45	%

Except for the cross currency swap agreement listed above, foreign currency derivative instruments outstanding are not designated as hedges for accounting purposes. The gains and losses related to mark-to-market adjustments are recognized as other income or expense in the income statement during the periods in which the derivative instruments are outstanding. See Note 14 to Condensed Consolidated Financial Statements for fair value amounts of these derivative instruments.

As of May 31, 2014, we had forward foreign currency contracts maturing between June 6, 2014 and November 3, 2014. The mark-to-market effect associated with these contracts, on a net basis, was a gain of $2 at May 31, 2014. These losses were largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate.

We have interest rate swap agreements to convert $75,000 of our Senior Notes to variable interest rates. The change in fair value of the Senior Notes, attributable to the change in the risk being hedged, was a liability of $5,334 at May 31, 2014 and was included in long-term debt in the Condensed Consolidated Balance Sheets. The fair values of the swaps in total were an asset of $5,293 at May 31, 2014 and were included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. The changes in the fair value of the swap and the fair value of the Senior Notes attributable to the change in the risk being hedged are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the two fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The calculation as of May 31, 2014 resulted in additional pre-tax gain of $94 year-to-date as the fair value of the interest rate swaps increased by more than the change in the fair value of the Senior Notes attributable to the change in the risk being hedged.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities in the customer base and their dispersion across many different industries and countries. As of May 31, 2014, there were no significant concentrations of credit risk.

Note 10: Commitments and Contingencies

Environmental Matters: From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or contribution of us relative to the other parties, the nature and magnitude of the

hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are identified as a “potentially responsible party” (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision.

Currently we are involved in various environmental investigations, clean up activities and administrative proceedings and lawsuits. In particular, we are currently deemed a PRP in conjunction with numerous other parties, in a number of government enforcement actions associated with landfills and/or hazardous waste sites. As a PRP, we may be required to pay a share of the costs of investigation and clean up of these sites. In addition, we are engaged in environmental remediation and monitoring efforts at a number of current and former operating facilities. While uncertainties exist with respect to the amounts and timing of the ultimate environmental liabilities, based on currently available information, we have concluded that these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow.

Other Legal Proceedings: From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including the asbestos litigation described in the following paragraphs, will not have a material adverse effect on our results of operations, financial condition or cash flow.

We have been named as a defendant in lawsuits in which plaintiffs have alleged injury due to products containing asbestos manufactured more than 30 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by us. We are typically dismissed as a defendant in such cases without payment. If the plaintiff presents evidence indicating that compensable injury occurred as a result of exposure to our products, the case is generally settled for an amount that reflects the seriousness of the injury, the length, intensity and character of exposure to products containing asbestos, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

A significant portion of the defense costs and settlements in asbestos-related litigation is paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which we acquired a business from a third party. Currently, this third party is defending and paying settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party.

In addition to the indemnification arrangements with third parties, we have insurance policies that generally provide coverage for asbestos liabilities (including defense costs). Historically, insurers have paid a significant portion of our defense costs and settlements in asbestos-related litigation. However, certain of our insurers are insolvent. We have entered into cost-sharing agreements with our insurers that provide for the allocation of defense costs and under certain circumstances, settlements and judgments, in asbestos-related lawsuits. Under these agreements, we are required under certain circumstances to fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent. In addition, to delineate our rights under certain insurance policies, in October 2009, we commenced a declaratory judgment action against one of our insurers in the United States District Court for the District of Minnesota. Additional insurers have been brought into the action to address issues related to the scope of their coverage. We recently entered into a settlement agreement with the defendant insurers in this case that provided for the allocation of defense costs and settlements in the future. The allocation under the settlement agreement depends on the outcome of an appeal of two issues to the United States Eighth Circuit Court of Appeals.

A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:


	26 Weeks Ended				3 Years Ended
($ in thousands)	May 31, 2014		June 1, 2013		November 30, 2013
Lawsuits and claims settled		4		—		22
Settlement amounts	$	178	$	—	$	1,448
Insurance payments received or expected to be received	$	155	$	—	$	1,087

We do not believe that it would be meaningful to disclose the aggregate number of asbestos-related lawsuits filed against us because relatively few of these lawsuits are known to involve exposure to asbestos-containing products that we manufactured. Rather, we believe it is more meaningful to disclose the number of lawsuits that are settled and result in a payment to the plaintiff. To the extent we can reasonably estimate the amount of our probable liabilities for pending asbestos-related claims, we establish a financial provision and a corresponding receivable for insurance recoveries.

Note 11: Operating Segments

We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. We evaluate the performance of each of our operating segments based on segment operating income, which is defined as gross profit less selling, general and administrative (SG&A) expenses. Segment operating income excludes special charges, net. Corporate expenses are fully allocated to each operating segment. Inter-segment revenues are recorded at cost plus a markup for administrative costs. Operating results of each segment are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance.

Through the third quarter of 2013, our business was reported in five operating segments: North America Adhesives, EIMEA (Europe, India, Middle East and Africa), Latin America Adhesives, Asia Pacific and Construction Products. Changes in our management reporting structure during the fourth quarter of 2013 required us to conduct an operating segment assessment in accordance with ASC Topic 280 “Segment Reporting”, to determine our reportable segments. As a result of this assessment, we now have four reportable segments: Americas Adhesives, EIMEA, Asia Pacific and Construction Products. Prior periods have been restated to reflect our new operating segments.

The tables below provide certain information regarding net revenue and segment operating income of each of our operating segments:

13 Weeks Ended

May 31, 2014

June 1, 2013

Inter-

Segment

Inter-

Segment

Trade

Segment

Operating

Trade

Segment

Operating

Revenue

Income

Revenue

Income

Americas Adhesives

236,985

5,774

31,889

228,773

5,198

31,825

EIMEA

189,656

4,427

10,156

185,194

2,793

14,145

Asia Pacific

67,948

3,107

1,758

62,115

3,788

2,793

Construction Products

49,445

691

2,480

42,934

134

4,047

Total

544,034

46,283

519,016

52,810

26 Weeks Ended

May 31, 2014

June 1, 2013

Inter-

Segment

Inter-

Segment

Trade

Segment

Operating

Trade

Segment

Operating

Revenue

Income

Revenue

Income

Americas Adhesives

446,651

11,453

57,095

436,504

10,076

57,750

EIMEA

361,215

8,533

18,596

362,695

5,469

20,618

Asia Pacific

132,995

6,579

3,546

122,694

7,279

4,767

Construction Products

89,154

963

3,292

76,965

215

5,411

Total

1,030,015

82,529

998,858

88,546

Reconciliation of segment operating income to income before income taxes and income from equity method investments:


	13 Weeks Ended						26 Weeks Ended
	May 31,			June 1,			May 31,			June 1,
	2014			2013			2014			2013
Segment operating income	$	46,283		$	52,810		$	82,529		$	88,546
Special charges, net		(13,538	)		(10,843	)		(25,272	)		(16,176	)
Other income (expense), net		(204	)		(1,814	)		(1,254	)		(1,436	)
Interest expense		(4,760	)		(4,884	)		(8,886	)		(10,211	)

Income before income taxes and income from equity method investments	$	27,781		$	35,269		$	47,117		$	60,723

Note 12: Income Taxes

As of May 31, 2014, we had a $5,295 liability recorded under FASB ASC 740, “Income Taxes” for gross unrecognized tax benefits, excluding interest. As of May 31, 2014, we had accrued $613 of gross interest relating to unrecognized tax benefits. During the second quarter of 2014 our recorded liability for gross unrecognized tax benefits decreased by $48.

Note 13: Goodwill

A summary of goodwill activity for the first six months of 2014 is presented below:


Balance at November 30, 2013	$	263,103
Plexbond Quimica, S.A. acquisition (Note 2)		151
Currency impact		1,135

Balance at May 31, 2014	$	264,389

Note 14: Fair Value Measurements

The following tables present information about our financial assets and liabilities that are measured at fair value on a recurring basis as of May 31, 2014 and November 30, 2013, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

May 31,

Fair Value Measurements Using:

Description

2014

Level 1

Level 2

Level 3

Assets:

Marketable securities

1,271

—

Derivative assets

956

—

956

—

Interest rate swaps

5,293

—

5,293

—

Liabilities:

Derivative liabilities

954

—

954

—

Cash-flow hedges

3,594

—

3,594

—

Contingent consideration liability, continuing operations

354

—

354

Contingent consideration liability, discontinued operations

5,000

—

5,000



	November 30,		Fair Value Measurements Using:
Description	2013		Level 1		Level 2		Level 3
Assets:
Marketable securities	$	28,786	$	28,786	$	—	$	—
Derivative assets		533		—		533		—
Interest rate swaps		5,930		—		5,930		—
Liabilities:
Derivative liabilities	$	1,399	$	—	$	1,399	$	—
Cash-flow hedges		4,801		—		4,801		—
Contingent consideration liability, continuing operations		566		—		—		566
Contingent consideration liability, discontinued operations		5,000		—		—		5,000

Note 15: Share Repurchase Program

On September 30, 2010, the Board of Directors authorized a share repurchase program of up to $100,000 of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduced our common stock for the par value of the shares with the excess being applied against additional paid-in capital.

We did not repurchase any shares during the second quarter of 2014. During the second quarter of 2013 we repurchased shares under this program, with an aggregate value of $4,775. Of this amount, $125 reduced common stock and $4,650 reduced additional paid-in capital. During the first six months of 2014 we repurchased shares under this program, with an aggregate value of $12,254. Of this amount, $250 reduced common stock and $12,004 reduced additional paid-in capital. There were no shares repurchased under this program during the first quarter of 2013.

Note 16: Redeemable Non-Controlling Interest

We account for the non-controlling interest in H.B. Fuller Kimya San. Tic A.S. (HBF Kimya) as a redeemable non-controlling interest because both the non-controlling shareholder and H.B. Fuller have an option, exercisable beginning August 1, 2018, to require the redemption of the shares owned by the non-controlling shareholder at a price determined by a formula based on 24 months trailing EBITDA. Since the option makes the redemption of the non-controlling ownership shares of HBF Kimya outside of our control, these shares are classified as a redeemable non-controlling interest in temporary equity in the Condensed Consolidated Balance Sheets. The non-controlling shareholder is entitled to increase his ownership by 1 percent per year for 5 years up to a maximum of 13 percent ownership based on the achievement of profitability targets in each year. The option is subject to a minimum price of €3,500. The redemption value of the option, if it were currently redeemable, is estimated to be €3,500.

HBF Kimya’s results of operations are consolidated in our financial statements. Both the non-controlling interest and the accretion adjustment to redemption value are included in net income attributable to non-controlling interests in the Condensed Consolidated Statements of Income and in the carrying value of the redeemable non-controlling interest on the Condensed Consolidated Balance Sheets. As of May 31, 2014 the redeemable non-controlling interest was:


Balance at November 30, 2013	$	4,717
Net income attributed to redeemable non-controlling interest		155
Foreign currency translation adjustment		14

Balance at May 31, 2014	$	4,886

Note 17: Subsequent Event

On June 25, 2014 we entered into an agreement to purchase 95 percent of the equity of Tonsan Adhesive, Inc., for 1.4 billion Chinese renminbi (approximately $230,000), subject to certain closing conditions. In addition, the agreement provides for the purchase of the remaining 5 percent under certain circumstances. Tonsan Adhesive, Inc. develops, manufactures and sells a comprehensive range of engineering adhesive products for key durable assembly markets, such as transportation (automotive, rail and shipbuilding), machinery, photovoltaic, electronics and electrical appliances. Tonsan Adhesive, Inc. is based in Beijing, China.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended November 30, 2013 for important background information related to our business.

Net revenue in the second quarter of 2014 increased 4.8 percent over the second quarter of 2013. Sales volume increased 4.8 percent and pricing decreased 0.3 percent compared to last year. The strengthening of the Euro offset by the weakening of the Australian dollar, Canadian dollar, Indian rupee and Turkish lira, compared to the U.S. dollar, for the second quarter of 2014 compared to the second quarter of 2013 were the main drivers of the positive 0.3 percent currency effect. Gross profit margin decreased 200 basis points primarily driven by $2.1 million of business integration costs that are not classified as special charges and $3.2 million for the implementation of our ERP system. We incurred special charges, net of $13.5 million for costs related to the Business Integration Project in the second quarter of 2014 and $10.8 million in the second quarter of 2013.

Net income attributable to H.B. Fuller in the second quarter of 2014 was $20.5 million as compared to $25.9 million in the second quarter of 2013. On a diluted earnings per share basis, the second quarter of 2014 was $0.40 per share as compared to $0.51 per share for the same period last year.

Net revenue in the first six months of 2014 increased 3.1 percent over the first six months of 2013. Sales volume increased 3.6 percent and pricing decreased 0.3 percent compared to last year. The weakening of the Australian dollar, Canadian dollar, Indian rupee and Turkish lira offset by the strengthening of the Euro, compared to the U.S. dollar, for the first six months of 2014 compared to the first six months of 2013 were the main drivers of the negative 0.2 percent currency effect. Gross profit margin decreased 120 basis points primarily driven by $3.5 million of business integration costs that are not classified as special charges and $3.2 million for the implementation of our ERP system. We incurred special charges, net of $25.3 million for costs related to the Business Integration Project in the first six months of 2014 and $16.2 million in the first six months of 2013.

Net income attributable to H.B. Fuller in the first six months of 2014 was $35.1 million as compared to $46.6 million in the first six months of 2013. On a diluted earnings per share basis, the first six months of 2014 was $0.69 per share as compared to $0.91 per share for the same period last year.

Results of Operations

Net revenue:


	13 Weeks Ended							26 Weeks Ended
	May 31,		June 1,		2014 vs			May 31,		June 1,		2014 vs
($ in millions)	2014		2013		2013			2014		2013		2013
Net revenue	$	544.0	$	519.0		4.8	%	$	1,030.0	$	998.9		3.1	%

We review variances in net revenue in terms of changes related to product pricing, sales volume, changes in foreign currency exchange rates and acquisitions. The pricing/sales volume variance and small acquisitions including Plexbond Quimica, S.A., which was acquired in the third quarter of 2013 are viewed as organic growth. The following table shows the net revenue variance analysis for the second quarter and first six months of 2014 compared to the same periods in 2013:


	13 Weeks Ended May 31, 2014			26 Weeks Ended May 31, 2014
	vs June 1, 2013			vs June 1, 2013
Product pricing		(0.3	%)		(0.3	%)
Sales volume		4.8	%		3.6	%
Currency		0.3	%		(0.2	%)

		4.8	%		3.1	%

Organic growth was 4.5 percent in the second quarter of 2014 compared to the second quarter of 2013. Sales volume increased 4.8 percent and pricing was 0.3 percent lower compared to last year. The 4.5 percent organic growth in 2014 was driven by 15.2 percent growth in Construction Products, 13.8 percent growth in Asia Pacific and 4.1 percent growth in Americas Adhesives. The majority of the currency impact was driven by the strengthening of the Euro offset by the weakening of the Australian dollar, Canadian dollar, Indian rupee and Turkish lira compared to the U.S. dollar.

Organic growth was 3.3 percent in the first six months of 2014 compared to the first six months of 2013. Sales volume increased 3.6 percent and pricing was negative 0.3 percent compared to last year. The 3.3 percent organic growth in 2014 was driven by 15.8 percent growth in Construction Products, 12.4 percent growth in Asia Pacific and 2.8 percent growth in Americas Adhesives. The majority of the currency impact was driven by the weakening of the Australian dollar, Canadian dollar, Indian rupee and Turkish lira offset by the strengthening of the Euro compared to the U.S. dollar.

Cost of sales:


	13 Weeks Ended									26 Weeks Ended
	May 31,			June 1,			2014 vs			May 31,			June 1,			2014 vs
($ in millions)	2014			2013			2013			2014			2013			2013
Raw materials	$	310.8		$	295.4			5.2	%	$	585.8		$	567.1			3.3	%
Other manufacturing costs		90.6			77.0			17.7	%		168.5			151.8			11.0	%

Cost of sales	$	401.4		$	372.4			7.8	%	$	754.3		$	718.9			4.9	%
Percent of net revenue		73.8	%		71.8	%					73.2	%		72.0	%

Cost of sales in the second quarter of 2014 compared to second quarter of 2013 increased 7.8 percent. Raw material cost as a percentage of net revenue increased 20 basis points compared to last year. Other manufacturing costs as a percentage of revenue increased 180 basis points compared to last year mainly due to $2.1 million business integration costs that are not classified as special charges and $3.2 million costs associated with the implementation of our ERP system. As a result, cost of sales as a percentage of net revenue increased 200 basis points in the second quarter of 2014 compared to the same period last year.

Cost of sales in the first six months of 2014 compared to first six months of 2013 increased 4.9 percent. Raw material cost as a percentage of net revenue increased 20 basis points compared to the same period last year. Other manufacturing costs as a percentage of revenue increased 100 basis points compared to last year mainly due to $3.5 million business integration costs that are not classified as special charges and $3.2 million costs associated with the implementation of our ERP system. As a result, cost of sales as a percentage of net revenue increased 120 basis points in the first six months of 2014 compared to the same period last year.

Gross profit:


	13 Weeks Ended									26 Weeks Ended
	May 31,			June 1,			2014 vs			May 31,			June 1,			2014 vs
($ in millions)	2014			2013			2013			2014			2013			2013
Gross profit	$	142.7		$	146.6			(2.7	%)	$	275.7		$	280.0			(1.5	%)
Percent of net revenue		26.2	%		28.2	%					26.8	%		28.0	%

Gross profit in the second quarter of 2014 decreased $3.9 million and gross profit margin decreased 200 basis points compared to the second quarter of 2013. Implementation costs of our ERP system and business integration costs that are not classified as special charges were the primary reason for the decrease in gross profit.

Gross profit in the first six months of 2014 decreased by $4.3 million and gross profit margin decreased by 120 basis points compared to the first six months of 2013. Implementation costs of our ERP system and business integration costs that are not classified as special charges were the primary reason for the decrease in gross profit.

Selling, general and administrative (SG&A) expenses:


	13 Weeks Ended									26 Weeks Ended
	May 31,			June 1,			2014 vs			May 31,			June 1,			2014 vs
($ in millions)	2014			2013			2013			2014			2013			2013
SG&A	$	96.4		$	93.8			2.7	%	$	193.2		$	191.4			0.9	%
Percent of net revenue		17.7	%		18.1	%					18.8	%		19.2	%

SG&A expenses for the second quarter of 2014 increased $2.6 million or 2.7 percent compared to the second quarter of 2013. The 40 basis point decrease in SG&A expense as a percentage of net revenue was driven by effective cost controls and the ongoing benefits of the Business Integration Project offset by $4.9 million of costs related to the implementation of our ERP system.

SG&A expenses for the first six months of 2014 increased $1.8 million or 0.9 percent compared to the first six months of 2013. The 40 basis point decrease in SG&A expense as a percentage of net revenue was driven by effective cost controls and the ongoing benefits of the Business Integration Project offset by $4.9 million of costs related to the implementation of our ERP system.

We make SG&A expense plans at the beginning of each fiscal year and barring significant changes in business conditions or our outlook for the future, we maintain these spending plans for the entire year. Management routinely monitors our SG&A spending relative to these fiscal year plans for each operating segment and for the company overall. We feel it is important to maintain a consistent spending program in this area as many of the activities within the SG&A category such as the sales force, technology development, and customer service are critical elements of our business strategy. For the current year we planned SG&A expenses to increase relative to last year by an amount slightly less than our expected growth in net revenue.

Special charges, net:


	13 Weeks Ended							26 Weeks Ended
	May 31,		June 1,		2014 vs			May 31,		June 1,		2014 vs
($ in millions)	2014		2013		2013			2014		2013		2013
Special charges, net	$	13.5	$	10.8		24.9	%	$	25.3	$	16.2		56.2	%

The following table provides detail of special charges, net:


	13 Weeks Ended				26 Weeks Ended
	May 31,		June 1,		May 31,		June 1,
($ in millions)	2014		2013		2014		2013
Acquisition and transformation related costs	$	2.6	$	1.9	$	4.3	$	4.2
Workforce reduction costs		0.9		3.7		3.0		4.2
Facility exit costs		7.3		3.2		12.4		5.0
Other related costs		2.7		2.0		5.6		2.8

Special charges, net	$	13.5	$	10.8	$	25.3	$	16.2

The integration of the industrial adhesives business we acquired in March 2012 involves a significant amount of restructuring and capital investment to optimize the new combined entity. In addition to this acquisition, we announced our intentions to take a series of actions in our existing EIMEA operating segment to improve the profitability and future growth prospects of this operating segment. We have combined these two initiatives into a single project which we refer to as the “Business Integration Project”. During the 13 weeks ended May 31, 2014 and June 1, 2013, we incurred special charges, net of $13.5 million and $10.8 million respectively, for costs related to the Business Integration Project. During the 26 weeks ended May 31, 2014 and June 1, 2013, we incurred special charges, net of $25.3 million and $16.2 million respectively, for costs related to the Business Integration Project.

Acquisition and transformation related costs of $2.6 million for the 13 weeks ended May 31, 2014 and $1.9 million for the 13 weeks ended June 1, 2013 include costs related to organization consulting, financial advisory and legal services necessary to integrate the acquired business into our existing operating segments. During the 13 weeks ended May 31, 2014, we incurred workforce reduction costs of $0.9 million, cash facility exit costs of $5.7 million, non-cash facility exit costs of $1.6 million and other incremental transformation related costs of $2.7 million including the cost of personnel directly working on the integration. During the 13 weeks ended June 1, 2013, we incurred workforce reduction costs of $3.7 million, cash facility exit costs of $2.3 million, non-cash facility exit costs of $0.9 million and other incremental transformation related costs of $2.0 million including the cost of personnel directly working on the integration.

Acquisition and transformation related costs of $4.3 million for the 26 weeks ended May 31, 2014 and $4.2 million for the 26 weeks ended June 1, 2013 include costs related to organization consulting, financial advisory and legal services necessary to integrate the acquired business into our existing operating segments. During the 26 weeks ended May 31, 2014, we incurred workforce reduction costs of $3.0 million, cash facility exit costs of $9.3 million, non-cash facility exit costs of $3.1 million and other incremental transformation related costs of $5.6 million including the cost of personnel directly working on the integration. During the 26 weeks ended June 1, 2013, we incurred workforce reduction costs of $4.2 million, cash facility exit costs of $3.7 million, non-cash facility exit costs of $1.3 million and other incremental transformation related costs of $2.8 million including the cost of personnel directly working on the integration.

We present operating segment information consistent with how we organize our business internally, assess performance and make decisions regarding the allocation of resources. Segment operating income is defined as gross profit less selling, general and administrative expenses. Because this definition excludes special charges, we have not allocated special charges to the operating segments or included them in Management’s Discussion & Analysis of operating segment results. For informational purposes only, the following table provides the special charges, net attributable to each operating segment for the periods presented:


	13 Weeks Ended				26 Weeks Ended
	May 31,		June 1,		May 31,		June 1,
($ in millions)	2014		2013		2014		2013
Americas Adhesives	$	0.8	$	2.1	$	1.3	$	3.6
EIMEA		11.2		7.9		21.7		10.9
Asia Pacific		1.0		0.4		1.4		0.5
Company-wide		0.5		0.4		0.9		1.2

Special Charges, net	$	13.5	$	10.8	$	25.3	$	16.2

The benefits of the Business Integration Project are expected to be substantial. We have plans to create annual cash cost savings and other cash pretax profit improvement benefits aggregating to $90.0 million when the various integration activities are completed in 2014. By 2015, the Business Integration Project activities are expected to improve the EBITDA margin of the global business from just under 11 percent in 2011 to a target level of 15 percent. The project incorporates many different work streams each of which has a specific timeline for completion and delivery of benefits. Taking the expected impact of all initiatives into account, the profit improvement benefits should drive steady annual improvement in EBITDA margin until the target level is achieved in 2015.

We estimated the total costs of the Business Integration Project to be approximately $125.0 million. Primarily due to delays in completing the EIMEA portion of the project, we expect total project costs will exceed this estimate by an immaterial amount. The following table provides detail of costs incurred inception-to-date as of May 31, 2014 for the Business Integration Project:


	Costs Incurred
	Inception-to-Date
($ in millions)	as of May 31, 2014
Acquisition and transformation related costs	$	38.7
Work force reduction costs		40.9
Cash facility exit costs		22.1
Non-cash facility exit costs		12.5
Other related costs		16.2

Business Integration Project	$	130.4

The costs associated with the acquisition integration and the cash costs of the restructuring are incremental cash outlays that will be funded with existing cash and cash generated from operations. Non-cash costs are primarily related to accelerated depreciation of long-lived assets.

The capital expenditures related to the Business Integration Project are significant. In 2014, we expect to spend approximately $45.0 million to complete the Business Integration Project. This capital spending forecast, which is consistent with our original forecast, will be funded from the operating cash flows of the business and if necessary, from available cash and short-term borrowing.

When we report our progress on achieving our profit improvement initiatives each quarter we focus on three key metrics which capture the bulk of the Business Integration Project objectives: (1) cost savings achieved through workforce reductions, (2) cost reductions achieved through facility closures and consolidation and (3) the EBITDA margin of the business relative to our expected trend over the timeframe of the project.

For the quarter ended May 31, 2014, we achieved cost savings of $4.4 million related to workforce reductions and $1.1 million related to facility closures and consolidations. For the quarter ended June 1, 2013, we achieved cost savings of $3.6 million related to workforce reductions and $3.1 million related to facility closures and consolidations. The above cost savings represent benefits from selected activities included in the Business Integration Project. For the quarter ended May 31, 2014 and June 1, 2013, we achieved EBITDA margin of 11.5 percent and 12.9 percent, respectively.

Other income (expense), net:


	13 Weeks Ended								26 Weeks Ended
	May 31,			June 1,			2014 vs		May 31,			June 1,			2014 vs
($ in millions)	2014			2013			2013		2014			2013			2013
Other income (expense), net	$	(0.2	)	$	(1.8	)		NMP	$	(1.3	)	$	(1.4	)		NMP

NMP	= Non-meaningful percentage

Other income (expense), net in the second quarter of 2014 included $0.5 million of currency translation and re-measurement losses offset by $0.2 million of net financing income and $0.1 million of interest income. Other income (expense), net in the second quarter of 2013 included $1.7 million of currency translation and re-measurement losses and $0.3 million of net financing costs offset by $0.2 million of interest income.

For the first six months of 2014, other income (expense), net included $1.8 million of currency translation and re-measurement losses offset by $0.4 million of net financing income and $0.1 million of interest income. Other income (expense), net in the first six months of 2013 included $1.5 million of currency translation and re-measurement losses and $0.3 million of net financing costs offset by $0.4 million of interest income.

Interest expense:


	13 Weeks Ended							26 Weeks Ended
	May 31,		June 1,		2014 vs			May 31,		June 1,		2014 vs
($ in millions)	2014		2013		2013			2014		2013		2013
Interest expense	$	4.8	$	4.9		(2.5	%)	$	8.9	$	10.2		(13.0	%)

Interest expense in the second quarter of 2014 as compared to the same period last year was lower due to higher capitalized interest related to the Business Integration Project and the implementation of our ERP system, offset by higher average debt balances. We capitalized interest expense of $1.0 million in the second quarter of 2014 as compared to $0.4 million in the same period last year.

Interest expense for the first six months of 2014 as compared to same period last year was lower due to higher capitalized interest related to the Business Integration Project and the implementation of our ERP system, offset by higher average debt balances. We capitalized interest expense of $2.0 million for the first six months of 2014 as compared to $0.4 million through the same period last year.

Income taxes:


	13 Weeks Ended									26 Weeks Ended
	May 31,			June 1,			2014 vs			May 31,			June 1,			2014 vs
($ in millions)	2014			2013			2013			2014			2013			2013
Income taxes	$	8.8		$	10.9			(18.6	%)	$	15.4		$	18.0			(14.5	%)
Effective tax rate		31.8	%		30.8	%					32.6	%		29.6	%

Income tax expense of $8.8 million in the second quarter of 2014 includes $0.9 million of discrete tax benefits and $1.6 million of tax benefits relating to special charges for costs related to the Business Integration Project. Excluding the discrete tax benefits and the effects of items included in special charges, the overall effective tax rate was 27.4 percent. Without discrete tax benefits of $0.7 million and the impact of costs related to the Business Integration Project in the second quarter of 2013, the overall effective tax rate was 30.4 percent. The primary reason for the lower rate in the second quarter of 2014 compared to the second quarter of 2013 resulted from changes in the geographic mix of pretax earnings.

Income tax expense of $15.4 million in the first six months of 2014 includes $1.1 million of discrete tax benefits and $3.9 million of tax benefits relating to special charges for costs related to the Business Integration Project. Excluding the discrete tax benefits and the effects of items included in special charges, the overall effective tax rate was 28.1 percent. Without discrete tax benefits of $1.5 million and the impact of costs related to the Business Integration Project in the first six months of 2013, the overall effective tax rate was 30.0 percent. The primary reason for the lower rate for the first six months of 2014 resulted from changes in the geographic mix of pretax earnings compared to the same period last year.

Income from equity method investments:


	13 Weeks Ended							26 Weeks Ended
	May 31,		June 1,		2014 vs			May 31,		June 1,		2014 vs
($ in millions)	2014		2013		2013			2014		2013		2013
Income from equity method investments	$	1.7	$	1.6		2.4	%	$	3.5	$	4.1		(13.4	%)

The income from equity method investments relates to our 50 percent ownership of the Sekisui-Fuller joint venture in Japan.

Net income attributable to non-controlling interests:

13 Weeks Ended

26 Weeks Ended

May 31,

June 1,

2014 vs

May 31,

June 1,

2014 vs

($ in millions)

2014

2013

2014

2013

Net income attributable to non-controlling interests

(0.1

)

(0.1

)

NMP

(0.2

)

(0.2

)

NMP

NMP = Non-meaningful percentage

Net income attributable to non-controlling interests relates to an 11 percent redeemable non-controlling interest in HBF Turkey.

Net income attributable to H.B. Fuller:


	13 Weeks Ended									26 Weeks Ended
	May 31,			June 1,			2014 vs			May 31,			June 1,			2014 vs
($ in millions)	2014			2013			2013			2014			2013			2013
Net income attributable to H.B. Fuller	$	20.5		$	25.9			(20.8	%)	$	35.1		$	46.6			(24.7	%)
Percent of net revenue		3.8	%		5.0	%					3.4	%		4.7	%

The net income attributable to H.B. Fuller for the second quarter of 2014 was $20.5 million compared to $25.9 million for the second quarter of 2013. The second quarter of 2014 included $13.5 million of special charges, net ($12.0 million after tax) for costs related to the Business Integration Project. The second quarter of 2013 included $10.8 million of special charges, net ($8.4 million after tax) for costs related to the Business Integration Project. The diluted earnings per share for the second quarter of 2014 was $0.40 per share as compared to $0.51 per share for the second quarter of 2013.

The net income attributable to H.B. Fuller for the first six months of 2014 was $35.1 million compared to $46.6 million for the first six months of 2013. The first six months of 2014 included $25.3 million of special charges, net ($21.4 million after tax) for costs related to the Business Integration Project. The first six months of 2013 included $16.2 million of special charges, net ($12.6 million after tax) for costs related to the Business Integration Project. The diluted earnings per share for the first six months of 2014 was $0.69 per share as compared to $0.91 per share for the same period last year.

Operating Segment Results

The tables below provide certain information regarding the net revenue and segment operating income of each of our operating segments. The pricing/sales volume variance is viewed as organic growth. For segment evaluation by the chief operating decision maker, segment operating income is defined as gross profit less SG&A expenses and excludes special charges, net.

Net Revenue by Segment:


	13 Weeks Ended										26 Weeks Ended
	May 31, 2014					June 1, 2013					May 31, 2014					June 1, 2013
	Net		% of			Net		% of			Net		% of			Net		% of
($ in millions)	Revenue		Total			Revenue		Total			Revenue		Total			Revenue		Total
Americas Adhesives	$	236.9		44	%	$	228.8		44	%	$	446.6		43	%	$	436.5		44	%
EIMEA		189.6		35	%		185.2		36	%		361.2		36	%		362.7		36	%
Asia Pacific		68.0		12	%		62.1		12	%		133.0		12	%		122.7		12	%
Construction Products		49.5		9	%		42.9		8	%		89.2		9	%		77.0		8	%

Total	$	544.0		100	%	$	519.0		100	%	$	1,030.0		100	%	$	998.9		100	%


Segment Operating Income:

	13 Weeks Ended										26 Weeks Ended
	May 31, 2014					June 1, 2013					May 31, 2014					June 1, 2013
($ in millions)	Segment Operating Income		% of Total			Segment Operating Income		% of Total			Segment Operating Income		% of Total			Segment Operating Income		% of Total
Americas Adhesives	$	31.9		69	%	$	31.9		60	%	$	57.1		69	%	$	57.7		66	%
EIMEA		10.2		22	%		14.1		27	%		18.6		23	%		20.6		23	%
Asia Pacific		1.7		4	%		2.8		5	%		3.5		4	%		4.8		5	%
Construction Products		2.5		5	%		4.0		9	%		3.3		4	%		5.4		6	%

Total	$	46.3		100	%	$	52.8		101	%	$	82.5		100	%	$	88.5		100	%

The following table provides a reconciliation of segment operating income to income before income taxes and income from equity method investments, as reported on the Condensed Consolidated Statements of Income.


	13 Weeks Ended						26 Weeks Ended
($ in millions)	May 31, 2014			June 1, 2013			May 31, 2014			June 1, 2013
Segment operating income	$	46.3		$	52.8		$	82.5		$	88.5
Special charges, net		(13.5	)		(10.8	)		(25.3	)		(16.2	)
Other income (expense), net		(0.2	)		(1.8	)		(1.2	)		(1.4	)
Interest expense		(4.8	)		(4.9	)		(8.9	)		(10.2	)

Income before income taxes and income from equity method investments	$	27.8		$	35.3		$	47.1		$	60.7

Americas Adhesives


	13 Weeks Ended									26 Weeks Ended
	May 31,			June 1,			2014 vs			May 31,			June 1,			2014 vs
($ in millions)	2014			2013			2013			2014			2013			2013
Net revenue	$	236.9		$	228.8			3.6	%	$	446.6		$	436.5			2.3	%
Segment operating income	$	31.9		$	31.9			0.2	%	$	57.1		$	57.7			(1.1	%)
Segment profit margin %		13.5	%		13.9	%					12.8	%		13.2	%

The following tables provide details of the Americas Adhesives net revenue variances:


	13 Weeks Ended May 31, 2014 vs June 1, 2013			26 Weeks Ended May 31, 2014 vs June 1, 2013
Organic growth		4.1	%		2.8	%
Currency		(0.5	%)		(0.5	%)

Total		3.6	%		2.3	%

Net revenue increased 3.6 percent in the second quarter of 2014 compared to the second quarter of 2013. The 4.1 percent increase in organic growth was attributable to a 4.6 percent increase in sales volume partially offset by a 0.5 percent decrease in pricing. The weaker Canadian dollar compared to the U.S. dollar resulted in a 0.5 percent decrease in net revenue. As a percentage of net revenue, raw material cost decreased 70 basis points. Manufacturing costs as a percentage of net revenue increased 150 basis points compared with the second quarter of last year. The main driver for this increase are costs associated with the implementation of our new ERP system. Segment operating income increased 0.2 percent and segment profit margin as a percentage of net revenue decreased 40 basis points in the second quarter compared to the second quarter last year.

Net revenue increased 2.3 percent in the first six months of 2014 compared to the first six months of 2013. The 2.8 percent increase in organic growth was attributable to a 3.5 percent increase in sales volume partially offset by a 0.7 percent decrease in pricing. The weaker Canadian dollar compared to the U.S. dollar resulted in a 0.5 percent decrease in net revenue. As a percentage of net revenue, raw material cost was flat versus the same period last year. Manufacturing costs as a percentage of net revenue increased 100 basis points compared to the first six months of last year mainly due to costs associated with the implementation of our new ERP system. Segment operating income decreased 1.1 percent and segment profit margin as a percentage of net revenue decreased 40 basis points in the first six months compared to the same period last year.

EIMEA


	13 Weeks Ended									26 Weeks Ended
($ in millions)	May 31, 2014			June 1, 2013			2014 vs 2013			May 31, 2014			June 1, 2013			2014 vs 2013
Net revenue	$	189.6		$	185.2			2.4	%	$	361.2		$	362.7			(0.4	%)
Segment operating income	$	10.2		$	14.1			(28.2	%)	$	18.6		$	20.6			(9.8	%)
Segment profit margin%		5.4	%		7.6	%					5.1	%		5.7	%

The following table provides details of the EIMEA net revenue variances:


	13 Weeks Ended May 31, 2014 vs June 1, 2013			26 Weeks Ended May 31, 2014 vs June 1, 2013
Organic growth		(0.6	%)		(1.9	%)
Currency		3.0	%		1.5	%

Total		2.4	%		(0.4	%)

Net revenue increased 2.4 percent in the second quarter of 2014 compared to the second quarter of 2013. The negative organic growth of 0.6 percent was attributable to a 1.4 percent decrease in sales volume partially offset by 0.8 percent increase in pricing. The positive currency effect of 3.0 percent was a result of a stronger Euro partially offset by weaker Turkish lira, Indian rupee and Egyptian pound compared to the U.S. dollar. Sales volume was down in core Europe reflecting the generally soft end market conditions across most of the region. Sales volume growth was generated in the emerging markets, mainly in India and Turkey. Raw material cost as a percentage of net revenue increased 50 basis points in the second quarter compared to the same quarter last year primarily due to higher vinyl acetate monomer costs. All other manufacturing cost as a percentage of net revenue was 210 basis points higher than last year mainly due to business integration costs that are not classified as special charges. SG&A expenses as a percentage of net revenue declined 40 basis points relative to the prior year. As a result of the above factors, segment operating income decreased 28.2 percent and segment profit margin decreased 220 basis points compared to the second quarter last year.

Net revenue decreased 0.4 percent in the first six months of 2014 compared to the first six months of 2013. The negative organic growth of 1.9 percent was attributable to a 2.7 percent decrease in sales volume partially offset by 0.8 percent increase in pricing. The positive currency effect of 1.5 percent was a result of a stronger Euro partially offset by weaker Turkish lira, Indian rupee and Egyptian pound compared to the U.S. dollar. Sales volume was down in core Europe reflecting the generally soft end market conditions across most of the region. Sales volume growth was generated in the emerging markets, mainly in India and Turkey. Raw material cost as a percentage of net revenue decreased 50 basis points in the first six months compared to the same period last year. All other manufacturing costs as a percentage of net revenue were 130 basis points higher than last year mainly due to business integration costs that are not classified as special charges. SG&A expenses as a percentage of net revenue declined 20 basis points relative to the prior year. As a result of the above factors, segment operating income decreased 9.8 percent and segment profit margin decreased 60 basis points compared to the first six months of last year.

Asia Pacific


	13 Weeks Ended									26 Weeks Ended
($ in millions)	May 31, 2014			June 1, 2013			2014 vs 2013			May 31, 2014			June 1, 2013			2014 vs 2013
Net revenue	$	68.0		$	62.1			9.4	%	$	133.0		$	122.7			8.4	%
Segment operating income	$	1.7		$	2.8			(37.0	%)	$	3.5		$	4.8			(25.6	%)
Segment profit margin %		2.6	%		4.5	%					2.7	%		3.9	%

The following table provides details of Asia Pacific net revenue variances:


	13 Weeks Ended May 31, 2014 vs June 1, 2013			26 Weeks Ended May 31, 2014 vs June 1, 2013
Organic growth		13.8	%		12.4	%
Currency		(4.4	%)		(4.0	%)

Total		9.4	%		8.4	%

Net revenue in the second quarter of 2014 increased 9.4 percent compared to the second quarter last year. The 13.8 percent increase in organic growth was attributable to a 13.6 percent increase in sales volume and a 0.2 percent increase in pricing. The China, Southeast Asia, Korea and Australia markets showed growth compared to the second quarter last year. Negative currency effects of 4.4 percent compared to last year are mainly attributable to Australia and Southeast Asia markets. Raw material costs as a percentage of net revenue increased 200 basis points compared to the second quarter of last year mainly due to sales mix. All other manufacturing costs as a percentage of net revenue increased 210 basis points compared to the second quarter of last year mainly driven by investments made in the electronics business as well as business integration costs that are not classified as special charges. Compared to the second quarter of last year, segment operating income decreased $1.0 million and segment profit margin decreased 190 basis points.

Net revenue in the first six months of 2014 increased 8.4 percent compared to the first six months last year. The 12.4 percent increase in organic growth was attributable to a 12.5 percent increase in sales volume and a 0.1 percent decrease in pricing. The China, Southeast Asia, Korea and Australia markets showed growth compared to the first six months of last year. Negative currency effects of 4.0 percent compared to last year are mainly attributable to Australia and Southeast Asia markets. Raw material costs as a percentage of net revenue increased 200 basis points compared to the first six months of last year mainly due to sales mix. All other manufacturing costs as a percentage of net revenue increased 120 basis points compared to the first six months of last year driven by investments made in the electronics business as well as business integration costs that are not classified as special charges. Compared to the first six months of last year, segment operating income decreased $1.3 million and segment profit margin decreased 120 basis points.

Construction Products


	13 Weeks Ended									26 Weeks Ended
($ in millions)	May 31, 2014			June 1, 2013			2014 vs 2013			May 31, 2014			June 1, 2013			2014 vs 2013
Net revenue	$	49.5		$	42.9			15.2	%	$	89.2		$	77.0			15.8	%
Segment operating income	$	2.5		$	4.0			(38.7	%)	$	3.3		$	5.4			(39.2	%)
Segment profit margin %		5.0	%		9.4	%					3.7	%		7.0	%

The following tables provide details of the Construction Products net revenue variances:


	13 Weeks Ended May 31, 2014 vs June 1, 2013			26 Weeks Ended May 31, 2014 vs June 1, 2013
Organic growth		15.2	%		15.8	%

Net revenue increased 15.2 percent in the second quarter of 2014 compared to the second quarter of 2013. The increase was driven by a 19.9 percent increase in sales volume partially offset by a 4.7 percent decrease in pricing. The increase in sales volume was primarily attributed to continued market share gains with several key retail partners. The decrease in pricing is mainly due to price reductions related to certain product lines in the wholesale channel. Raw material cost as a percentage of net revenue was approximately 290 basis points higher in the second quarter of 2014 compared to last year primarily due to changes in sales mix. Manufacturing costs as a percentage of net revenue increased 180 basis points compared to the second quarter of last year driven mainly by incremental new business. Segment operating income decreased 38.7 percent and segment profit margin decreased 440 basis points in the second quarter compared to the same period last year.

Net revenue increased 15.8 percent in the first six months of 2014 compared to the first six months of 2013. The increase was driven by a 19.6 percent increase in sales volume partially offset by a 3.8 percent decrease in pricing. The increase in sales volume was primarily attributed to continued market share gains with several key retail partners. The decrease in pricing is mainly due to price reductions related to certain product lines in the wholesale channel. Raw material cost as a percentage of net revenue was approximately 220 basis points higher in the first six months of 2014 compared to last year primarily due to changes in sales mix. Manufacturing costs as a percentage of net revenue increased 110 basis points compared to the first six months of last year driven mainly by incremental new business. Segment operating income decreased 39.2 percent and segment profit margin decreased 330 basis points in the first six months compared to the same period last year.

Financial Condition, Liquidity and Capital Resources

Total cash and cash equivalents as of May 31, 2014 were $95.0 million as compared to $155.1 million as of November 30, 2013 and $161.2 million as of June 1, 2013. Of the $95.0 million in cash and cash equivalents as of May 31, 2014, $91.6 million was held outside the United States. Total long and short-term debt was $566.1 million as of May 31, 2014, $492.9 million as of November 30, 2013 and $496.4 million as of June 1, 2013. The total debt to total capital ratio as measured by Total Debt divided by (Total Debt plus Total Equity) was 37.2 percent as of May 31, 2014 as compared to 34.6 percent as of November 30, 2013 and 37.8 percent as of June 1, 2013.

We believe that cash flows from operating activities will be adequate to meet our ongoing liquidity and capital expenditure needs. In addition, we believe we have the ability to obtain both short-term and long-term debt to meet our financing needs for the foreseeable future. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. operations and U.S. capital spending and U.S. pension and other postretirement benefit contributions in addition to funding U.S. acquisitions, dividend payments, debt service and share repurchases as needed. For those international earnings considered to be reinvested indefinitely, we currently have no intention to, and plans do not indicate a need to, repatriate these funds for U.S. operations.

Our credit agreements and note purchase agreements include restrictive covenants that, if not met, could lead to a renegotiation of our credit lines and a significant increase in our cost of financing. At May 31, 2014, we were in compliance with all covenants of our contractual obligations as shown in the following table:


Covenant	Debt Instrument	Measurement	Result as of May 31, 2014
TTM EBITDA / TTM Interest Expense	All Debt Instruments	Not less than 2.5		12.6
Total Indebtedness / TTM EBITDA	All Debt Instruments	Not greater than 3.5		2.5

•

TTM = Trailing 12 months

•

EBITDA for covenant purposes is defined as consolidated net income, plus (i) interest expense, (ii) taxes, (iii) depreciation and amortization, (iv) non-cash impairment losses, (v) extraordinary non-cash losses incurred other than in the ordinary course of business, (vi) nonrecurring extraordinary non-cash restructuring charges, (vii) cash expenses for advisory services and for arranging financing for the Forbo Acquisition (including the non-cash write-off of deferred financing costs and any loss or expense on foreign exchange transactions intended to hedge the purchase price for the Forbo acquisition) with cash expenses not to exceed $25.0 million, and (viii) cash expenses incurred during fiscal years 2011 through 2014 in connection with facilities consolidation, restructuring and integration, discontinuance of operations, work force reduction, sale or abandonment of assets other than inventory, and professional and other fees incurred in connection with the Forbo acquisition or the restructuring of our EIMEA operations, not to exceed $85.0 million in the aggregate, and (x) not to exceed $65.0 million during fiscal year 2012 and (y) not to exceed $65.0 million during fiscal years 2013 and 2014 combined, minus extraordinary non-cash gains incurred other than in the ordinary course of business. For the Total Indebtedness / TTM EBITDA ratio, TTM EBITDA is adjusted for the pro forma results from Material Acquisitions and Material Divestitures as if the acquisition or divestiture occurred at the beginning of the calculation period. Additional detail is provided in the Current Report on Form 8-K dated March 5, 2012.

We believe we have the ability to meet all of our contractual obligations and commitments in fiscal 2014.

Selected Metrics of Liquidity

Key metrics we monitor are net working capital as a percent of annualized net revenue, trade account receivable days sales outstanding (DSO), inventory days on hand, free cash flow and debt capitalization ratio.


	May 31, 2014	June 1, 2013
Net working capital as a percentage of annualized net revenue¹	19.0%	18.0%
Accounts receivable DSO²	60 Days	55 Days
Inventory days on hand³	69 Days	57 Days
Free cash flow⁴	$(127.0) million	$(16.6) million
Total debt to total capital ratio⁵	37.2%	37.8%

¹	Current quarter net working capital (trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables) divided by annualized net revenue (current quarter multiplied by four).

²	Trade receivables net of the allowance for doubtful accounts at the balance sheet date multiplied by 56 (8 weeks) and divided by the net revenue for the last 2 months of the quarter.

³	Total inventory multiplied by 56 and divided by cost of sales (excluding delivery costs) for the last 2 months of the quarter.

⁴	Year-to-date net cash provided by (used in) operations from continuing operations, less purchased property, plant and equipment and dividends paid.

⁵	Total debt divided by (total debt plus total stockholders’ equity).

Another key metric is the return on invested capital, or ROIC. The calculation is represented by total return divided by total invested capital.

•

Total return is defined as: gross profit less SG&A expenses, less taxes at the effective tax rate plus income from equity method investments. Total return is calculated using trailing 12 month information.

•

Total invested capital is defined as the sum of notes payable, current maturities of long-term debt, long-term debt, redeemable non-controlling interest and total equity.

We believe ROIC provides a true measure of return on capital invested and is focused on the long term. The following table shows the ROIC calculations based on the definition above:


($ in millions)	Trailing 12 months as of May 31, 2014			Trailing 12 months as of June 1, 2013
Gross profit	$	565.9		$	558.0
Selling, general and administrative expenses		(376.4	)		(378.2	)
Income taxes at effective rate		(52.2	)		(53.2	)
Income from equity method investments		7.8			9.0

Total return	$	145.1		$	135.6
Total invested capital	$	1,525.8		$	1,317.0
Return on invested capital		9.5	%		10.3	%

Summary of Cash Flows

Cash Flows from Operating Activities from Continuing Operations:


	26 Weeks Ended
($ in millions)	May 31, 2014			June 1, 2013
Net cash provided by (used in) operating activities	$	(33.8	)	$	40.7

Net income including non-controlling interests was $35.3 million in the first six months of 2014 compared to $46.8 million in the first six months of 2013. Depreciation and amortization expense totaled $33.7 million in the first six months of 2014 compared to $30.0 million in the first six months of 2013. Accrued compensation was a use of cash of $24.9 million in 2014 compared to a use of cash of $12.0 million last year. The use of cash in both years is related to payments for our employee incentive plans in the first quarter and to the timing of payments of severance related costs for the Business Integration Project. Income taxes payable was a use of cash of $4.0 million in the first six months of 2014 compared to a use of cash of $8.2 million in same period last year. The use of cash in 2014 and 2013 are related to the timing of income tax payments and accruals.

Changes in net working capital (trade receivables, inventory and trade payables) accounted for a use of cash of $57.3 million compared to a use of cash of $14.8 million last year. The table below provides the cash flow impact due to changes in the components of net working capital:


	26 Weeks Ended
($ in millions)	May 31, 2014			June 1, 2013
Trade receivables, net	$	(23.8	)	$	1.2
Inventory		(60.6	)		(17.0	)
Trade payables		27.1			1.0

Total cash flow impact	$	(57.3	)	$	(14.8	)

•

Trade Receivables, net – Trade Receivables, net was a use of cash of $23.8 million in 2014 compared to a source of cash of $1.2 million in 2013. The use of cash in 2014 compared to the source of cash in 2013 is partially related to higher net revenue and a higher DSO. The DSO was 60 days at May 31, 2014 and 55 days at June 1, 2013.

•

Inventory – Inventory was a use of cash of $60.6 million and $17.0 million in 2014 and 2013, respectively. The higher use of cash in 2014 is related to increased inventory to support the manufacturing transitions as part of the Business Integration Project and the implementation of our ERP system in North America. Inventory days on hand were 69 days as of May 31, 2014 and 57 days as of June 1, 2013.

•

Trade Payables – For the first six months of 2014 trade payables was a source of cash of $27.1 million compared to a source of cash of $1.0 million in 2013. The higher source of cash in 2014 reflects the higher purchases of property, plant and equipment and purchases of inventory that had not been paid at the end of the second quarter.

Cash Flows from Investing Activities from Continuing Operations:


	26 Weeks Ended
($ in millions)	May 31, 2014			June 1, 2013
Net cash used in investing activities	$	(80.5	)	$	(48.4	)

Purchases of property, plant and equipment were $82.1 million in the first six months of 2014 as compared to $48.0 million for the same period of 2013. The increase in 2014 compared to 2013 was primarily related to capital expenditures for the Business Integration Project and the implementation of our ERP system. In the first quarter of 2013, an adjustment of the purchase price for the Forbo industrial adhesives business acquisition reduced cash used in investing activities by $1.6 million.

Cash Flows from Financing Activities from Continuing Operations:


	26 Weeks Ended
($ in millions)	May 31, 2014		June 1, 2013
Net cash provided by (used in) financing activities	$	54.7	$	(31.0	)

Proceeds from long-term debt in the first six months of 2014 were $175.0 million compared to $95.0 million in the first six months of 2013. Repayments of long-term debt were $110.0 million in the first six months of 2014 and $110.0 million in the first six months of 2013. In 2014, the net proceeds from notes payable of $9.0 million was used to finance our continuing operations. In 2013 net repayments from notes payable was $5.8 million. Cash generated from the exercise of stock options was $4.7 million and $4.4 million for the first six months of 2014 and 2013, respectively. Repurchases of common stock were $15.4 million in the first six months of 2014 compared to $7.1 million in the same period of 2013. The higher 2014 repurchases of common stock were due to $12.3 million of repurchases from our 2010 share repurchase program and higher repurchases related to statutory minimum tax withholding in conjunction with the vesting of restricted stock.

Cash Flows from Discontinued Operations:


	26 Weeks Ended
($ in millions)	May 31, 2014		June 1, 2013
Net cash used in operating activities of discontinued operations	$	—	$	(0.1	)

Cash flows from discontinued operations includes cash used in operations of the Central America Paints business.

Forward-Looking Statements and Risk Factors

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this Quarterly Report on Form 10-Q, we discuss expectations regarding our future performance which include anticipated financial performance, savings from restructuring and process initiatives, global economic conditions, liquidity requirements, the impact of litigation and environmental matters, the effect of new accounting pronouncements and one-time accounting charges and credits, and similar matters. This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, our plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Part II, Item 1A. Risk Factors in this report and Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013, identify some of the important factors that could cause our actual results to differ materially from those in any such forward-looking statements. This list of important factors does not include all such factors nor necessarily present them in order of importance. In order to comply with the terms of the safe harbor, we have identified these important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Additionally, the variety of products sold by us and the regions where we do business makes it difficult to determine with certainty the increases or decreases in revenues resulting from changes in the volume of products sold, currency impact, changes in geographic and product mix and selling prices. Our best estimates of these changes as well as changes in other factors have been included. References to volume changes include volume, product mix and delivery charges, combined. These factors should be considered, together with any similar risk factors or other cautionary language, which may be made elsewhere in this Quarterly Report on Form 10-Q.

We may refer to Part II, Item 1A. Risk Factors and this section of the Form 10-Q to identify risk factors related to other forward looking statements made in oral presentations, including investor conferences and/or webcasts open to the public.

This disclosure, including that under “Forward-Looking Statements and Risk Factors,” and other forward-looking statements and related disclosures made by us in this report and elsewhere from time to time, represents our best judgment as of the date the information is given. We do not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public company disclosures (such as in filings with the Securities and Exchange Commission or in company press releases) on related subjects.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk: We are exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and cost of raw materials.

Our financial performance may be negatively affected by the unfavorable economic conditions. Recessionary economic conditions may have an adverse impact on our sales volumes, pricing levels and profitability. As domestic and international economic conditions change, trends in discretionary consumer spending also become unpredictable and subject to reductions due to uncertainties about the future. A general reduction in consumer discretionary spending due to recession in the domestic and international economies, or uncertainties regarding future economic prospects, could have a material adverse effect on our results of operations.

Interest Rate Risk: Exposure to changes in interest rates result primarily from borrowing activities used to fund operations. Committed floating rate credit facilities are used to fund a portion of operations. We believe that probable near-term changes in interest rates would not materially affect financial condition, results of operations or cash flows. The annual impact on interest expense of a one-percentage point interest rate change on the outstanding balance of our variable rate debt as of May 31, 2014 would be approximately $1.6 million or $0.03 per diluted share.

Foreign Exchange Risk: As a result of being a global enterprise, there is exposure to market risks from changes in foreign currency exchange rates, which may adversely affect operating results and financial condition. Approximately 59 percent of net revenue was generated outside of the United States for the first six months of 2014. Principal foreign currency exposures relate to the Euro, British pound sterling, Canadian dollar, Chinese renminbi, Japanese yen, Australian dollar, Argentine peso, Brazilian real, Columbian peso, Mexican peso, Turkish lira, Egyptian pound, Indian rupee and Malaysian ringgit.

Our objective is to balance, where possible, local currency denominated assets to local currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. We enter into cross border transactions through importing and exporting goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in currencies other than the local currency. This also applies to services provided and other cross border agreements among subsidiaries.

We take steps to minimize risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. We do not enter into any speculative positions with regard to derivative instruments.

From a sensitivity analysis viewpoint, based on the financial results of the first six months of 2014, and foreign currency balance sheet positions as of May 31, 2014, a hypothetical overall 10 percent change in the U.S. dollar would have resulted in a change in net income attributable to H.B. Fuller of approximately $2.7 million or $0.05 per diluted share.

Raw Materials: The principal raw materials used to manufacture products include resins, polymers, synthetic rubbers, vinyl acetate monomer and plasticizers. We generally avoid single source supplier arrangements for raw materials. While alternate supplies of most key raw materials are available, unplanned supplier production outages may lead to strained supply-demand situations for several key raw materials such as tackifyers and base polymers. There is also tightness in feed stream chemicals such as ethylene and propylene.

For the six months ended May 31, 2014, our single largest expenditure was the purchase of raw materials. Our objective is to purchase raw materials that meet both our quality standards and production needs at the lowest total cost. Most raw materials are purchased on the open market or under contracts that limit the frequency but not the magnitude of price increases. In some cases, however, the risk of raw material price changes is managed by strategic sourcing agreements which limit price increases to increases in supplier feedstock costs, while requiring decreases as feedstock costs decline. The leverage of having substitute raw materials approved for use wherever possible is used to minimize the impact of possible price increases.

Item 4. Controls and Procedures

(a) Controls and procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our president and chief executive officer and executive vice president, chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)). Based on this evaluation, the president and chief executive officer and the executive vice president, chief financial officer concluded that, as of May 31, 2014, our disclosure controls and procedures were effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) 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 us, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in internal control over financial reporting

We are in the process of implementing a global Enterprise Resource Planning (ERP) system that will upgrade and standardize our information system. The implementation is expected to occur in phases over the next several years. The implementation of a global ERP system will likely affect the processes that constitute our internal control over financial reporting and will require testing for effectiveness.

We have completed the implementation with respect to several subsidiaries/locations and will continue to roll out the ERP system over the next several years. As with any new information system we implement, this application, along with the internal controls over financial reporting included in this process, was appropriately considered within the testing for effectiveness with respect to the implementation in these subsidiaries/locations.

Except as described above, there were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Environmental Matters. From time to time, we become aware of compliance matters relating to, or receive notices from, federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. We review the circumstances of each individual site, considering the number of parties involved, the level of potential liability or contribution of us relative to the other parties, the nature and magnitude of the hazardous substances involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Also, from time to time, we are identified as a “potentially responsible party” (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and/or similar state laws that impose liability for costs relating to the clean up of contamination resulting from past spills, disposal or other release of hazardous substances. We are also subject to similar laws in some of the countries where current and former facilities are located. Our environmental, health and safety department monitors compliance with applicable laws on a global basis. To the extent we can reasonably estimate the amount of our probable liabilities for environmental matters, we establish a financial provision.

Other Legal Proceedings. From time to time and in the ordinary course of business, we are a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, contract, patent and intellectual property, environmental, health and safety, tax and employment matters. While we are unable to predict the outcome of these matters, we have concluded, based upon currently available information, that the ultimate resolution of any pending matter, individually or in the aggregate, including the asbestos litigation described in the following paragraphs, will not have a material adverse effect on our results of operations, financial condition or cash flow.

A summary of the number of and settlement amounts for asbestos-related lawsuits and claims is as follows:


	26 Weeks Ended				3 Years Ended
($ in millions)	May 31, 2014		June 1, 2013		November 30, 2013
Lawsuits and claims settled		4		—		22
Settlement amounts	$	0.2	$	—	$	1.4
Insurance payments received or expected to be received	$	0.2	$	—	$	1.1

Based on currently available information, we have concluded that the resolution of any pending matter, including asbestos-related litigation, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flow. However, adverse developments and/or periodic settlements could negatively impact the results of operations or cash flows in one or more future periods.

Item 1A. Risk Factors

This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013. There have been no material changes in the risk factors disclosed by us under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended November 30, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Information on our purchases of equity securities during the second quarter follows:


Period	(a) Total Number of Shares Purchased¹		(b) Average Price Paid per Share		(d) Maximum Approximate Dollar Value of Shares that may yet be Purchased Under the Plan or Program (millions)
March 2, 2014 – April 5, 2014		140	$	47.66	$	62.0
April 6, 2014 – May 3, 2014		2,109	$	45.62	$	62.0
May 4, 2014 – May 31, 2014		—	$	—	$	62.0

¹	The total number of shares purchased includes: (i) shares purchased under the board’s authorization described below and (ii) shares withheld to satisfy the employees’ withholding taxes upon vesting of restricted stock.

Repurchases of common stock are made to support our stock-based employee compensation plans and for other corporate purposes. Upon vesting of restricted stock awarded to employees, shares are withheld to cover the employees’ minimum withholding taxes.

On September 30, 2010, the Board of Directors authorized a new share repurchase program of up to $100.0 million of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market, from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases is dependent on price, market conditions and applicable regulatory requirements. Upon repurchase of the shares, we reduced our common stock for the par value of the shares with the excess being applied against additional paid-in capital.

Item 6. Exhibits


31.1		Form of 302 Certification –James J. Owens

31.2		Form of 302 Certification –James R. Giertz

32.1		Form of 906 Certification –James J. Owens

32.2		Form of 906 Certification –James R. Giertz

101		The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended May 31, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Total Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				H.B. Fuller Company

Dated: June 27, 2014				/s/ James R. Giertz
				James R. Giertz
				Executive Vice President,
				Chief Financial Officer

Exhibit Index

Exhibits


31.1		Form of 302 Certification – James J. Owens

31.2		Form of 302 Certification – James R. Giertz

32.1		Form of 906 Certification –James J. Owens

32.2		Form of 906 Certification –James R. Giertz

101		The following materials from the H.B. Fuller Company Quarterly Report on Form 10-Q for the quarter ended May 31, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Total Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.