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 December 3, 2011 for important background information related to our business.

We completed the acquisition of the Forbo industrial adhesives business on March 5, 2012. The Forbo industrial adhesives business acquired is referred to as the "acquired business" and the legacy H.B. Fuller business is referred to as the "legacy business" in the MD&A.

Net revenue in the second quarter of 2012 increased 43.1 percent over the second quarter of 2011. Organic sales growth, which we define as revenue growth due to changes in sales volume and selling prices, was a positive 6.1 percent as compared to the second quarter of 2011. The organic sales growth was primarily related to product pricing actions in response to raw material cost inflation. The weakening of the Euro and Australian dollar partially offset by the strengthening of the Chinese renminbi for the second quarter of 2012 compared to the second quarter of 2011 were the main drivers of the negative 2.4 percent currency effect compared to the U.S. dollar. Inclusion of the acquired business increased net revenue by $144.4 million. However, the generally lower margins generated by the acquired business was the primary reason for the 210 basis point decline in gross profit margin. The gross profit margin of the legacy business increased 140 basis points compared to the second quarter of 2011. Our SG&A expenses increased by 32.5 percent in the second quarter of 2012 compared to the same period last year, however, decreased by 140 basis points as a percentage of net revenue. The increase in SG&A expense related to the inclusion of the acquired business and flat year over year SG&A expense in the legacy business. We have combined the acquisition of the acquired business and the EIMEA operating segment transformation into a single project which we refer to as the Business Integration Project. We incurred special charges, net in 2012 of $32.1 million for costs related to the Business Integration Project.

Net income attributable to H.B. Fuller in the second quarter of 2012 was $1.9 million as compared to $25.1 million in the second quarter of 2011. On a diluted earnings per share basis, the second quarter of 2012 was $0.04 per share as compared to $0.50 per share for the same period last year.

For the first six months of 2012 net revenue increased 28.4 percent compared to the first six months of 2011. Organic sales growth was 8.6 percent with product pricing up 8.2 percent and sales volume up 0.4 percent. Year to date organic sales growth was driven by the Construction Products operating segment with double digit growth and the North America Adhesives and EIMEA operating segments nearly achieving double digit growth. The U.S. dollar strengthened against the Euro and Australian dollar and weakened against the Chinese renminbi resulting in a negative 1.6 percent currency effect on year to date net revenue. As discussed in the second quarter analysis above, the inclusion of the acquired business increased net revenue by $144.4 million. However, the lower margins generated by the acquired business was the primary reason for the 40 basis point decline in gross profit margin. The gross profit margin of the legacy business increased 170 basis points compared to the same period last year. Year to date SG&A expenses increased by 21.6 percent compared to the same period last year, however, decreased by 100 basis points as a percentage of net revenue. The increase in SG&A expense related to the inclusion of the acquired business. We incurred special charges, net in 2012 of $38.6 million for costs related to the Business Integration Project.

Year to date net income attributable to H.B. Fuller was $17.2 million as compared to $39.5 million for the same period in 2011. On a diluted earnings per share basis, the first six months of 2012 was $0.34 per share as compared to $0.79 per share for the same period last year.

Results of Operations

Net revenue:



                               13 Weeks Ended                           26 Weeks Ended
                     June 2,      May 28,       2012 vs       June 2,      May 28,       2012 vs
   ($ in millions)     2012         2011         2011           2012         2011         2011
   Net revenue       $  527.0     $  368.4          43.1 %    $  872.4     $  679.5          28.4 %

                                13 Weeks Ended         26 Weeks Ended
                                 June 2, 2012           June 2, 2012
             Product pricing                6.8 %                  8.2 %
             Sales volume                  (0.7 %)                 0.4 %
             Currency                      (2.4 %)                (1.6 %)
             Acquisitions                  39.4 %                 21.4 %

                                           43.1 %                 28.4 %

Organic growth was 6.1 percent (6.8 percent increase from product pricing offset by a 0.7 percent decrease in sales volume) for the second quarter of 2012 as compared to the same period last year. The organic growth was driven by strong growth in the North America Adhesives and EIMEA operating segments. The negative currency effects in the quarter were primarily the result of the weakening of the Euro and Australian dollar partially offset by the strengthening of the Chinese renminbi as compared to the U.S dollar. The inclusion of the acquired business added $144.4 million to net revenue.

Year to date organic growth was 8.6 percent with an increase in product pricing of 8.2 percent and an increase in sales volume of 0.4 percent. All operating segments generated positive organic growth led by the Construction Products, North America Adhesives and EIMEA operating segments. The U.S. dollar strengthening against the Euro and the Australian dollar and weakening against the Chinese renminbi were the primary causes of the 1.6 percent negative currency impact.

Cost of sales:

                                                  13 Weeks Ended                             26 Weeks Ended
                                       June 2,       May 28,        2012 vs       June 2,       May 28,        2012 vs
($ in millions)                          2012          2011          2011           2012          2011          2011
Raw materials                          $  308.5      $  209.6           47.2 %    $  501.5      $  384.5           30.4 %
Other manufacturing costs                  81.9          55.8           46.8 %       131.7         106.4           23.8 %

Cost of sales                          $  390.4      $  265.4           47.1 %    $  633.2      $  490.9           29.0 %
Percent of net revenue                     74.1 %        72.0 %                       72.6 %        72.2 %

The 47.1 percent increase in the cost of sales in the second quarter of 2012 as compared to the second quarter of 2011 was driven by the inclusion of the acquired business and increases in raw material costs. Cost of sales as a percentage of net revenue increased 210 basis points primarily due to lower margins currently generated by the acquired business. Cost of sales as a percentage of net revenue decreased by 140 basis points for the legacy business compared to the second quarter of 2011 as the cumulative impact of pricing actions taken over the past year continued to offset raw material cost inflation. Raw material costs continued to increase primarily due to unfavorable changes in supply and demand. Driven by the significant divergence in the price of petroleum versus natural gas, adhesives raw material suppliers have moved almost entirely towards utilizing natural gas rather than petroleum in their manufacturing process. When suppliers switch to natural gas, fewer raw materials utilized by the adhesives industry are being produced. At the same time, demand for these raw materials continues to increase, both from within the adhesives industry and from other competing markets that utilize the same raw materials. Combined, these conditions continue to result in ongoing raw material cost inflation resulting in higher raw material costs in the second quarter of 2012 compared to the second quarter of 2011. We expect the inflation in raw material costs that we have seen over the past two years to abate for the remainder of this fiscal year as supply and demand have reached better balance for the time being. Our raw material costs are expected to remain at second quarter levels through the end of this year.

Year to date cost of sales increased 29.0 percent and cost of sales as a percentage of net revenue increased 40 basis points compared to the prior year. Similar to the second quarter analysis above, the primary cause of these increases is the inclusion of the acquired business in the second quarter of 2012. Cost of sales as a percentage of net revenue for the legacy business decreased 170 basis points compared to the same period last year as the cumulative impact of pricing actions taken over the past year continued to offset raw material cost inflation.

                                                  13 Weeks Ended                             26 Weeks Ended
                                       June 2,       May 28,        2012 vs       June 2,       May 28,        2012 vs
($ in millions)                          2012          2011          2011           2012          2011          2011
Gross profit                           $  136.6      $  103.0           32.6 %    $  239.2      $  188.6           26.9 %
Percent of net revenue                     25.9 %        28.0 %                       27.4 %        27.8 %

Gross profit for the second quarter of 2012 increased by $33.6 million compared to the second quarter of 2011, however, gross profit margin declined by 210 basis points. The inclusion of the acquired business more than offset improved margins in the legacy business as described in the cost of sales section. We continued to implement selling price increases and work to reformulate away from high cost raw materials to improve our gross profit margin.

Year to date gross profit increased $50.6 million as compared to the same period in 2011. Consistent with the second quarter analysis, the inclusion of the acquired business offset by improved margins in the legacy business drove these results.

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

                                                    13 Weeks Ended                              26 Weeks Ended
                                         June 2,        May 28,        2012 vs       June 2,       May 28,        2012 vs
($ in millions)                           2012           2011           2011           2012          2011          2011
SG&A                                    $    93.0      $    70.1           32.5 %    $  168.0      $  138.1           21.6 %
Percent of net revenue                       17.6 %         19.0 %                       19.3 %        20.3 %

SG&A expenses increased $22.9 million or 32.5 percent compared to the second quarter of 2011. This increase is attributable to the addition of the acquired business as SG&A expenses for the legacy business were flat year over year. The lower relative cost structure of the acquired business and the increase in net revenue for the legacy business resulted in the 140 basis point decrease in SG&A expense as a percentage of net revenue.

Year to date SG&A expenses increased $29.9 million compared to the same period last year. However, SG&A expense as a percentage of net revenue decreased by 100 basis points primarily due to the lower cost structure of the acquired business and net revenue for the legacy business growing at a higher rate than SG&A expenses. We continue to invest for growth by adding resources to our sales and technical organizations.

For the legacy business 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 have planned SG&A expenses to increase relative to last year by an amount slightly less than our expected growth in net revenue. Our analysis of the impact of our SG&A spending in the quarter and the year to date period is generally focused on spending variances that are significantly above or below this planned level.

Special charges, net:

                                                     13 Weeks Ended                            26 Weeks Ended
                                           June 2,       May 28,       2012 vs       June 2,       May 28,       2012 vs
($ in millions)                             2012          2011          2011          2012          2011          2011
Special charges, net                      $    32.1     $      -            NMP     $    38.6     $      -            NMP

NMP = Non-meaningful percentage

The following table provides detail of special charges, net:

--------------------------------------------------------------------------------
                                                    13 Weeks Ended             26 Weeks Ended
($ in millions)                                      June 2, 2012               June 2, 2012
Acquisition and transformation related
costs:
Professional services                              $           11.0           $           19.5
Financing availability costs                                     -                         4.3
Foreign currency option contract                                 -                         0.8
Loss (gain) on foreign currency forward
contracts                                                        -                       (11.6 )
Other related costs                                             0.3                        0.6
Restructuring costs:
Workforce reduction costs                                      19.6                       23.5
Facility exit costs                                             1.2                        1.5

Special charges, net                               $           32.1           $           38.6

We completed the acquisition of the acquired business on March 5, 2012. The integration of this business will involve a significant amount of restructuring and capital investment to optimize the new combined entity. In addition, in July of 2011 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 June 2, 2012 and for the 26 weeks ended June 2, 2012, we incurred special charges, net of $32.1 million and $38.6 million respectively, for costs related to the Business Integration Project.

Acquisition and transformation related costs of $11.0 million for the 13 weeks ended June 2, 2012 and $19.5 million for the 26 weeks ended June 2, 2012, include costs related to organization consulting, investment advisory, financial advisory, legal and valuation services necessary to acquire and integrate the acquired business into our existing operating segments. For the 26 weeks ended June 2, 2012, we also incurred other costs related to the acquisition of the acquired business including an expense of $4.3 million to make a bridge loan available if needed and an expense of $0.8 million related to the purchase of a foreign currency option to hedge a portion of the acquisition purchase price.

During the first quarter of 2012, we purchased forward currency contracts maturing on March 5, 2012 to purchase 370,000 Swiss francs at a blended forward rate of 1.06245 USD/CHF. Our objective was to economically hedge the purchase price for the pending acquisition of the global industrial adhesives business of Forbo Group after the price was established. The currency contracts were not designated as hedges for accounting purposes. At the end of the first quarter on March 3, 2012, the mark-to-market adjustments on these forward currency contracts were a gain of $11.6 million due to the increase of the blended forward rate to 1.09387 USD/CHF. The forward currency contracts were settled on March 5, 2012 at a rate of 1.09385 USD/CHF when the acquisition closed and resulted in a small loss in our second quarter ended June 2, 2012. For the six months ended June 2, 2012, the net gain on the forward currency contracts was $11.6 million which partially offset other acquisition and transformation related costs.

During the 13 weeks ended June 2, 2012, we incurred workforce reduction costs of $19.6 million, facility exit costs of $1.2 million and other costs of $0.3 million related to the Business Integration Project. For the 26 weeks ended June 2, 2012, we incurred workforce reduction costs of $23.5 million, facility exit costs of $1.5 million and other costs of $0.6 million related to the Business Integration Project.

The Business Integration Project is a broad-based transformation plan involving all major processes in three of our existing operating segments. The integration strategy and execution plan is unique for each operating segment reflecting the differences within the legacy operating segments as well as differences within the acquired business in each geographic region. In the North America Adhesives operating segment, the integration work is essentially a consolidation of two similar businesses. The customer facing portion of the two businesses (sales, marketing and technical) will be combined into a new, streamlined organization that is designed to be more efficient and more responsive to customer needs. The production capacity of the two organizations will be optimized mostly by transferring volume from the acquired business to existing facilities within the legacy North America Adhesives operating segment. Since capacity already exists within the receiving facilities, the capital investment required to transfer this production and the time required to affect these transfers will be minimized.

In the EIMEA operating segment, the Business Integration Project touches more aspects of the business and is more complex. The two businesses to be combined have similar inefficiencies and opportunities for improved productivity, generally due to excess complexity within the core processes of each of the businesses. Similar to the North America Adhesives project, the customer facing organizations will be optimized by combining the two organizations into one new, streamlined organization that is more efficient and more responsive to the unique customer groups that we serve. In addition, the support and administrative functions of both businesses will be reorganized and in many cases relocated to create more efficient functions. The integration of the production assets

In the Asia Pacific operating segment, the Business Integration Project is less complex because the acquired business in that region was relatively small. The focus of the integration work in this region will be to build a solid foundation for growth in the commercial and technical areas and, over time, create a more efficient production network in China.

The benefits of the Business Integration Project are expected to be substantial. We have plans to create annual cash cost savings and other cash pre-tax profit improvement benefits aggregating $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. Some of the initiatives, such as raw material cost reductions, will deliver more immediate benefits while other initiatives, such as facility closures, will take longer to implement and the related cost savings will be achieved later in the project. Taking the expected impact of all initiatives into account, the profit improvement benefits from the project and the resulting improvement in EBITDA margin should occur in generally equal increments over the current and subsequent 10 fiscal quarters.

The total costs to achieve these benefits are expected to be approximately $121.0 million of which $46.1 million have been expensed since inception of the Business Integration Project in 2011. The remaining expected costs of approximately $74.9 million will occur over the next several quarters through the end of 2014. The major components of these additional costs include cash costs associated with the integration of the acquired business of approximately $14.5 million, the cash costs associated with the restructuring of the workforce and the manufacturing footprint of approximately $46.5 million, other related costs of approximately $9.4 million and non-cash costs of approximately $4.5 million, primarily related to accelerated depreciation of long-lived assets. The majority of the restructuring costs are expected to occur over the next two years with all initiatives complete no later than the end of 2014. 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. The capital expenditures related to the Business Integration Project will be in large part funded as part of our annual capital spending program which would normally run approximately $40.0 million per year for the legacy business and an additional $10.0 million per year for the acquired business. Overall, we expect our normal annual capital spending program of approximately $50.0 million per year to increase to approximately $65.0 million per year for the years 2012, 2013 and 2014. This capital spending program will be funded from the operating cash flows of the business over the project time frame and, if necessary, from available cash and short term borrowing.

Since inception of the Business Integration Project, we have expensed costs of $46.1 million including acquisition related cost of $21.1 million, workforce reduction costs of $23.5 million and non-cash facility exit costs of $1.5 million. The remaining expected Business Integration Project costs of $74.9 million will be incurred over several quarters as the measures are implemented, and will total approximately $42.1 million in the remainder of fiscal year 2012, approximately $23.8 million in fiscal year 2013 and approximately $9.0 million in fiscal year 2014.

Going forward, we plan to report our progress on achieving our profit improvement initiatives each quarter. We will 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. In addition, the costs to achieve these benefits will be reported relative to the $121 million total expected cost estimate in each reporting period.

The specific work streams of the Business Integration Project which have been approved by management and recorded in our results of operations are as follows:

In January 2012, we initiated a facility closure and transfer plan as part of our previously announced actions in our existing EIMEA operating segment, including the closure of facilities in Wels, Austria and Borgolavezzaro, Italy and the transfer of shared services functions to a single location in Mindelo, Portugal. We expected to incur total

In April 2012, we approved a plan for the integration of the recently acquired Forbo industrial adhesives business in our North America Adhesives operating segment, including the closure of six production facilities located in North America. We expect to incur exit costs of approximately $12.7 million related to these actions. The exit costs for this portion of the Business Integration Project include expenditures of approximately $5.0 million for severance and related employee costs and approximately $7.7 million for other associated cash costs, primarily related to facility shutdowns. This portion of the Business Integration Project began in the second quarter and is expected to be completed by the end of fiscal year 2013.

Asset impairment charges:

                                                   13 Weeks Ended                            26 Weeks Ended
                                         June 2,       May 28,       2012 vs       June 2,       May 28,       2012 vs
($ in millions)                           2012          2011          2011          2012          2011          2011
Asset impairment charges                $     0.7     $      -            NMP     $     0.7     $     0.3           NMP

NMP = Non-meaningful percentage

In the second quarter of 2012, we recorded asset impairment charges of $0.7 . . .