Introduction

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows:

> Overview: This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends.

> Outlook: This section provides a discussion of management's general outlook about market demand, our competitive position and product development.

> Separation from Former Parent: This section provides a general discussion of our Separation from our Former Parent.

> Basis of Presentation: This section provides a discussion of the basis on which our consolidated financial statements were prepared, including our historical results of operations and adjustments thereto, primarily related to allocations of general corporate expenses from our Former Parent.

> Results of Operations: This section provides an analysis of our results of operations for the three years ended December 31, 2011, 2010 and 2009.

> Liquidity and Capital Resources: This section provides a discussion of our financial condition and an analysis of our cash flows for the three years ended December 31, 2011, 2010 and 2009. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 31, 2011, as well as a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital.

> Critical Accounting Policies: This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.

> Quantitative and Qualitative Disclosures about Market Risk: This section discusses how we monitor and manage exposure to potential gains and losses associated with changes in interest rates, foreign currency exchange rates and commodity prices.

Overview

The Company is a leader in home and security products focused on the design, manufacture and sale of market leading branded products in the following categories: kitchen and bath cabinetry, plumbing and accessories, advanced material windows products and entry door systems, and security and storage products.

For the year ended December 31, 2011, net sales based on country of destination were:

                 (In millions)
                 United States                   $ 2,755.0        83 %
                 Canada                              390.3        12
                 China and other international       183.3         5
                 Total                           $ 3,328.6       100 %

Consumer confidence, general economic conditions, existing home sales, new home sales, home prices and credit availability significantly influence demand for our products. During 2008 and 2009, the U.S. home products market declined substantially due to the U.S. recession, resulting in a decrease in home sales and a contraction in new home construction. As a result, our sales and operating income declined substantially, and we implemented initiatives to reduce costs and streamline our supply chains by reducing manufacturing facilities and headcount by approximately 40%.

During 2010 and 2011, market conditions stabilized and our sales increased as a result of growth with new and existing customers. In 2010, our operating income increased significantly compared to 2009 due to favorable operating leverage on higher sales, the benefit of reduced cost structures, and lower restructuring and other charges. In 2011, operating income decreased, primarily due to asset impairment charges, recognition of defined benefit plan actuarial losses, increased raw material and transportation costs, higher restructuring and other charges, and cabinet promotional activity.

Outlook

We expect that a U.S. home products market recovery from the current low levels will be gradual and uneven. The recovery of the U.S. home products market will largely depend on consumer confidence, employment, home prices and credit availability. Over the long term, we believe that the U.S. home products market will benefit from favorable population and immigration trends, which will drive demand for new housing units, and from aging existing housing stock that will continue to need to be repaired and remodeled.

We remain focused on our initiatives designed to outperform our markets. We believe our strong brand positions, consumer focused innovation, flexible and efficient supply chains, and excellent customer service will position our business to perform well in the marketplace. However, we expect that near term results will continue to be challenging as consumers remain cautious. In addition, we expect costs may be higher for raw materials and transportation, a consumer preference for lower-priced valued oriented products will persist, and a heavy promotional environment for large ticket discretionary purchases such as kitchen cabinets will continue through 2012 but remain at about the same level as we experienced in 2011. We strive to offset the unfavorable impact of these items with productivity initiatives and price increases.

Separation from Former Parent

On September 27, 2011, the board of directors of our Former Parent approved the Separation. The Separation was accomplished by increasing the total number of issued and outstanding shares of Home & Security common stock such that 155,052,629 shares of Home & Security common stock were available for distribution to holders of common stock of our Former Parent. In accordance with the Separation and Distribution Agreement between our Former Parent and the Company, the distribution of Home & Security common stock was made on October 3, 2011, with our Former Parent stockholders receiving one share of Home & Security common stock for each share of Former Parent common stock held as of 6:00 p.m. New York City Time on September 20, 2011. In addition, we paid a dividend of $548.9 million to our Former Parent prior to the Separation on October 3, 2011 and made a payment of $6.0 million to our Former Parent on January 3, 2012.

Following the Separation, our Former Parent changed its name to Beam Inc. and retained no ownership interest in Home & Security. Home & Security and Beam Inc. now have separate public ownership, boards of directors and management.

A registration statement on Form 10, as amended (the "Form 10"), describing the Separation was filed by Home & Security with the SEC and was declared effective on September 2, 2011. On October 4, 2011, our common stock began trading "regular-way" on the New York Stock Exchange under the ticker symbol "FBHS".

Basis of Presentation

The consolidated financial statements and segment information included in this Annual Report have been derived principally from the consolidated financial statements of the Company, which prior to the Separation was a wholly-owned subsidiary of our Former Parent, using the historical results of operations, and the historical basis of assets and liabilities. Our historical financial statements include allocations of certain general corporate expenses of Former Parent incurred directly by our Former Parent. During the years ended December 31, 2011, 2010 and 2009, these allocations totaled $23.4 million, $32.0 million and $34.2 million, respectively. The 2011 allocation is for nine months only (January 1, 2011 through the date of the Separation) because Home & Security became an independent company on October 3, 2011. These allocated expenses include costs associated with legal, finance, treasury, accounting, internal audit and general management services and are included in "Corporate" in the accompanying segment information. Management believes that the assumptions and methodologies underlying the allocation of these general corporate expenses are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been incurred by the Company if it had operated as an independent company or of the costs expected to be incurred in the future. The consolidated financial statements included in this Annual Report on Form 10-K may not necessarily reflect the Company's results of operations, financial condition and cash flows in the future or what its results of operations, financial condition and cash flows would have been had the Company been a stand-alone company during the periods presented. In particular:

> Prior to the Separation, substantially all of the Company's debt was payable to our Former Parent. Following the Separation, the Company has a capital structure with significantly less debt than was reflected in the historical financial statements. In 2011, our Former Parent made equity contributions of $2.7 billion to the Company capitalizing intercompany loans outstanding.

> The Company estimates that it would have incurred approximately $14 million of incremental corporate expenses if it had functioned as an independent stand-alone public company for the year ended December 31, 2011 and approximately $20 million of incremental costs for the years ended December 31, 2010 and 2009.

> Our effective tax rate historically reflected the impact of certain unusual items including the resolution of taxing authority audits and changes in valuation allowances, as well as recurring factors including changes in geographical mix of income before taxes and the level of pre-tax income or losses. Our effective tax rate has also historically been impacted by a high level of related party interest expense.

Results of Operations

The following discussion of both consolidated results of operations and segment results of operations refers to the year ended December 31, 2011 compared to the year ended December 31, 2010, and the year ended December 31, 2010 compared to the year ended December 31, 2009. The discussion of consolidated results of operations should be read in conjunction with the discussion of segment results of operations and our financial statements and notes thereto included in this Annual Report on Form 10-K.

Years Ended December 31, 2011, 2010 and 2009



(In millions)                      2011         % change              2010          % change              2009
Net Sales:
Kitchen & Bath Cabinetry      $ 1,256.3              5.7 %       $ 1,188.8               5.6 %       $ 1,125.7
Plumbing & Accessories            962.8              4.2             923.8              10.6             835.0
Advanced Material
Windows & Door Systems            552.9             (8.0 )           600.7               9.1             550.8
Security & Storage                556.6              7.0             520.2               5.0             495.3
Total Home & Security         $ 3,328.6              2.9 %       $ 3,233.5               7.5 %       $ 3,006.8
Operating (Loss) Income:
Kitchen & Bath Cabinetry      $     5.7            (79.8 )%      $    28.2                 - %       $   (25.1 )
Plumbing & Accessories            138.0              4.2             132.5              16.0             114.2
Advanced Material
Windows & Door Systems           (101.2 )              -              17.6                 -             (37.5 )
Security & Storage                 62.6             15.9              54.0              32.7              40.7
Corporate(a)                     (120.7 )              -             (33.9 )            11.3             (38.2 )
Total Home & Security         $   (15.6 )         (107.9 )%      $   198.4             266.7         $    54.1

(a) Corporate expenses include allocations of certain Former Parent general corporate expenses incurred directly by our Former Parent. These allocated expenses include costs associated with legal, finance, treasury, accounting, internal audit and general management services. Corporate expenses also include the components of defined benefit plan expense other than service cost which totaled expense (income) of $74.2 million, $(4.8) million and $(1.2) million for the years ended December 31, 2011, 2010 and 2009, respectively. There are no amounts that are the elimination or reversal of transactions between reportable segments.

Certain items had a significant impact on our results in 2011, 2010 and 2009. These included defined benefit plan recognition of actuarial losses and gains, asset impairment charges, restructuring and other charges and the impact of changes in foreign currency exchange rates.

In 2011, financial results included:

> defined benefit plan recognition of actuarial losses in 2011 of $80.0 million compared to gains of $3.5 million in 2010, primarily due to a decrease in the discount rate as well as a lower than expected rate of return on pension plan assets,

> asset impairment charges of $90.0 million before tax ($55.3 million after tax) associated with the Advanced Material Windows & Door Systems segment, primarily as the result of reduced revenue growth and profit margin expectations associated with our Simonton tradename over the next two to three years. Our revenue and profit margin expectations were lowered based upon the results of our annual planning process that was completed in the fourth quarter and included consideration of our actual fourth quarter 2011 results, including lower 2011 sales due to the expiration of U.S. tax incentives for purchases of energy-efficient home products, as well as our projection of the recovery of the U.S. home products market,

> restructuring and other charges of $20.0 million before tax ($12.5 million after tax) associated with cabinet and window manufacturing facility closures,

> the impact of foreign exchange, which had a favorable impact compared to 2010, of approximately $20 million on net sales, approximately $5 million on operating income and approximately $1 million on net income. The effects of foreign exchange on the Company's results are principally associated with movements in the Canadian dollar and the Euro.

In 2010, financial results included:

> restructuring and other charges of $12.5 million before tax ($8.5 million after tax) associated with product line integration and facility consolidations and

> the impact of foreign exchange, which had a favorable impact compared to 2009, of approximately $40 million on net sales, approximately $15 million on operating income and approximately $10 million on net income. The effects of foreign exchange on the Company's results are principally associated with movements in the Canadian dollar and the Euro.

In 2009, financial results included:

> restructuring and other charges of $52.0 million before tax ($27.5 million after tax) associated with supply chain realignment and capacity and cost reduction initiatives, including the announced closure of seven U.S. manufacturing facilities, as well as workforce reductions.

2011 Compared to 2010

Total Home & Security

Net Sales

Net sales increased $95.1 million, or 3%, to $3,328.6 million. The increase was primarily due to expanding relationships with key customers, new product introductions, the impact of price increases to help mitigate raw material and transportation cost increases, and an approximately $20 million impact of favorable foreign currency. These increases were partially offset by weaker market conditions, including the impact of expiring governmental tax incentives in the U.S. and Canada in 2010, and higher promotional spending.

Cost of products sold

Cost of products sold increased $155.0 million, or 7%, primarily due to recognition of actuarial losses related to defined benefit plans (a $41.0 million loss in 2011 compared to a $2.5 million gain in 2010), higher sales, increased raw material costs (mainly for brass, steel, wood and resins) and costs to support new product introductions. The increase was partially offset by the benefit of productivity initiatives.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $66.3 million, or 8%, primarily due to recognition of actuarial losses related to defined benefit plans (a $39.0 million loss in 2011 compared to a $1.0 million gain in 2010), planned increases in strategic spending to support growth initiatives and new product introductions, as well as higher transportation costs. These increases were partially offset by a lower allocation of general administrative expenses from our Former Parent and other expense reductions. In addition, expense comparisons were unfavorably impacted by the 2010 favorable resolution of litigation (approximately $8 million).

Amortization of intangible assets

Amortization of intangible assets decreased $1.3 million due to a customer relationship intangible that was fully amortized in the third quarter of 2010.

Restructuring charges

Restructuring charges were $4.7 million and $8.0 million in the year ended December 31, 2011 and 2010, respectively. The 2011 charges related to cabinet and window manufacturing facility closures.

Asset impairment charges

In the fourth quarter of 2011, we recorded asset impairment charges of $90.0 million ($55.3 million after tax) related to indefinite-lived tradenames in the Advanced Material Windows & Door Systems segment. These charges were primarily the result of reduced revenue growth and profit margin expectations associated with our Simonton tradename over the next two to three years. Our revenue and profit margin expectations were lowered based upon the results of our annual planning process that was completed in the fourth quarter and included consideration of our actual fourth quarter 2011 results, including lower 2011 sales due to the expiration of U.S. tax incentives for purchases of energy-efficient home products, as well as our projection of the recovery of the U.S. home products market. We did not record asset impairment charges in 2010.

Business separation costs

We recorded $2.4 million of business separation costs during the year ended December 31, 2011 related to non-cash non-recurring costs associated with the modification of outstanding share-based compensation awards as a result of the Separation.

Operating (loss) income

Operating (loss) income decreased $214.0 million, to a loss of $15.6 million, primarily due to asset impairment charges of $90.0 million, recognition of actuarial losses related to defined benefit plans ($80.0 million), and higher raw material and transportation costs (approximately $75 million). Operating income also decreased due to higher promotional spending and business separation costs, and an unfavorable comparison to the 2010 favorable resolution of litigation (approximately $8 million). Operating income benefited from higher sales, price increases and productivity initiatives.

Related party interest expense, net

Related party interest expense, net, was $23.2 million in the year ended December 31, 2011 compared to $116.0 million in 2010. The decrease of $92.8 million was predominantly due to the capitalization of a substantial majority of intercompany loans with our Former Parent in the first quarter of 2011.

External interest expense

External interest expense increased $2.9 million due to external borrowings in the fourth quarter of 2011 as a stand-alone company.

Other expense (income), net

Other expense (income), net, was expense of $1.6 million in the year ended December 31, 2011 compared to income of $1.0 million in 2010. The $2.6 million change was primarily due to net foreign currency transaction losses in 2011 compared to gains in 2010. Other expense, net includes non-operating income and expense, such as interest income and transaction gains/losses related to foreign currency-denominated transactions.

Income taxes

The effective income tax rates, calculated as if the Company were a separate taxpayer, for the years ended December 31, 2011 and 2010 were 20.6% and 21.8%, respectively. The effective tax rate in 2011 was unfavorably impacted due to the recording of valuation allowances related to state and foreign net operating loss carryforwards and an income tax expense on foreign dividends, $9.1 million of which related to foreign dividends received in preparation for the Separation. The 2011 effective rate was favorably impacted by a tax benefit related to the conclusion of foreign and state income tax audits and enacted changes in state tax laws. The effective tax rate in 2010 was favorably impacted by a tax benefit related to final settlement of a U.S. federal income tax audit covering the 2004 to 2007 years. See Note 13, "Income Taxes," for further detail.

Noncontrolling interests

Noncontrolling interest expense was $1.0 million in the year ended December 31, 2011 compared to $1.2 million in 2010.

Net (loss) income attributable to Home & Security

The net (loss) income attributable to Home & Security was a net loss of $35.6 million in the year ended December 31, 2011 compared to net income of $63.8 million in 2010. The $99.4 million decrease in net income was primarily due to recognition of defined benefit plan actuarial losses in 2011 (approximately $52 million net impact) and lower operating income, at least in part due to tradename impairment charges ($55.3 million), as well as a higher effective income tax rate. Net income benefited from lower related party interest expense (net).

Results by Segment

Kitchen & Bath Cabinetry

Net sales increased $67.5 million, or 6%, primarily due to higher sales volume as a result of new business with key customers awarded in 2010, new product introductions and approximately $10 million of favorable foreign exchange. Net sales were unfavorably impacted by a weak market for big-ticket remodeling and new construction, due in part to the absence of first-time new homebuyer tax credits that expired on April 30, 2010.

Operating income decreased $22.5 million, or 80%, primarily due to higher promotional spending, increased costs for raw materials (wood-related) and transportation, and $10.2 million of higher restructuring and other charges. These increased expenses were partially offset by higher sales volume and the benefit of price increases. Increased costs to support new business and long-term growth initiatives were partially offset by productivity initiatives.

Plumbing & Accessories

Net sales increased $39.0 million, or 4%, primarily due to new product introductions in the U.S., higher sales in China and approximately $10 million of favorable foreign exchange. Net sales were unfavorably impacted by market weakness caused in part by the expiration of governmental tax incentives in 2010 in the U.S. and Canada, as well as lower year-over-year customer inventory levels.

Operating income increased $5.5 million, or 4%, primarily due to higher sales. Operating income was unfavorably impacted by higher costs for raw materials (brass, zinc, stainless steel and resins), net of price increases. Strategic investments to support new business and long-term growth initiatives were offset by the benefit of productivity improvements.

Advanced Material Windows & Door Systems

Net sales decreased $47.8 million, or 8%, primarily due to market weakness caused by the expiration in December 2010 of U.S. tax incentives for purchases of energy-efficient home products.

Operating income decreased $118.8 million to a loss of $101.2 million, primarily due to asset impairment charges of $90.0 million recorded in the fourth quarter of 2011. These charges were primarily the result of reduced revenue growth and profit margin expectations associated with our Simonton tradename over the next two to three years. Our revenue and profit margin expectations were lowered based upon the results of our annual planning process that was completed in the fourth quarter and included consideration of our actual fourth quarter 2011 results, including lower 2011 sales due to the expiration of U.S. tax incentives for purchases of energy-efficient home products, as well as our projection of the recovery of the U.S. home products market. In addition, operating income decreased due to lower sales, unfavorable mix and higher raw material (steel and resins) and transportation costs, which were partially offset by the benefit of price increases. Operating income benefited from productivity initiatives.

Security & Storage

Net sales increased $36.4 million, or 7%, primarily due to strong growth in the safety and international padlock categories and new garage organization product introductions, partially offset by lower sales of tool storage products.

Operating income increased $8.6 million, or 16%, primarily due to productivity initiatives, increased volume and the absence of $7.0 million of 2010 restructuring and other charges. Higher steel and brass costs were largely offset through price increases. In addition, the operating income comparison in 2011 was unfavorably impacted by the 2010 favorable resolution of litigation (approximately $8 million).

Corporate

Corporate expenses increased $86.8 million, primarily due to the recognition of defined benefit plan actuarial losses of $80.0 million. In addition, we recorded $2.4 million of non-cash non-recurring costs associated with the modification of share-based compensation awards as a result of the Separation and expenses related to transitioning to a stand-alone company.

In future periods the Company may record material expense or income associated with actuarial gains and losses arising from periodic remeasurement of its liabilities for defined benefit plans. In 2011 such actuarial losses totaled $80.0 million. At a minimum the Company will remeasure its defined benefit plan liabilities in the fourth quarter of each year. Remeasurement of these liabilities in the fourth quarter attributable to updating liability discount rate and expected return on pension plan assets may, in particular, result in material income or expense recognition.

Corporate expenses include allocations of certain Former Parent general corporate expenses incurred directly by our Former Parent. These allocated expenses include costs associated with legal, finance, treasury, accounting, . . .