UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission file number 1-04851

THE SHERWIN-WILLIAMS COMPANY

(Exact name of registrant as specified in its charter)

OHIO		34-0526850
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
101 West Prospect Avenue, Cleveland, Ohio		44115-1075
(Address of principal executive offices)		(Zip Code)

(216) 566-2000

(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one:)

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $1.00 Par Value – 108,790,303 shares as of June 30, 2010.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 2. Unregistered Sales of Securities and Use of Proceeds			46
Item 5. Other Information			47
Item 6. Exhibits			48
SIGNATURES			49
INDEX TO EXHIBITS			50
EX-10(a)
EX-10(b)
EX-10(c)
EX-10(d)
EX-10(e)
EX-10(f)
EX-31(a)
EX-31(b)
EX-32(a)
EX-32(b)
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-31.(A)
EX-31.(B)
EX-32.(A)
EX-32.(B)
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Thousands of dollars, except per share data

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net sales		$	2,143,064			$	1,947,827			$	3,708,546			$	3,498,504
Cost of goods sold			1,171,171				1,052,485				2,044,685				1,922,556
Gross profit			971,893				895,342				1,663,861				1,575,948
Percent to net sales			45.4	%			46.0	%			44.9	%			45.0	%
Selling, general and administrative expenses			691,215				653,001				1,304,090				1,261,849
Percent to net sales			32.3	%			33.5	%			35.2	%			36.1	%
Other general expense — net			5,125				3,051				7,031				13,456
Interest expense			26,340				10,356				37,909				22,558
Interest and net investment income			(480	)			(659	)			(1,119	)			(1,295	)
Other income — net			(9,555	)			(2,530	)			(2,757	)			(3,636	)
Income before income taxes			259,248				232,123				318,707				283,016
Income taxes			77,542				74,100				104,398				87,714
Net income		$	181,706			$	158,023			$	214,309			$	195,302
Net income per common share*:
Basic		$	1.67			$	1.36			$	1.97			$	1.67
Diluted		$	1.64			$	1.35			$	1.94			$	1.66
Average shares outstanding — basic			107,686,335				115,196,891				107,822,967				115,571,760
Average shares and equivalents outstanding — diluted			109,832,652				116,297,525				109,460,619				116,411,483

See notes to condensed consolidated financial statements.

Thousands of dollars

		June 30,				December 31,				June 30,
		2010				2009				2009
Assets
Current assets:
Cash and cash equivalents		$	48,401			$	69,329			$	49,259
Accounts receivable, less allowance			986,327				696,055				908,660
Inventories:
Finished goods			666,136				630,683				681,418
Work in process and raw materials			127,692				107,805				88,574
			793,828				738,488				769,992
Deferred income taxes			120,948				121,276				98,848
Other current assets			190,418				144,871				151,012
Total current assets			2,139,922				1,770,019				1,977,771
Goodwill			1,011,949				1,014,825				1,011,284
Intangible assets			276,429				279,413				300,423
Deferred pension assets			248,959				245,301				215,648
Other assets			235,514				195,612				154,681
Property, plant and equipment:
Land			104,851				85,166				86,714
Buildings			605,457				600,687				593,022
Machinery and equipment			1,571,553				1,512,218				1,522,054
Construction in progress			23,227				23,086				17,602
			2,305,088				2,221,157				2,219,392
Less allowances for depreciation			1,477,575				1,402,472				1,377,089
			827,513				818,685				842,303
Total Assets		$	4,740,286			$	4,323,855			$	4,502,110
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings		$	199,487			$	22,674			$	499,201
Accounts payable			881,141				674,766				704,747
Compensation and taxes withheld			205,119				176,538				172,836
Accrued taxes			134,854				76,499				117,484
Current portion of long-term debt			9,269				12,267				10,519
Other accruals			403,671				430,924				398,943
Total current liabilities			1,833,541				1,393,668				1,903,730
Long-term debt			699,815				782,670				291,025
Postretirement benefits other than pensions			284,660				283,784				250,090
Other long-term liabilities			391,044				372,783				323,267
Shareholders’ equity:
Common stock — $1.00 par value: 108,790,303, 109,436,869 and 116,761,783 shares outstanding at June 30, 2010, December 31, 2009 and June 30, 2009, respectively			230,461				228,647				227,964
Preferred stock — convertible, no par value: 216,753 shares outstanding at June 30, 2010, December 31, 2009 and June 30, 2009			216,753				216,753				216,753
Unearned ESOP compensation			(216,753	)			(216,753	)			(216,753	)
Other capital			1,161,273				1,068,963				1,042,120
Retained earnings			4,653,954				4,518,428				4,358,169
Treasury stock, at cost			(4,190,479	)			(4,007,633	)			(3,526,189	)
Cumulative other comprehensive loss			(323,983	)			(317,455	)			(368,066	)
Total shareholders’ equity			1,531,226				1,490,950				1,733,998
Total Liabilities and Shareholders’ Equity		$	4,740,286			$	4,323,855			$	4,502,110

See notes to condensed consolidated financial statements.

Thousands of dollars

		Six Months Ended
		June 30,				June 30,
		2010				2009
OPERATING ACTIVITIES
Net income		$	214,309			$	195,302
Adjustments to reconcile net income to net operating cash:
Depreciation			66,206				73,200
Amortization of intangible assets			13,206				12,196
Stock-based compensation expense			19,489				11,247
Provisions for qualified exit costs			72				9,668
Provisions for environmental-related matters			4,722				9,151
Defined benefit pension plans net cost			8,926				16,482
Net increase in postretirement liability			1,200				1,300
Other			14,998				4,175
Change in working capital accounts — net			(67,855	)			(39,684	)
Costs incurred for environmental-related matters			(19,384	)			(14,797	)
Costs incurred for qualified exit costs			(7,918	)			(4,041	)
Other			(11,515	)			(7,775	)
Net operating cash			236,456				266,424
INVESTING ACTIVITIES
Capital expenditures			(47,453	)			(40,896	)
Acquisitions of businesses, net of cash acquired			(49,061	)			(14,058	)
Proceeds from sale of assets			1,109				1,504
Increase in other investments			(59,045	)			(38,418	)
Net investing cash			(154,450	)			(91,868	)
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings			180,725				(17,680	)
Proceeds from long-term debt			1,329				4,480
Payments of long-term debt			(89,235	)			(24,061	)
Costs associated with repurchase of long-term debt			(22,192	)
Payments of cash dividends			(78,783	)			(83,190	)
Proceeds from stock options exercised			62,475				12,337
Income tax effect of stock-based compensation exercises and vesting			12,104				2,847
Treasury stock purchased			(175,492	)			(49,367	)
Other			(4,966	)			(4,259	)
Net financing cash			(114,035	)			(158,893	)
Effect of exchange rate changes on cash			11,101				7,384
Net (decrease) increase in cash and cash equivalents			(20,928	)			23,047
Cash and cash equivalents at beginning of year			69,329				26,212
Cash and cash equivalents at end of period		$	48,401			$	49,259
Income taxes paid		$	24,377			$	26,876
Interest paid			40,818				24,197

See notes to condensed consolidated financial statements.

(UNAUDITED)

Periods ended June 30, 2010 and 2009

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior year amounts have been restated to conform with the current year presentation.

There have been no significant changes in critical accounting policies since December 31, 2009. Accounting estimates were revised as necessary during the first six months of 2010 based on new information and changes in facts and circumstances.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 became effective, resulting in the elimination of a tax deduction previously allowed for the Medicare Part D subsidy beginning in years after December 31, 2012. The Company recognized the deferred tax effects of the reduced deductibility of the subsidy during the first quarter. The resulting one-time increase in income taxes of $11.4 million reduced basic and diluted earnings per share for the six months of 2010 by $0.11 and $0.10, respectively. See Note 11.

The Company uses the last-in, first-out (LIFO) method of valuing inventory. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs are subject to the final year-end LIFO inventory valuation. In addition, interim inventory levels include management’s estimates of annual inventory losses due to shrinkage and other factors. The final year-end valuation of inventory is based on an annual physical inventory count performed during the fourth quarter. For further information on inventory valuations and other matters, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2009.

The consolidated results for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

NOTE 2—IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-11, which amends the Subsequent Events Topic of the

Accounting Standards Codification (ASC) to eliminate the requirement for public companies to disclose the date through which subsequent events have been evaluated. The Company will continue to evaluate subsequent events through the date of the issuance of the financial statements, however, consistent with the guidance, this date will no longer be disclosed. ASU 2010-11 does not have any impact on the Company’s results of operations, financial condition or liquidity.

Effective January 1, 2010, the Company adopted FAS No. 166, “Accounting for Transfers of Financial Assets” (now codified in the Transfers and Servicing Topic of the ASC) and FAS No. 167, “Amendments to FASB Interpretation (FIN) No. 46(R)” (now codified in the Consolidation Topic of the ASC). FAS No. 166 removes the concept of a qualifying special-purpose entity (SPE) from FAS No. 140 and eliminates the exception for qualifying SPEs from the consolidation guidance of FIN No. 46(R). FAS No. 167 changes the analysis that must be performed to determine the primary beneficiary of a variable interest entity (VIE), amends certain guidance in FIN No. 46(R) for determining whether an entity is a VIE and requires enhanced disclosures about involvement with VIEs. The statements do not have a significant impact on the Company’s results of operations, financial condition, liquidity or disclosures.

NOTE 3—DIVIDENDS

Dividends paid on common stock during each of the first two quarters of 2010 and 2009 were $0.360 per common share and $0.355 per common share, respectively.

NOTE 4—COMPREHENSIVE INCOME

Comprehensive income is summarized as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Thousands of dollars)		2010				2009				2010				2009
Net income		$	181,706			$	158,023			$	214,309			$	195,302
Foreign currency translation adjustments			(21,173	)			42,205				(14,687	)			33,324
Amortization of net prior service costs and net actuarial losses, net of taxes(1)			3,841				4,676				7,492				9,315
Adjustments of marketable equity securities and derivative instruments used in cash flow hedges, net of taxes(2)			333				(132	)			665				(87	)
Comprehensive income		$	164,707			$	204,772			$	207,779			$	237,854

NOTE 5—PRODUCT WARRANTIES

Changes in the Company’s accrual for product warranty claims during the first six months of 2010 and 2009, including customer satisfaction settlements, were as follows:

(Thousands of dollars)		2010				2009
Balance at January 1		$	22,214			$	18,029
Charges to expense			10,869				9,191
Settlements			(10,478	)			(10,829	)
Balance at June 30		$	22,605			$	16,391

For further details on the Company’s accrual for product warranty claims, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 6—EXIT OR DISPOSAL ACTIVITIES

Liabilities associated with exit or disposal activities are recognized as incurred in accordance with the Exit or Disposal Cost Obligations Topic of the ASC. Qualified exit costs primarily include post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to liabilities accrued for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with the Property, Plant and Equipment Topic of the ASC, and if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Additional impairment may be recorded for subsequent revisions in estimated fair value.

In the six months ended June 30, 2010, 7 stores in the Paint Stores Group and 4 branches in the Global Finishes Group were closed due to lower demand or redundancy. During the six months ended June 30, 2010, amounts charged to SG&A and Costs of goods sold included qualified exit costs and severance costs of $0.2 million related to these closed facilities and $0.5 million for severance costs related to a Consumer Group manufacturing facility closed during 2009. Adjustments to prior provisions of $0.6 million related to Global Finishes Group facilities closed during 2009 were recorded in Other general expense – net in the six months ended June 30, 2010.

The following table summarizes the activity and remaining liabilities associated with qualified exit costs at June 30, 2010 and for the six-month period then ended:

(Thousands of dollars)

										Actual				Adjustments to
		Balance at				Provisions in				expenditures				prior provisions				Balance at
		December 31,				Cost of goods				charged to				in Other general				June 30,
Exit Plan		2009				sold or SG&A				accrual				expense - net				2010
Global Finishes Group branches shutdown in 2010:
Severance and related costs						$	31			$	(31	)
Other qualified exit costs							142				(142	)
Paint Stores Group stores shutdown in 2010:
Other qualified exit costs							55				(14	)						$	41
Paint Stores Group stores shutdown in 2009:
Other qualified exit costs		$	3,213								(606	)							2,607
Consumer Group manufacturing facilities shutdown in 2009:
Severance and related costs			4,532				457				(3,123	)							1,866
Other qualified exit costs			2,258								(388	)							1,870
Global Finishes Group manufacturing facility and branches shutdown in 2009:
Severance and related costs			204								(79	)		$	(16	)			109
Other qualified exit costs			3,703								(850	)			(597	)			2,256
Paint Stores Group manufacturing and distribution facilities, administrative offices and stores shutdown in 2008:
Severance and related costs			70								(61	)							9
Other qualified exit costs			5,426								(996	)							4,430
Consumer Group manufacturing and distribution facilities shutdown in 2008:
Severance and related costs			311																311
Other qualified exit costs			83								(33	)							50
Global Finishes Group administrative offices and branches shutdown in 2008:
Other qualified exit costs			88								(88	)
Paint Stores Group manufacturing facility shutdown in 2007:
Other qualified exit costs			1,578								(169	)							1,409
Consumer Group manufacturing facility shutdown in 2007:
Other qualified exit costs			2,166																2,166
Other qualified exit costs for facilities shutdown prior to 2007			7,501								(1,338	)							6,163
Totals		$	31,133			$	685			$	(7,918	)		$	(613	)		$	23,287

For further details on the Company’s exit or disposal activities, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 7—HEALTH CARE, PENSION AND OTHER BENEFITS

Shown below are the components of the Company’s net periodic benefit cost for domestic defined benefit pension plans, foreign defined benefit pension plans and postretirement benefits other than pensions:

		Domestic Defined								Foreign Defined								Postretirement Benefits
		Benefit Pension Plans								Benefit Pension Plans								Other than Pensions
(Thousands of dollars)		2010				2009				2010				2009				2010				2009
Three Months Ended June 30:
Net periodic benefit cost:
Service cost		$	4,264			$	3,760			$	488			$	333			$	883			$	847
Interest cost			4,574				4,632				1,003				803				4,016				3,924
Expected return on assets			(10,640	)			(9,222	)			(695	)			(494	)
Amortization of:
Prior service cost (credit)			415				359				7				13				(164	)			(164	)
Actuarial loss			4,781				7,208				333				86				326				71
Net periodic benefit cost		$	3,394			$	6,737			$	1,136			$	741			$	5,061			$	4,678
Six Months Ended June 30:
Net periodic benefit cost:
Service cost		$	8,453			$	9,076			$	989			$	639			$	1,766			$	1,695
Interest cost			9,014				9,249				2,039				1,538				8,033				7,848
Expected return on assets			(21,155	)			(18,423	)			(1,410	)			(947	)
Amortization of:
Prior service cost (credit)			830				746				14				24				(328	)			(328	)
Actuarial loss			9,472				14,416				680				164				652				143
Net periodic benefit cost		$	6,614			$	15,064			$	2,312			$	1,418			$	10,123			$	9,358

For further details on the Company’s health care, pension and other benefits, see Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 8—OTHER LONG-TERM LIABILITIES

The Company initially provides for estimated costs of environmental-related activities relating to its past operations and third-party sites for which commitments or clean-up plans have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated costs are determined based on currently available facts regarding each site. If the best estimate of costs can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is provided. At June 30, 2010, the unaccrued maximum of the estimated range of possible outcomes is $100.5 million higher than the minimum.

The Company continuously assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals as information becomes available

upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributed to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site.

Included in Other long-term liabilities at June 30, 2010 and 2009 were accruals for extended environmental-related activities of $92.8 million and $123.7 million, respectively. Estimated costs of current investigation and remediation activities of $64.7 million and $52.6 million are included in Other accruals at June 30, 2010 and 2009, respectively.

Four of the Company’s currently and formerly owned manufacturing sites account for the majority of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at June 30, 2010. At June 30, 2010, $115.9 million, or 73.6 percent of the total accrual, related directly to these four sites. In the aggregate unaccrued maximum of $100.5 million at June 30, 2010, $61.9 million, or 61.6 percent, related to the four manufacturing sites. While environmental investigations and remedial actions are in different stages at these sites, additional investigations, remedial actions and monitoring will likely be required at each site.

Management cannot presently estimate the ultimate potential loss contingencies related to these sites or other less significant sites until such time as a substantial portion of the investigation at the sites is completed and remedial action plans are developed. In the event any future loss contingency significantly exceeds the current amount accrued, the recording of the ultimate liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. Management does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which environmental investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties.

Management expects these contingent environmental-related liabilities to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain environmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.

For further details on the Company’s Other long-term liabilities, see Note 9 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 9—LITIGATION

In the course of its business, the Company is subject to a variety of claims and lawsuits, including litigation relating to product liability and warranty, personal injury, environmental, intellectual property, commercial, contractual and antitrust claims that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. These uncertainties will ultimately be resolved when one or more future events occur or fail to occur confirming the incurrence of a liability or the reduction of a liability. In accordance with the Contingencies Topic of the ASC, the Company accrues for these contingencies by a charge to income when it is both probable that one or more future events will occur confirming the fact of a loss and the amount of the loss can be reasonably estimated. In the event that the Company’s loss contingency is ultimately determined to be significantly higher than currently accrued, the recording of the additional liability may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such additional liability is accrued. In those cases where no accrual is recorded because it is not probable that a liability has been incurred and cannot be reasonably estimated, any potential liability ultimately determined to be attributable to the Company may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. In those cases where no accrual is recorded or exposure to loss exists in excess of the amount accrued, the Contingencies Topic of the ASC requires disclosure of the contingency when there is a reasonable possibility that a loss or additional loss may have been incurred if even the possibility may be remote.

Lead pigment and lead-based paint litigation. The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is and has been a defendant in a number of legal proceedings, including individual personal injury actions, purported class actions, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs’ claims have been based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practice and consumer protection laws, enterprise liability, market share liability, public nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company is also a defendant in legal proceedings arising from the manufacture and sale of non-lead-based paints that seek recovery based upon various legal theories, including the failure to adequately warn of potential exposure to lead during surface preparation when using non-lead-based paint on surfaces previously painted with lead-based paint. The Company believes that the litigation brought to date is without merit or subject to meritorious defenses and is vigorously defending such litigation. The Company has not settled any lead pigment or lead-based paint litigation. The Company expects that additional lead pigment and lead-based paint litigation may be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief.

Notwithstanding the Company’s views on the merits, litigation is inherently subject to many uncertainties, and the Company ultimately may not prevail. Adverse court rulings or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against the Company and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted, promulgated or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products or to overturn the effect of court decisions in which the Company and other manufacturers have been successful.

Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings, or the effect that any legislation and/or administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the potential costs and liabilities related to such litigation, or resulting from any such legislation and regulations. The Company has not accrued any amounts for such litigation. Any potential liability that may result from such litigation or such legislation and regulations cannot reasonably be estimated. In the event any significant liability is determined to be attributable to the Company relating to such litigation, the recording of the liability may result in a material impact on net income for the annual or interim period during which such liability is accrued. Additionally, due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, liquidity or financial condition cannot be made due to the aforementioned uncertainties.

Public nuisance claim litigation. The Company and other companies are or were defendants in legal proceedings seeking recovery based on public nuisance liability theories, among other theories, brought by the State of Rhode Island, the City of St. Louis, Missouri, various cities and counties in the State of New Jersey, various cities in the State of Ohio and the State of Ohio, the City of Milwaukee, Wisconsin and the County of Santa Clara, California and other public entities in the State of California. Except for the Santa Clara County, California proceeding, all of these legal proceedings have been concluded in favor of the Company and other defendants at various stages in the proceedings.

The proceedings initiated by the State of Rhode Island included two jury trials. The claim was originally tried to a jury in 2002 and the court declared a mistrial as the jury, which was split four to two in favor of the defendants, was unable to reach a unanimous decision. The State of Rhode Island retried the case and on February 22, 2006, the jury returned a verdict, finding that (i) the cumulative presence of lead pigment in paints and coatings on buildings in the State of Rhode Island constitutes a public nuisance, (ii) the Company, along with two other defendants, caused or substantially contributed to the creation of the public nuisance, and (iii) the Company and two other defendants should be ordered to abate the public nuisance. The Company and two other defendants appealed and, on July 1, 2008, the Rhode Island Supreme Court, among other determinations, reversed the judgment of abatement with respect to the Company and two other

defendants. The Rhode Island Supreme Court’s decision reversed the public nuisance liability judgment against the Company on the basis that the complaint failed to state a public nuisance claim as a matter of law.

The Santa Clara County, California proceeding was initiated in March 2000 and purports to be a class action on behalf of all public entities in the State of California other than the State and its agencies. The plaintiffs’ asserted various claims including fraud and concealment, strict product liability/failure to warn, strict product liability/design defect, negligence, negligent breach of a special duty, public nuisance, private nuisance, and violations of California’s Business and Professions Code. A number of the asserted claims were resolved in favor of the defendants through pre-trial proceedings. On March 3, 2006, the Court of Appeal, Sixth Appellate District, among other determinations, reversed the dismissal of the public nuisance claim for abatement brought by the cities of Santa Clara and Oakland and the City and County of San Francisco, and affirmed the dismissal of the public nuisance claim for damages to the plaintiffs’ properties. The plaintiffs have filed a motion for leave to file a fourth amended complaint. On April 4, 2007, the trial court entered an order granting the defendants’ motion to bar payment of contingent fees to private attorneys. The plaintiffs appealed the trial court’s order and, on April 8, 2008, the California Court of Appeal reversed the trial court’s order. The defendants filed a petition for review with the California Supreme Court and the Supreme Court has decided to review the Court of Appeal’s decision. Proceedings in the trial court are stayed pending the appeal.

Litigation seeking damages from alleged personal injury. The Company and other companies are defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. These proceedings include claims by children allegedly injured from ingestion of lead pigment or lead-containing paint, claims for damages allegedly incurred by the children’s parents or guardians, and claims for damages allegedly incurred by professional painting contractors. These proceedings generally seek compensatory and punitive damages, and seek other relief including medical monitoring costs. These proceedings include purported claims by individuals, groups of individuals and class actions.

The plaintiff in Thomas v. Lead Industries Association, et al., initiated an action against the Company, other alleged former lead pigment manufacturers and the Lead Industries Association in September 1999. The claims against the Company and the other defendants include strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, concert of action, civil conspiracy and enterprise liability. Implicit within these claims is the theory of “risk contribution” liability (Wisconsin’s theory which is similar to market share liability) due to the plaintiff’s inability to identify the manufacturer of any product that allegedly injured the plaintiff. Following various pre-trial proceedings during which certain of the plaintiff’s claims were dismissed by the court, on March 10, 2003, the trial court granted the defendants’ motion for summary judgment, dismissing the case with prejudice and awarding costs to each defendant. The plaintiff appealed and, on June 14, 2004, the Wisconsin Court of Appeals affirmed the trial court’s decision. On July 15, 2005, the Wisconsin Supreme Court reversed in part the trial court’s decision and decided, assuming all of plaintiff’s facts in the summary judgment record to be true, that the risk contribution theory could then apply to excuse the plaintiff’s lack of evidence identifying any of the Company’s or the other defendant’s products as the cause of the alleged injury. The case was remanded to the trial court for further

proceedings and a trial commenced on October 1, 2007. On November 5, 2007, the jury returned a defense verdict, finding that the plaintiff had ingested white lead carbonate, but was not brain damaged or injured as a result. The plaintiff filed post-trial motions for a new trial that was denied by the trial court. On March 4, 2008, final judgment was entered in favor of the Company and other defendants. The plaintiff has filed an appeal of the final judgment.

Wisconsin is the only jurisdiction to date to apply a theory of liability with respect to alleged personal injury (i.e., risk contribution/market share liability) that does not require the plaintiff to identify the manufacturer of the product that allegedly injured the plaintiff in the lead pigment and lead-based paint litigation.

Insurance coverage litigation. The Company and its liability insurers, including certain Underwriters at Lloyd’s of London, initiated legal proceedings against each other to determine, among other things, whether the costs and liabilities associated with the abatement of lead pigment are covered under certain insurance policies issued to the Company. An ultimate loss in the insurance coverage litigation would mean that insurance proceeds could be unavailable under the policies at issue to mitigate any ultimate abatement related costs and liabilities. The Company has not recorded any assets related to these insurance policies or otherwise assumed that proceeds from these insurance policies would be received in estimating any contingent liability accrual. Therefore, an ultimate loss in the insurance coverage litigation without a determination of liability against the Company in the lead pigment or lead-based paint litigation will have no impact on the Company’s results of operation, liquidity or financial condition. As previously stated, however, the Company has not accrued any amounts for the lead pigment or lead-based paint litigation and any significant liability ultimately determined to be attributable to the Company relating to such litigation may result in a material impact on the Company’s results of operations, liquidity or financial condition for the annual or interim period during which such liability is accrued. The Company’s action, an Ohio state court action, has been stayed and the liability insurers action, a New York state court action, has been dismissed.

NOTE 10—OTHER EXPENSE (INCOME)

Other general expense — net

Included in Other general expense — net were the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Thousands of dollars)		2010				2009				2010				2009
Provisions for environmental matters — net		$	2,785			$	2,950			$	4,722			$	9,151
Loss on disposition of assets			2,681				372				2,922				1,101
Adjustments to prior provisions for qualified exit costs			(341	)			(271	)			(613	)			3,204
Other general expense — net		$	5,125			$	3,051			$	7,031			$	13,456

Provisions for environmental matters–net represent site-specific increases or decreases to environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued.

Environmental-related accruals are not recorded net of insurance proceeds in accordance with the Offsetting Subtopic of the Balance Sheet Topic of the ASC. See Note 8 for further details on the Company’s environmental-related activities.

The loss on disposition of assets represents net realized losses associated with the disposal of fixed assets previously used in the conduct of the primary business of the Company.

The adjustments to prior provisions for qualified exit costs represent site specific increases or decreases to accrued qualified exit costs as adjustments for costs of employee terminations are required or as information becomes available upon which more accurate amounts can be reasonably estimated. See Note 6 for further details on the Company’s exit or disposal activities.

Other income — net

Included in Other income — net were the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Thousands of dollars)		2010				2009				2010				2009
Dividend and royalty income		$	(1,527	)		$	(614	)		$	(2,493	)		$	(1,571	)
Net expense from financing and investing activities			2,839				1,267				4,571				1,683
Foreign currency related gains			(8,376	)			(868	)			(2,374	)			(969	)
Other income			(2,816	)			(3,604	)			(4,924	)			(5,516	)
Other expense			325				1,289				2,463				2,737
Other income — net		$	(9,555	)		$	(2,530	)		$	(2,757	)		$	(3,636	)

The net expense from financing and investing activities includes the net loss relating to the change in the Company’s financing fees and write-off of origination costs related to the repurchase of a portion of its 7.45% debentures.

Foreign currency related gains included foreign currency transaction gains and losses and realized and unrealized net gains from foreign currency option and forward contracts. The Company had foreign currency option and forward contracts outstanding at June 30, 2010 and 2009. All of the outstanding contracts had maturity dates of less than twelve months and were undesignated hedges with changes in fair value being recognized in earnings in accordance with the Derivatives and Hedging Topic of the ASC. These derivative instrument values were included in either Other current assets or Other accruals and were insignificant at June 30, 2010 and 2009.

Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. Each individual item within the other income or other expense caption was immaterial; no single category of items exceeded $1.0 million.

NOTE 11—INCOME TAXES

The effective tax rate was 29.9 percent and 32.8 percent for the second quarter and first six months of 2010, respectively, and 31.9 percent and 31.0 percent for the second quarter and the first six months of 2009, respectively. The increase in the effective tax rate for the first six months of 2010 compared to 2009 was due to the impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act signed into law in March 2010. The Company recognized the deferred tax effects of the reduced deductibility of the postretirement prescription drug coverage during the first quarter of 2010, which resulted in a Federal and State income tax charge of $11.4 million.

At December 31, 2009, the Company had $37.0 million in unrecognized tax benefits, the recognition of which would have an effect of $32.5 million on the current provision for income taxes. Included in the balance of unrecognized tax benefits at December 31, 2009, was $9.6 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised of items related to assessed state income tax audits, state settlement negotiations currently in progress and expiring statutes in foreign jurisdictions.

The Company classifies all income tax related interest and penalties as income tax expense. At December 31, 2009, the Company had accrued $11.8 million for the potential payment of income tax interest and penalties.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Other than as noted below, the Internal Revenue Service (IRS) substantially completed the audit of the 2004 and 2005 tax years. The IRS commenced an examination of the Company’s U.S. income tax returns for the 2006 and 2007 tax years in the fourth quarter of 2008. Fieldwork is anticipated to be completed prior to December 31, 2010. At this time, the Company has determined that an insignificant payment is due. The IRS is currently examining transactions related to The Sherwin-Williams Company Employee Stock Purchase and Savings Plan. The IRS has indicated it may issue Notices of Proposed Adjustment for income taxes for the 2004 through 2007 tax years related to these transactions. The IRS has also indicated they are reviewing the applicability of excise taxes with respect to these transactions for the 2003 through 2007 tax years. During the IRS’s examination of the transactions, it requested the Department of Labor to review the transactions. Following the Department of Labor’s initial examination, it is coordinating its response with the IRS. As of June 30, 2010, the Company is subject to non-U.S. income tax examinations for the tax years of 2002 through 2009. In addition, the Company is subject to state and local income tax examinations for the tax years 1992 through 2009.

At December 31, 2009, $9.6 million of unrecognized tax positions could significantly change during the next twelve months. Through June 30, 2010, $4.9 million of the amount was reversed due to the resolution of the related tax position. There were no other significant changes to any of the other balances of unrecognized tax benefits at December 31, 2009 during the first six months of 2010.

NOTE 12—NET INCOME PER COMMON SHARE

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Thousands of dollars except per share data)		2010				2009				2010				2009
Basic
Average common shares outstanding			107,686,335				115,196,891				107,822,967				115,571,760
Net income		$	181,706			$	158,023			$	214,309			$	195,302
Less net income allocated to unvested restricted shares			(1,983	)			(1,668	)			(2,186	)			(2,050	)
Net income allocated to common shares		$	179,723			$	156,355			$	212,123			$	193,252
Basic net income per common share		$	1.67			$	1.36			$	1.97			$	1.67
Diluted
Average common shares outstanding			107,686,335				115,196,891				107,822,967				115,571,760
Stock options and other contingently issuable shares (1)			2,146,317				1,100,634				1,637,652				839,723
Average common shares outstanding assuming dissolution			109,832,652				116,297,525				109,460,619				116,411,483
Net income		$	181,706			$	158,023			$	214,309			$	195,302
Less net income allocated to unvested restricted shares assuming dissolution			(1,950	)			(1,356	)			(2,154	)			(1,733	)
Net income allocated to common shares assuming dissolution		$	179,756			$	156,667			$	212,155			$	193,569
Diluted net income per common share		$	1.64			$	1.35			$	1.94			$	1.66

The Company has two classes of participating securities: common shares and restricted shares, representing 99% and 1% of outstanding shares, respectively. The restricted shares are shares of unvested restricted stock granted under the Company’s restricted stock award program. Unvested restricted shares granted prior to April 20, 2010 received non-forfeitable dividends, and the shares are therefore considered a participating security. Effective April 20, 2010, the restricted stock award program was revised and dividends on performance-based restricted shares granted after this date are deferred and payment is contingent upon the awards vesting. Only the time-based restricted shares, which continue to receive non-forfeitable dividends, are considered a participating security. Basic and diluted earnings per share are calculated using the two-class method in accordance with the Earnings Per Share Topic of the ASC.

NOTE 13—REPORTABLE SEGMENT INFORMATION

The Company reports segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources in accordance with the Segment Disclosures Topic of the ASC.

		Three Months Ended June 30, 2010
										Global
		Paint Stores				Consumer				Finishes								Consolidated
(Thousands of dollars)		Group				Group				Group				Administrative				Totals
Net external sales		$	1,244,979			$	410,216			$	486,547			$	1,322			$	2,143,064
Intersegment transfers							423,551				30,750				(454,301	)
Total net sales and intersegment transfers		$	1,244,979			$	833,767			$	517,297			$	(452,979	)		$	2,143,064
Segment profit		$	211,959			$	80,694	*		$	39,954							$	332,607
Interest expense														$	(26,340	)			(26,340	)
Administrative expenses and other															(47,019	)			(47,019	)
Income before income taxes		$	211,959			$	80,694			$	39,954			$	(73,359	)		$	259,248

		Three Months Ended June 30, 2009
										Global
		Paint Stores				Consumer				Finishes								Consolidated
		Group				Group				Group				Administrative				Totals
Net external sales		$	1,170,039			$	366,488			$	409,691			$	1,609			$	1,947,827
Intersegment transfers							356,532				48,033				(404,565	)
Total net sales and intersegment transfers		$	1,170,039			$	723,020			$	457,724			$	(402,956	)		$	1,947,827
Segment profit		$	193,488			$	66,085	*		$	31,157							$	290,730
Interest expense														$	(10,356	)			(10,356	)
Administrative expenses and other															(48,251	)			(48,251	)
Income before income taxes		$	193,488			$	66,085			$	31,157			$	(58,607	)		$	232,123

		Six Months Ended June 30, 2010
										Global
		Paint Stores				Consumer				Finishes								Consolidated
		Group				Group				Group				Administrative				Totals
Net external sales		$	2,095,892			$	702,365			$	907,646			$	2,643			$	3,708,546
Intersegment transfers							704,720				53,005				(757,725	)
Total net sales and intersegment transfers		$	2,095,892			$	1,407,085			$	960,651			$	(755,082	)		$	3,708,546
Segment profit		$	259,715			$	118,159	**		$	62,956							$	440,830
Interest expense														$	(37,909	)			(37,909	)
Administrative expenses and other															(84,214	)			(84,214	)
Income before income taxes		$	259,715			$	118,159			$	62,956			$	(122,123	)		$	318,707

		Six Months Ended June 30, 2009
										Global
		Paint Stores				Consumer				Finishes								Consolidated
		Group				Group				Group				Administrative				Totals
Net external sales		$	2,068,447			$	654,640			$	772,202			$	3,215			$	3,498,504
Intersegment transfers							627,345				82,783				(710,128	)
Total net sales and intersegment transfers		$	2,068,447			$	1,281,985			$	854,985			$	(706,913	)		$	3,498,504
Segment profit		$	250,068			$	96,289	**		$	36,462							$	382,819
Interest expense														$	(22,558	)			(22,558	)
Administrative expenses and other															(77,245	)			(77,245	)
Income before income taxes		$	250,068			$	96,289			$	36,462			$	(99,803	)		$	283,016

In the reportable segment financial information, Segment profit was total net sales and intersegment transfers less operating costs and expenses. Domestic intersegment transfers were accounted for at the approximate fully absorbed manufactured cost, based on normal capacity volumes, plus customary distribution costs. International intersegment transfers were accounted for at values comparable to normal unaffiliated customer sales. The Administrative segment includes the administrative expenses of the Company’s corporate headquarters site. Also included in the Administrative segment was interest expense, interest and investment income, certain expenses related to closed facilities and environmental-related matters, and other expenses which were not directly associated with the Reportable Operating Segments. The Administrative segment did not include any significant foreign operations. Also included in the Administrative segment was a real estate management unit that is responsible for the ownership, management and leasing of non-retail properties held primarily for use by the Company, including the Company’s headquarters site, and disposal of idle facilities. Sales of this segment represented external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its primary businesses. Gains and losses from the sale of property were not a significant operating factor in determining the performance of the Administrative segment.

Net external sales and segment profit of all consolidated foreign subsidiaries were $337.4 million and $24.0 million, respectively, for the second quarter of 2010, and $248.2 million and $4.1

million, respectively, for the second quarter of 2009. Net external sales and segment profit of these subsidiaries were $619.1 million and $48.2 million, respectively, for the first six months of 2010, and $468.0 million and $4.4 million, respectively, for the first six months of 2009. Long-lived assets of these subsidiaries totaled $271.4 million and $245.1 million at June 30, 2010 and June 30, 2009, respectively. Domestic operations accounted for the remaining net external sales, segment profits and long-lived assets. No single geographic area outside the United States was significant relative to consolidated net external sales, income before taxes, or consolidated long-lived assets.

Export sales and sales to any individual customer were each less than 10 percent of consolidated sales to unaffiliated customers during all periods presented.

NOTE 14—ACQUISITIONS

Effective April 1, 2010, the Company acquired Sayerlack Industrial Coatings (Sayerlack) for $53.8 million, excluding any post-closing adjustments. Headquartered in Pianoro, Italy, Sayerlack is a leading coatings innovator in the joinery, furniture and cabinets markets. The acquisition strengthens the Global Finishes Group’s growing global platform for product finishes. A valuation was completed in the second quarter, and Sayerlack was included in the Company’s consolidated financial statements since the date of acquisition. The acquisition resulted in the recognition of goodwill and intangible assets.

During the first quarter of 2009, the Company acquired Altax Sp. zo.o. (Altax). Headquartered in Poznan, Poland, Altax is a leading innovator of protective woodcare coatings and serves multiple channels, including industrial, professional and DIY. Included in the Consumer Group, the acquisition provides a platform for further growth in Central Europe. The aggregate consideration paid for Altax was $11.5 million, net of cash acquired, including the assumption of certain financial obligations. The acquisition resulted in the recognition of goodwill and intangible assets.

The following unaudited pro-forma summary presents consolidated financial information as if Sayerlack and Altax had been acquired as of the beginning of each period presented. The pro-forma consolidated financial information does not necessarily reflect the actual results that would have occurred had the acquisitions taken place on January 1, 2009 or of future results of operations of the combined companies under ownership and operation of the Company.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Thousands of dollars except per share data)		2010				2009				2010				2009
Net sales		$	2,143,064			$	1,979,377			$	3,743,174			$	3,567,563
Net income			181,706				159,301				213,989				194,369
Net income per common share:
Basic		$	1.67			$	1.37			$	1.96			$	1.66
Diluted		$	1.64			$	1.36			$	1.94			$	1.65

NOTE 15—FAIR VALUE MEASUREMENTS

The Fair Value Measurements and Disclosures Topic of the ASC applies to the Company’s financial and non-financial assets and liabilities. The guidance applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurements. The Company did not have any fair value measurements for its non-financial assets and liabilities during the second quarter. The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis, categorized using the fair value hierarchy:

						Quoted Prices in								Significant
		Fair Value at				Active Markets for				Significant Other				Unobservable
		June 30,				Identical Assets				Observable Inputs				Inputs
(Thousands of dollars)		2010				(Level 1)				(Level 2)				(Level 3)
Assets:
Deferred compensation plan asset(1)		$	18,357			$	14,664			$	3,693
Call warrant investment(2)			12,095								12,095
Currency derivative asset(3)			466								466
Total assets at fair value		$	30,918			$	14,664			$	16,254
Liabilities:
Deferred compensation plan liability(4)		$	19,633			$	19,633
Total liabilities at fair value		$	19,633			$	19,633