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		(I.R.S. Employer
incorporation or organization)		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		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 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 — 103,760,672 shares as of September 30, 2011.

 

 

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			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 5. Other Information			49
Item 6. Exhibits			50
SIGNATURES			51
INDEX TO EXHIBITS			52
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

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Thousands of dollars, except per share data

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net sales		$	2,484,920			$	2,172,259			$	6,695,257			$	5,880,805
Cost of goods sold			1,446,621				1,200,674				3,836,795				3,245,359
Gross profit			1,038,299				971,585				2,858,462				2,635,446
Percent to net sales			41.8	%			44.7	%			42.7	%			44.8	%
Selling, general and administrative expenses			760,179				703,672				2,206,857				2,007,762
Percent to net sales			30.6	%			32.4	%			33.0	%			34.1	%
Other general expense (income) — net			1,600				(817	)			2,074				6,214
Interest expense			10,452				11,310				32,874				49,219
Interest and net investment income			(840	)			(1,008	)			(1,971	)			(2,127	)
Other expense — net			6,632				3,049				6,623				292
Income before income taxes			260,276				255,379				612,005				574,086
Income taxes			80,399				80,121				184,697				184,519
Net income		$	179,877			$	175,258			$	427,308			$	389,567
Net income per common share:
Basic		$	1.74			$	1.63			$	4.06			$	3.59
Diluted		$	1.71			$	1.60			$	3.98			$	3.53
Average shares outstanding — basic			102,151,164				106,454,042				103,939,552				107,366,658
Average shares and equivalents outstanding — diluted			104,123,272				108,397,737				106,161,544				109,095,936

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Thousands of dollars

		September 30,				December 31,				September 30,
		2011				2010				2010
Assets
Current assets:
Cash and cash equivalents		$	46,026			$	58,585			$	64,948
Accounts receivable, less allowance			1,173,581				916,661				1,069,890
Inventories:
Finished goods			743,191				743,953				713,343
Work in process and raw materials			223,565				173,748				145,645
			966,756				917,701				858,988
Deferred income taxes			127,090				127,348				121,438
Other current assets			195,940				193,427				209,838
Total current assets			2,509,393				2,213,722				2,325,102
Goodwill			1,106,654				1,102,458				1,085,703
Intangible assets			316,476				320,504				339,188
Deferred pension assets			264,293				248,333				250,679
Other assets			353,837				332,100				267,131
Property, plant and equipment:
Land			106,322				106,101				94,872
Buildings			671,188				668,506				662,150
Machinery and equipment			1,643,623				1,617,530				1,641,788
Construction in progress			46,019				34,038				26,840
			2,467,152				2,426,175				2,425,650
Less allowances for depreciation			1,527,666				1,474,057				1,512,770
			939,486				952,118				912,880
Total Assets		$	5,490,139			$	5,169,235			$	5,180,683
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term borrowings		$	517,499			$	388,592			$	354,556
Accounts payable			996,734				909,649				927,616
Compensation and taxes withheld			234,878				253,247				233,771
Accrued taxes			142,717				62,547				139,956
Current portion of long-term debt			10,084				7,875				6,314
Other accruals			452,817				442,030				462,888
Total current liabilities			2,354,729				2,063,940				2,125,101
Long-term debt			641,257				648,326				705,472
Postretirement benefits other than pensions			297,200				295,896				285,104
Other long-term liabilities			547,026				551,633				421,870
Shareholders’ equity:
Common stock — $1.00 par value:
103,760,672, 107,020,728 and 107,934,798 shares outstanding at September 30, 2011, December 31, 2010 and September 30, 2010, respectively			106,901				231,346				230,731
Preferred stock — convertible, no par value:
175,737, 216,753 and 216,753 shares outstanding at September 30, 2011, December 31, 2010 and September 30, 2010, respectively			175,737				216,753				216,753
Unearned ESOP compensation			(175,737	)			(216,753	)			(216,753	)
Other capital			1,304,503				1,222,909				1,182,805
Retained earnings			779,509				4,824,489				4,790,309
Treasury stock, at cost			(237,752	)			(4,390,983	)			(4,268,545	)
Cumulative other comprehensive loss			(317,859	)			(278,321	)			(292,164	)
The Sherwin-Williams Company shareholders’ equity			1,635,302				1,609,440				1,643,136
Noncontrolling interest			14,625
Total shareholders’ equity			1,649,927				1,609,440				1,643,136
Total Liabilities and Shareholders’ Equity		$	5,490,139			$	5,169,235			$	5,180,683

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thousands of dollars

		Nine Months Ended
		September 30,				September 30,
		2011				2010
OPERATING ACTIVITIES
Net income		$	427,308			$	389,567
Adjustments to reconcile net income to net operating cash:
Depreciation			112,807				100,673
Amortization of intangible assets			23,263				21,774
Stock-based compensation expense			31,775				28,498
Provisions for qualified exit costs			1,338				(57	)
Provisions for environmental-related matters			7,344				6,696
Defined benefit pension plans net cost			11,848				13,408
Net increase in postretirement liability			2,047				1,638
Other			1,742				10,626
Change in working capital accounts — net			(142,813	)			(66,376	)
Costs incurred for environmental-related matters			(17,920	)			(24,981	)
Costs incurred for qualified exit costs			(5,090	)			(9,887	)
Other			(7,686	)			6,031
Net operating cash			445,963				477,610
INVESTING ACTIVITIES
Capital expenditures			(96,883	)			(76,116	)
Acquisitions of businesses, net of cash acquired			(29,847	)			(264,340	)
Proceeds from sale of assets			12,198				4,834
Increase in other investments			(66,408	)			(71,426	)
Net investing cash			(180,940	)			(407,048	)
FINANCING ACTIVITIES
Net increase in short-term borrowings			128,326				324,661
Proceeds from long-term debt			28,908				2,386
Payments of long-term debt			(33,665	)			(93,166	)
Costs associated with repurchase of long-term debt							(22,192	)
Payments of cash dividends			(115,651	)			(117,686	)
Proceeds from stock options exercised			41,503				72,382
Income tax effect of stock-based compensation exercises and vesting			9,538				15,046
Treasury stock purchased			(328,742	)			(253,558	)
Other			288				(4,815	)
Net financing cash			(269,495	)			(76,942	)
Effect of exchange rate changes on cash			(8,087	)			1,999
Net decrease in cash and cash equivalents			(12,559	)			(4,381	)
Cash and cash equivalents at beginning of year			58,585				69,329
Cash and cash equivalents at end of period		$	46,026			$	64,948
Income taxes paid		$	102,815			$	96,063
Interest paid			31,680				54,743

See notes to condensed consolidated financial statements.

THE SHERWIN-WILLIAMS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Periods ended September 30, 2011 and 2010

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.

There have been no significant changes in critical accounting policies since December 31, 2010. Accounting estimates were revised as necessary during the first nine months of 2011 based on new information and changes in facts and circumstances. Certain amounts in the 2010 condensed consolidated financial statements have been reclassified to conform to the 2011 presentation.

Effective July 1, 2011, the Company acquired a controlling interest in Leighs Paints with the option to acquire the remaining interest by December 31, 2011. The results of operations for Leighs Paints for this three month period are included in the consolidated results of operations of the Company while the amount attributable to the noncontrolling interest was not material and is not presented separately. The noncontrolling ownership interest in Leighs Paints is presented in the balance sheet as a separate component of equity. See Note 14.

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 of 2010. The resulting one-time increase in income taxes of $11.4 million reduced basic and diluted earnings per share for the first nine months of 2010 by $.11 and $.10, respectively. See Note 11.

The Company primarily 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, 2010.

The consolidated results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

NOTE 2—IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-8, which amends the Intangibles — Goodwill and Other Topic of the Accounting Standards Codification (ASC). The ASU gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the more likely than not conclusion is reached, the two-step impairment test must be performed. Otherwise, the two-step impairment test is not necessary. ASU No. 2011-8 is effective for fiscal years beginning after December 15, 2011, but early adoption is permitted. The Company will early adopt ASU No. 2011-8 and perform the optional qualitative assessment as part of its annual goodwill impairment test. The ASU is expected to reduce the number of reporting units for which the two-step impairment step must be performed, but it is not expected to affect the Company’s results of operations, financial condition or liquidity.

In June 2011, the FASB issued ASU No. 2011-5, which amends the Comprehensive Income Topic of the ASC. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. It will have no affect on the Company’s results of operations, financial condition or liquidity.

In May 2011, the FASB issued ASU No. 2011-4, which amends the Fair Value Measurements Topic of the ASC to help achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. The ASU will affect the Company’s fair value disclosures, but will not affect the Company’s results of operations, financial condition or liquidity.

NOTE 3—DIVIDENDS

Dividends paid on common stock during each of the first three quarters of 2011 and 2010 were $.365 per common share and $.360 per common share, respectively.

NOTE 4—COMPREHENSIVE INCOME

Comprehensive income is summarized as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Thousands of dollars)		2011				2010				2011				2010
Net income		$	179,877			$	175,258			$	427,308			$	389,567
Foreign currency translation adjustments			(74,886	)			28,554				(47,998	)			13,868
Amortization of net prior service costs and net
actuarial losses, net of taxes (1)			2,408				2,385				9,093				9,877
Adjustments of marketable equity securities,
net of taxes (2)			(225	)			880				(633	)			1,545
Comprehensive income		$	107,174			$	207,077			$	387,770			$	414,857

NOTE 5—PRODUCT WARRANTIES

Changes in the Company’s accrual for product warranty claims during the first nine months of 2011 and 2010, including customer satisfaction settlements, were as follows:

(Thousands of dollars)		2011				2010
Balance at January 1		$	23,103			$	22,214
Charges to expense			23,177				14,315
Settlements			(19,507	)			(13,674	)
Balance at September 30		$	26,773			$	22,855

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, 2010.

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 nine months ended September 30, 2011, 3 stores in the Paint Stores Group, 2 manufacturing facilities in the Consumer Group and 5 branches in the Global Finishes Group were closed due to lower demand or redundancy. During the nine months ended September 30, 2011, amounts charged to SG&A and Cost of goods sold included qualified exit costs and severance costs of $1.1 million related to these closed facilities. Adjustments to prior provisions of $0.3 million related to Global Finishes Group facilities closed during 2009 were recorded in Other general expense — net in the nine months ended September 30, 2011.

The following table summarizes the activity and remaining liabilities associated with qualified exit costs at September 30, 2011 and for the nine-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				September 30,
Exit Plan		2010				sold or SG&A				accrual				expense - net				2011
Consumer Group manufacturing facilities shutdown in 2011:
Severance and related costs						$	311											$	311
Global Finishes Group stores shutdown in 2011:
Severance and related costs							207			$	(108	)							99
Other qualified exit costs							597				(77	)							520
Global Finishes Group stores shutdown in 2010:
Other qualified exit costs		$	1,114								(138	)							976
Paint Stores Group stores shutdown in 2010:
Other qualified exit costs			4											$	(4	)
Paint Stores Group stores shutdown in 2009:
Other qualified exit costs			2,022								(663	)			(29	)			1,330
Global Finishes Group manufacturing facility and branches shutdown in 2009:
Other qualified exit costs			1,820								(696	)			262				1,386
Consumer Group manufacturing facilities shutdown in 2009:
Other qualified exit costs			721								(186	)							535
Consumer Group manufacturing and distribution facilities shutdown in 2008:
Other qualified exit costs			242								(50	)							192
Paint Stores Group manufacturing and distribution
facilities, administrative offices and stores shutdown in 2008:
Other qualified exit costs			3,058								(2,083	)			(6	)			969
Other qualified exit costs for facilities shutdown prior to 2008			7,066								(1,089	)							5,977
Totals		$	16,047			$	1,115			$	(5,090	)		$	223			$	12,295

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, 2010.

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)		2011				2010				2011				2010				2011				2010
Three Months Ended September 30:
Net periodic benefit cost:
Service cost		$	4,007			$	4,226			$	918			$	501			$	873			$	883
Interest cost			4,707				4,507				1,061				1,040				3,895				4,017
Expected return on assets			(11,610	)			(10,578	)			(662	)			(720	)
Amortization of:
Prior service cost (credit)			408				416								8				(164	)			(164	)
Actuarial loss			4,876				4,735				215				347				626				326
Net periodic benefit cost		$	2,388			$	3,306			$	1,532			$	1,176			$	5,230			$	5,062
Nine Months Ended September 30:
Net periodic benefit cost:
Service cost		$	12,021			$	12,679			$	2,814			$	1,490			$	2,621			$	2,649
Interest cost			14,121				13,521				3,225				3,079				11,685				12,050
Expected return on assets			(34,831	)			(31,733	)			(2,008	)			(2,130	)
Amortization of:
Prior service cost (credit)			1,226				1,246								22				(492	)			(492	)
Actuarial loss			14,630				14,207				650				1,027				1,878				978
Net periodic benefit cost		$	7,167			$	9,920			$	4,681			$	3,488			$	15,692			$	15,185

Effective July 1, 2011, the Employee Stock Purchase and Savings Plan was amended to reinstate the Company match to 6% of eligible employee contributions.

Effective October 1, 2011, participation in The Sherwin-Williams Company Salaried Employees’ Pension Investment Plan, a defined benefit plan, was frozen for new hires. All newly hired U.S. non-collectively bargained employees will be eligible to participate in The Sherwin-Williams Company Salaried Employees’ Revised Pension Investment Plan.

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, 2010.

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 September 30, 2011, the unaccrued maximum of the estimated range of possible outcomes is $101.6 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 September 30, 2011 and 2010 were accruals for extended environmental-related activities of $82.2 million and $89.9 million, respectively. Estimated costs of current investigation and remediation activities of $60.1 million and $64.6 million are included in Other accruals at September 30, 2011 and 2010, 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 September 30, 2011. At September 30, 2011, $101.1 million, or 71.0 percent of the total accrual, related directly to these four sites. In the aggregate unaccrued maximum of $101.6 million at September 30, 2011, $70.0 million, or 68.9 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, 2010.

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. With respect to such litigation, including the public nuisance litigation, the Company does not believe that it is probable that a loss has occurred, and it is not possible to estimate the range of potential losses as there is no prior history of a loss of this nature and there is no substantive information upon which an estimate could be based. In addition, any potential liability that may result from any changes to 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. At the conclusion of the second trial, 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 in the Superior Court of the State of California, County of Santa Clara. In the original complaint, 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. The named plaintiffs in the Fourth Amended Complaint, filed on March 16, 2011, are the Counties of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano and Ventura, and the Cities of Oakland, San Diego and San Francisco. The Fourth Amended Complaint asserts a sole claim for public nuisance, alleging that the presence of lead products for use in paint and coatings in, on and around buildings in the plaintiffs’ jurisdictions constitutes a public nuisance. The plaintiffs seek the abatement of the alleged public nuisance that exists within the plaintiffs’ jurisdictions.

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 in state court 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. The case ultimately proceeded to trial and, 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 appealed and, on December 16, 2010, the Wisconsin Court of Appeals affirmed the final judgment in favor of the Company and other defendants.

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. Although the risk contribution liability theory was applied during the Thomas trial, the constitutionality of this theory as applied to the lead pigment cases has not been judicially determined by the Wisconsin state courts. However, in an unrelated action filed in the United States District Court for the Eastern District of Wisconsin, Gibson v. American Cyanamid, et al., on November 15, 2010, the District Court held that Wisconsin’s risk contribution theory as applied in that case violated the defendants’ right to substantive due process and is unconstitutionally retroactive.

Insurance coverage litigation. The Company and its liability insurers, including certain Underwriters at Lloyd’s of London, initiated legal proceedings against each other to primarily 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. The Company’s action, filed on March 3, 2006 in the Common Pleas Court, Cuyahoga County, Ohio, is currently stayed. The liability insurers’ action, which was filed on February 23, 2006 in the Supreme Court of the State of New York, County of New York, has been dismissed. 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.

NOTE 10—OTHER

Other general expense (income) — net

Included in Other general expense (income) — net were the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Thousands of dollars)		2011				2010				2011				2010
Provisions for environmental matters — net		$	2,694			$	1,974			$	7,344			$	6,696
(Gain) loss on disposition of assets			(1,094	)			(2,643	)			(5,493	)			279
Adjustments to prior provisions for qualified exit costs							(148	)			223				(761	)
Other general expense (income) — net		$	1,600			$	(817	)		$	2,074			$	6,214

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 (gain) loss on disposition of assets represents net realized (gains) 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 expense — net

Included in Other expense — net were the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Thousands of dollars)		2011				2010				2011				2010
Dividend and royalty income		$	(1,067	)		$	(1,913	)		$	(4,052	)		$	(4,406	)
Net expense from financing activities			1,932				1,908				5,881				6,479
Foreign currency related losses			8,971				3,499				11,890				1,125
Other income			(5,877	)			(2,424	)			(14,213	)			(7,348	)
Other expense			2,673				1,979				7,117				4,442
Other expense — net		$	6,632			$	3,049			$	6,623			$	292

The net expense from financing activities includes the net expense relating to the change in the Company’s financing fees.

Foreign currency related losses 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 September 30, 2011 and 2010. 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 September 30, 2011 and 2010.

Other income and Other expense included items of revenue, gains, expenses and losses that were unrelated to the primary business purpose of the Company. There were no items within the other income or other expense caption that were individually significant.

NOTE 11—INCOME TAXES

The effective tax rate was 30.9 percent and 30.2 percent for the third quarter and first nine months of 2011, respectively, and 31.4 percent and 32.1 percent for the third quarter and the first nine months of 2010, respectively. The decrease in the effective tax rate for the first nine months of 2011 compared to 2010 was primarily due to the impact of an $11.4 million Federal and State income tax charge in the first nine months of 2010 related to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act signed into law in March 2010.

At December 31, 2010, the Company had $31.3 million in unrecognized tax benefits, the recognition of which would have an effect of $27.4 million on the current provision for income taxes. Included in the balance of unrecognized tax benefits at December 31, 2010, was $6.0 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, 2010, the Company had accrued $10.2 million for the potential payment of income tax interest and penalties.

There were no significant changes to any of the balances of unrecognized tax benefits at December 31, 2010 during the first nine months of 2011.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Internal Revenue Service (IRS) has substantially completed the audit of the 2004, 2005, 2006 and 2007 tax years. The IRS commenced an examination of the Company’s U.S. income tax returns for the 2008 and 2009 tax years in the third quarter of 2011. At this time, the Company has determined that an insignificant payment is due for the 2006 and 2007 audit period.

The Company disclosed in its 2010 Annual Report on Form 10-K and in previous filings that the IRS was auditing the Company’s federal tax returns for the 2004 through 2007 years for income taxes and the 2003 through 2009 years for excise taxes. The IRS was auditing transactions related to the Company’s ESOP (the “Leveraged ESOP Transactions”). The Leveraged ESOP Transactions were implemented on August 27, 2003 and August 1, 2006. (See Note 12 of the Company’s 2010 Annual Report.) At various times, principal and interest on the debt related to the transactions was forgiven as a mechanism for funding Company contributions of elective

deferrals and matching contributions to the ESOP. The Company claimed income tax deductions for the forgiven principal and interest on the debt along with dividends. The benefit of the tax deductions related to forgiven principal and interest was reflected in equity and did not flow through the provision for income taxes.

In October 2011, the Company reached a settlement of the IRS’ audit of the Company’s ESOP. The Company has fully resolved all IRS issues for the 2003 through 2009 tax years relating to the matters disclosed in the Company’s current report on Form 8-K dated May 20, 2011 challenging the ESOP related federal income tax deductions claimed by the Company and proposing substantial excise taxes and penalties. The settlement (including interest), which resolves all ESOP related tax issues, will result in an after-tax charge related to federal and state income taxes totaling approximately $75.0 million, or $.72 per diluted common share, and an additional reduction in Shareholders’ equity of approximately $51.2 million in the Company’s fourth quarter. The Department of Labor’s investigation of the Leveraged ESOP Transactions remains open.

As of September 30, 2011, the Company is subject to non-U.S. income tax examinations for the tax years of 2004 through 2010. In addition, the Company is subject to state and local income tax examinations for the tax years 2001 through 2010.

NOTE 12—NET INCOME PER COMMON SHARE

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Thousands of dollars except per share data)		2011				2010				2011				2010
Basic
Average common shares outstanding			102,151,164				106,454,042				103,939,552				107,366,658
Net income		$	179,877			$	175,258			$	427,308			$	389,567
Less net income allocated to unvested restricted shares			(2,102	)			(1,930	)			(4,810	)			(4,116	)
Net income allocated to common shares		$	177,775			$	173,328			$	422,498			$	385,451
Basic net income per common share		$	1.74			$	1.63			$	4.06			$	3.59
Diluted
Average common shares outstanding			102,151,164				106,454,042				103,939,552				107,366,658
Stock options and other contingently issuable shares (1)			1,972,108				1,943,695				2,221,992				1,729,278
Average common shares outstanding assuming dilution			104,123,272				108,397,737				106,161,544				109,095,936
Net income		$	179,877			$	175,258			$	427,308			$	389,567
Less net income allocated to unvested restricted shares assuming dilution			(2,070	)			(1,901	)			(4,736	)			(4,055	)
Net income allocated to common shares assuming dilution		$	177,807			$	173,357			$	422,572			$	385,512
Diluted net income per common share		$	1.71			$	1.60			$	3.98			$	3.53

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 21, 2010 received non-forfeitable dividends, and the shares are therefore considered a participating security. Effective April 21, 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. Two operating segments are aggregated to form the Global Finishes Group Reportable Operating Segment (GFG) in accordance with the quantitative thresholds within ASC 280-10-50-12. Management is closely monitoring the quantitative thresholds and the performance trends within GFG on an ongoing basis. Revised Reportable Operating Segments will be established if quantitative thresholds are exceeded for a sustained basis.

		Three Months Ended September 30, 2011
										Global
		Paint Stores				Consumer				Finishes								Consolidated
(Thousands of dollars)		Group				Group				Group				Administrative				Totals
Net external sales		$	1,417,765			$	351,579			$	714,351			$	1,225			$	2,484,920
Intersegment transfers							615,307				8,174				(623,481	)
Total net sales and intersegment transfers		$	1,417,765			$	966,886			$	722,525			$	(622,256	)		$	2,484,920
Segment profit		$	236,886			$	41,023	*		$	43,508							$	321,417
Interest expense														$	(10,452	)			(10,452	)
Administrative expenses and other															(50,689	)			(50,689	)
Income before income taxes		$	236,886			$	41,023			$	43,508			$	(61,141	)		$	260,276

		Three Months Ended September 30, 2010
										Global
		Paint Stores				Consumer				Finishes								Consolidated
		Group				Group				Group				Administrative				Totals
Net external sales		$	1,286,063			$	340,365			$	544,548			$	1,283			$	2,172,259
Intersegment transfers							519,186				4,689				(523,875	)
Total net sales and intersegment transfers		$	1,286,063			$	859,551			$	549,237			$	(522,592	)		$	2,172,259
Segment profit		$	225,079			$	59,699	*		$	31,925							$	316,703
Interest expense														$	(11,310	)			(11,310	)
Administrative expenses and other															(50,014	)			(50,014	)
Income before income taxes		$	225,079			$	59,699			$	31,925			$	(61,324	)		$	255,379

		Nine Months Ended September 30, 2011
										Global
		Paint Stores				Consumer				Finishes								Consolidated
		Group				Group				Group				Administrative				Totals
Net external sales		$	3,646,079			$	1,022,143			$	2,023,388			$	3,647			$	6,695,257
Intersegment transfers							1,609,877				20,666				(1,630,543	)
Total net sales and intersegment transfers		$	3,646,079			$	2,632,020			$	2,044,054			$	(1,626,896	)		$	6,695,257
Segment profit		$	512,374			$	143,484	**		$	126,388							$	782,246
Interest expense														$	(32,874	)			(32,874	)
Administrative expenses and other															(137,367	)			(137,367	)
Income before income taxes		$	512,374			$	143,484			$	126,388			$	(170,241	)		$	612,005

		Nine Months Ended September 30, 2010
										Global
		Paint Stores				Consumer				Finishes								Consolidated
		Group				Group				Group				Administrative				Totals
Net external sales		$	3,381,955			$	1,042,731			$	1,452,194			$	3,925			$	5,880,805
Intersegment transfers							1,388,908				13,688				(1,402,596	)
Total net sales and intersegment transfers		$	3,381,955			$	2,431,639			$	1,465,882			$	(1,398,671	)		$	5,880,805
Segment profit		$	484,795			$	177,859	**		$	94,882							$	757,536
Interest expense														$	(49,219	)			(49,219	)
Administrative expenses and other															(134,231	)			(134,231	)
Income before income taxes		$	484,795			$	177,859			$	94,882			$	(183,450	)		$	574,086

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 $513.8 million and $22.0 million, respectively, for the third quarter of 2011, and $376.1 million and $29.5

million, respectively, for the third quarter of 2010. Net external sales and segment profit of these subsidiaries were $1.49 billion and $83.8 million, respectively, for the first nine months of 2011, and $995.2 million and $77.7 million, respectively, for the first nine months of 2010. Long-lived assets of these subsidiaries totaled $648.2 million and $632.4 million at September 30, 2011 and September 30, 2010, 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 July 1, 2011, the Company acquired a controlling interest in Leighs Paints with the option to acquire the remaining interest by December 31, 2011. Headquartered in Bolton, United Kingdom, Leighs Paints is one of the leading industrial fire protection coatings manufacturers in the world, with a growing global platform driven by technology innovation and quality products. The acquisition strengthens the Global Finishes Group’s growing global platform.

Effective October 1, 2010, the Company acquired Pinturas Condor S.A. (Pinturas Condor), the leading paint and coatings company in Ecuador. Pinturas Condor develops and manufactures products to the architectural, industrial and automotive vehicle refinish markets and sells them to a combination of company-owned paint stores and exclusive dealers. Included in the Global Finishes Group, Pinturas Condor strengthens the Company’s product finish market position in Ecuador.

Effective September 1, 2010, the Company acquired Becker Industrial Products AB (Acroma). Headquartered in Stockholm, Sweden, Acroma is one of the largest manufacturers of industrial wood coatings globally and a technology leader in water, UV and other wood coatings. The acquisition strengthens the Global Finishes Group’s growing global platform for product finishes.

Effective April 1, 2010, the Company acquired Sayerlack Industrial Coatings (Sayerlack). 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.

The aggregate consideration paid for Pinturas Condor, Acroma and Sayerlack was $298.2 million, net of cash acquired. All three acquisitions resulted in the recognition of goodwill and intangible assets.

The following unaudited pro-forma summary presents consolidated financial information as if Leighs Paints, Pinturas Condor, Acroma and Sayerlack 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,

2010 or of future results of operations of the combined companies under ownership and operation of the Company.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Thousands of dollars except per share data)		2011				2010				2011				2010
Net sales		$	2,484,920			$	2,252,866			$	6,727,098			$	6,208,024
Net income			179,877				171,047				426,710				390,541
Net income per common share:
Basic		$	1.74			$	1.59			$	4.06			$	3.60
Diluted		$	1.71			$	1.56			$	3.97			$	3.54

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 third 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

September 30,

Identical Assets

Observable Inputs

Inputs

(Thousands of dollars)

2011

(Level 1)

(Level 2)

(Level 3)

Assets:

Deferred compensation plan asset (1)

$

18,607

$

15,966

$

2,641

Liabilities:

Deferred compensation plan liability (2)

$

21,553

$

21,553

NOTE 16—FINANCIAL INSTRUMENTS

The table below summarizes the carrying amount and fair value of the Company’s publicly traded debt and non-publicly traded debt in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. The fair values of the Company’s publicly traded debt are based

on quoted market prices. The fair values of the Company’s non-traded debt are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

		September 30, 2011								September 30, 2010
		Carrying				Fair				Carrying				Fair
(Thousands of dollars)		Amount				Value				Amount				Value
Publicly traded debt		$	632,412			$	689,775			$	691,493			$	760,623
Non-traded debt			18,929				18,222				20,293				19,623

On July 8, 2011, the Company entered into a new five-year $1.050 billion credit agreement, which replaces the existing three-year $500.0 million credit agreement. The new credit agreement may be used for general corporate purposes, including financing working capital requirements and supporting commercial paper borrowings.

During the second quarter of 2010, the Company repurchased $84.9 million of its publicly traded 7.45% debentures due 2097. At September 30, 2010, call warrants with a cost of $8.9 million that carry rights to call another $51.6 million of the 7.45% debentures were recorded in Other current assets. These call warrants were designated as a fair value hedge under ASC 815 against changes in value related to the notional amount of $51.6 million of the 7.45% debentures. Gains or losses were recognized in earnings in the period of the change together with the offsetting gains or losses on the hedged item attributed to the risk being hedged. The objective of the hedge was to protect the related debentures against changes in redemption value due to changes in long-term interest rates and credit ratings. As of September 30, 2010, the fair value of the call warrants increased by $7.7 million, and the related debenture fair value liability increased by a similar amount. The balance sheet carrying values of the call warrants and the related debentures were adjusted to reflect these changes in value.

NOTE 17—NON-TRADED INVESTMENTS

The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These non-traded investments have been identified as variable interest entities. However, because the Company does not have the power to direct the day-to-day operations of the investments and the risk of loss is limited to the amount of contributed capital, the Company is not considered the primary beneficiary. In accordance with the Consolidation Topic of the ASC, the investments are not consolidated. The Company uses the effective yield method to determine the carrying value of the investments. Under the effective yield method, the initial cost of the investments is amortized over the period that the tax credits are recognized. The carrying amount of the investments, included in Other assets, was $219.3 million and $128.1 million at September 30, 2011 and 2010, respectively. The liability for estimated future capital contributions to the investments was $173.3 million and $74.7 million at September 30, 2011 and 2010, respectively.

NOTE 18—CAPITAL STOCK

Effective March 31, 2011, the Company retired all of its 125.4 million common stock shares held in treasury, which resulted in decreases in Treasury stock, Common stock and Retained earnings of $4.5 billion, $0.1 billion and $4.4 billion, respectively.

Item 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SUMMARY

The Sherwin-Williams Company, founded in 1866, and its consolidated wholly owned subsidiaries (collectively, the “Company”) are engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America with additional operations in the Caribbean region, Europe and Asia. The Company is structured into three reportable operating segments — Paint Stores Group, Consumer Group and Global Finishes Group (collectively, the “Reportable Operating Segments”) — and an Administrative segment in the same way it is internally organized for assessing performance and making decisions regarding allocation of resources. See pages 6 through 13 and Note 19, on pages 74 through 77, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for more information concerning the Reportable Operating Segments.

The Company’s financial condition, liquidity and cash flow remained stable through the first nine months of 2011 in spite of continued soft domestic demand, rising global raw material costs, and tight credit markets. Net working capital decreased $45.3 million at September 30, 2011 compared to the end of the third quarter of 2010 due to a significant increase in current liabilities partially offset by a significant increase in current assets. The Company has been able to arrange sufficient short-term borrowing capacity at reasonable rates even as credit markets remain tight, and the Company has sufficient total available borrowing capacity to fund its current operating needs. Net operating cash decreased $31.6 million in nine months of 2011 to a cash source of $446.0 million from a cash source of $477.6 million in 2010. In the twelve month period from October 1, 2010 through September 30, 2011, the Company generated net operating cash of $674.9 million.

Consolidated net sales increased 14.4 percent in the third quarter to $2.485 billion from $2.172 billion in the third quarter of 2010, and increased 13.8 percent in the first nine months of 2011 to $6.695 billion from $5.881 billion in the first nine months of 2010 due primarily to selling price increases, acquisitions and strong organic sales growth by the Global Finishes Group. Consolidated gross profit as a percent of consolidated net sales decreased in the third quarter to 41.8 percent from 44.7 percent in 2010 and decreased to 42.7 percent from 44.8 percent in the first nine months due primarily to rising raw material costs and acquisitions partially offset by selling price increases. Selling, general and administrative expenses (SG&A) decreased as a percent of consolidated net sales to 30.6 percent from 32.4 percent in the third quarter of 2010 and decreased to 33.0 percent from 34.1 percent in the first nine months due primarily to good expense control across all Reportable Operating Segments. Interest expense decreased $0.9 million in the third quarter and decreased $16.3 million in the first nine months of 2011 due primarily to costs related to the repurchase of a portion of the Company’s 7.45% debentures completed in the second quarter 2010. The effective income tax rate for third quarter 2011 was 30.9 percent compared to 31.4 percent in 2010, and the rate for the first nine months of 2011 was 30.2 percent compared to 32.1 percent in 2010, including a one-time increase in income tax

expense of $11.4 million relating to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “Acts”) passed by Congress in March 2010. Diluted net income per common share increased to $1.71 per share for the third quarter of 2011 from $1.60 per share a year ago and increased to $3.98 per share from $3.53 per share in the first nine months, including charges aggregating $.18 per share related to the repurchasing of debentures and the Acts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and contain certain amounts that were based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. Management considered the impact of the uncertain economic environment and utilized certain outside sources of economic information when developing the basis for their estimates and assumptions. The impact of the global economic conditions on the estimates and assumptions used by management was believed to be reasonable under the circumstances. Management used assumptions based on historical results, considering the current economic trends, and other assumptions to form the basis for determining appropriate carrying values of assets and liabilities that were not readily available from other sources. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions, materially different economic trends or from using materially different assumptions. However, management believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely to significantly impact the current valuation of assets and liabilities that were not readily available from other sources.

A comprehensive discussion of the Company’s critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1, on pages 46 through 50, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2010.

FINANCIAL CONDITION, LIQUIDITY AND CASH FLOW

Overview

The Company’s financial condition, liquidity and cash flow remained stable through the first nine months of 2011 in spite of continued soft domestic demand, rising global raw material costs, and tight credit markets. Net working capital decreased $45.3 million at September 30, 2011 compared to the end of the third quarter of 2010 due to a significant increase in current liabilities partially offset by a significant increase in current assets. Inventories increased $107.8 million and accounts receivable increased $103.7 million. All other current assets decreased $27.2 million. Short-term borrowings increased $162.9 million and accounts payable increased $69.1 million from September 30, 2010. All other current liabilities decreased $2.4 million.

Excluding short-term borrowings, net working capital increases were impacted by increased sales, higher raw material costs, foreign currency exchange rate changes, and acquisitions. The Company has been able to arrange sufficient short-term borrowing capacity at reasonable rates even as credit markets remain tight, and the Company has sufficient total available borrowing capacity to fund its current operating needs. In the first nine months of 2011, short-term borrowings increased $128.9 million and accounts payable increased $87.1 million from December 31, 2010 primarily due to the seasonal increase in need for working capital and higher raw material costs, and all other current liabilities increased $74.8 million primarily due to timing of tax payments. Since September 30, 2010, accounts receivable and inventories increased $211.5 million due primarily to increased sales, higher raw material costs and acquisitions. The remaining current assets decreased $27.2 million. Accounts receivable and inventories increased $306.0 million from December 31, 2010 to September 30, 2011 when normal seasonal trends typically require significant growth in these categories. The Company’s current ratio was 1.07 at September 30, 2011 compared to 1.09 at September 30, 2010 and 1.07 at December 31, 2010. Total debt at September 30, 2011 increased $102.5 million to $1.169 billion from $1.066 billion at September 30, 2010 and increased as a percentage of total capitalization to 41.7 percent from 39.4 percent at the end of the third quarter last year. Total debt increased $124.0 million and increased from 39.4 percent of total capitalization at December 31, 2010. At September 30, 2011, the Company had remaining borrowing ability of $1.318 billion. Net operating cash decreased $31.6 million in nine months of 2011 to a cash source of $446.0 million from a cash source of $477.6 million in 2010 primarily due to an increase in cash used to fund the seasonal increase in net working capital requirements resulting from higher sales partially offset by an increase in net income of $37.7 million. In the twelve month period from October 1, 2010 through September 30, 2011, the Company generated net operating cash of $674.9 million and increased total debt $102.5 million used to invest $145.9 million in capital additions and improvements and $63.7 million in acquisitions, purchase $450.9 million in treasury stock and pay $154.4 million in cash dividends to its shareholders of common stock.

Net Working Capital, Debt and Other Long-Term Assets and Liabilities

Cash and cash equivalents decreased $12.6 million during the first nine months of 2011. Cash requirements for increased sales and normal seasonal increases in working capital, capital expenditures of $96.9 million, acquisitions of $29.8 million, net payments made on long-term debt of $4.8 million, payments of cash dividends of $115.7 million and treasury stock purchases of $328.7 million were funded primarily by net cash from operations and net increase in short-term borrowings of $128.9 million. At September 30, 2011, the Company’s current ratio was 1.07 compared to 1.07 at December 31, 2010 and 1.09 a year ago. The decrease from a year ago was due primarily to the year-over-year increase in short-term borrowings and accounts payable more than offsetting increases in accounts receivable and inventories.

Goodwill and intangible assets increased $0.2 million from December 31, 2010 and decreased $1.8 million from September 30, 2010. The net increase during the first nine months of 2011 was due primarily to acquisitions of $25.2 million and capitalization of software of $9.4 million partially offset by amortization of $23.3 million and foreign currency translation of $11.1 million. The net decrease over the twelve-month period from September 30, 2010 resulted from amortization of $36.5 million and impairments of $4.5 million partially offset by acquisitions of