UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

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

or

[   ]	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

(216) 566-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

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 – 141,346,784 shares as of September 30, 2004.

Table of Contents

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

See notes to condensed consolidated financial statements.

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

See notes to condensed consolidated financial statements.

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

See notes to condensed consolidated financial statements.

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

Periods ended September 30, 2004 and 2003

Note A—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2003. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated results for the third quarter and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2004.

Minority interest reflects the minority shareholders interest in the net income and equity of Sherwin-Williams Kinlita Co., Ltd (Kinlita).

Note B—STOCK BASED COMPENSATION

At September 30, 2004, the Company had two stock-based compensation plans accounted for under the recognition and measurement principles of Accounting Principles Board Opinion (APBO) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as more fully described in Note 1 and Note 11 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Pro-forma information regarding the impact of stock-based compensation on net income and earnings per share is required by Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation.” Such pro-forma information, determined as if the Company had accounted for its employee stock options under the fair value method of that Statement, is illustrated in the following table:

During the third quarter and first nine months of 2004, 784,265 and 2,810,323 shares, respectively, were issued for the exercise of stock options. During the first nine months of 2004, 294,000 net shares were issued for restricted stock grants.

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Note C—ACQUISITIONS

During the second quarter of 2004, the Company acquired a majority interest in Kinlita for $8.4 million paid in cash. Kinlita, included in the Automotive Finishes Segment, supplies coatings to original equipment truck and bus manufacturers in the Peoples Republic of China. The acquisition was accounted for as a purchase, with results of operations included in the consolidated financial statements beginning with the month of April 2004. The Kinlita acquisition resulted in the recognition of goodwill and was completed primarily to participate in the growing Chinese automotive coatings market.

During the third quarter of 2004, the Company completed its acquisitions of 100% of the stock of Duron, Inc. (Duron) and Paint Sundry Brands Corporation (PSB) for an aggregate consideration of $642.4 million, including the assumption of certain financial obligations. Both acquisitions were financed through the use of cash, liquidated short-term investments and $350.0 million in proceeds from the sale of commercial paper under the Company’s existing commercial paper program. Both acquisitions were accounted for as purchases, with results of operations included in the consolidated financial statements beginning with the month of September 2004.

Duron, included in the Paint Stores Segment, is a leading coatings company in the eastern portion of the United States servicing the professional painting contractor, builder and do-it-yourself markets through 229 company-owned stores. PSB, included in the Consumer Segment, provides high quality paint applicators to professional paint contractors and do-it-yourself users in the United States, Canada and the United Kingdom under the Purdy ®, Bestt Liebco ® and other brands. The Duron and PSB acquisitions resulted in the recognition of goodwill and were completed primarily to assist with the continued implementation of the Company’s growth strategy of supplying high quality products and services to professional paint contractors and do-it-yourself users through various channels of distribution.

Goodwill recognized in the acquisitions amounted to $119.1 million in the Paint Stores Segment, $207.2 million in the Consumer Segment and $4.8 million in the Automotive Finishes Segment. Identifiable intangible assets valued in the acquisitions amounted to $86.0 million in the Paint Stores Segment and $62.4 million in the Consumer Segment. The allocations of the purchase prices to specific assets and liabilities during the second and third quarters of 2004 were based on preliminary independent appraisals and internal estimates. The final allocations will most likely not differ significantly from the preliminary amounts allocated.

The following unaudited pro-forma summary presents consolidated financial information as if Kinlita, Duron and PSB had been acquired at 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, 2003 or of future results of operations of the combined companies under ownership and operation of the Company.

1

Included in the reported pro-forma net income are material charges of $30.5 million paid by Duron for settlement of certain compensation arrangements incurred prior to closing and $4.8 million paid by PSB for loan origination fees written off prior to closing.

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Note D—DIVIDENDS

Dividends paid on common stock during each of the first three quarters of 2004 and 2003 were $.17 per common share and $.155 per common share, respectively.

Note E—OTHER EXPENSE - NET

Items included in Other expense – net are as follows:

The net expense from financing and investing activities represents the realized gains or losses associated with the disposal of fixed assets, the net gain or loss relating to the change in the Company’s investment in certain long-term asset funds and financing fees.

Other income and other expense include miscellaneous items that are not related to the primary business purpose of the Company.

Note F—DISPOSITION AND TERMINATION OF OPERATIONS

The Company is continually re-evaluating its operating facilities against its long-term strategic goals. The Company recognizes liabilities associated with exit or disposal activities as incurred in accordance with SFAS No. 146, “Accounting for Costs Asssociated with Exit or Disposal Activities.” Qualifying exit costs primarily include post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to prior provisions 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 SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and, if impairment exists, the carrying value of the related assets is reduced to estimated fair value. Adjustments may be made for subsequent revisions in estimated fair value, not to exceed original asset carrying value before impairment.

During the first nine months of 2004, a distribution facility in the Automotive Finishes Segment and a manufacturing facility in the Consumer Segment were closed. In accordance with SFAS No. 146, non-cancelable rent, post-closure severance and other related costs were accrued during the second quarter. The following table summarizes the liabilities for qualified exit costs at September 30, 2004 and the activity for the nine-month period then ended:

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(Thousands of dollars)

For further details on the disposition and termination of operations, see Note 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Note G—PRODUCT WARRANTIES

Changes in the Company’s accrual for product warranty claims during the first nine months of 2004 and 2003, including customer satisfaction settlements during the year, were as follows:

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, 2003.

Note H—COMPREHENSIVE INCOME

Comprehensive income is summarized as follows:

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Note I—INCOME PER COMMON SHARE

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Note J—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 SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Net External Sales/ Operating Profit

Intersegment Transfers

Segment operating profit is total revenue, including intersegment transfers, less operating costs and expenses. Domestic intersegment transfers are accounted for at the approximate fully absorbed manufactured cost plus distribution costs. International intersegment transfers are accounted for at values comparable to normal unaffiliated customer sales. The Administrative Segment’s expenses include interest which is unrelated to certain financing activities of the Operating Segments, certain foreign currency transaction losses related to dollar-denominated debt and other financing activities, and other adjustments.

Net external sales and operating profits of all consolidated foreign subsidiaries were $160.4 million and $9.3 million, respectively, for the third quarter of 2004, and $135.9 million and $4.5 million, respectively, for the third quarter of 2003. Net external sales and operating profits of these subsidiaries were $463.7 million and $22.5 million, respectively, for the first nine months of 2004, and $387.0 million and $14.6 million, respectively, for the first nine months of 2003. Long-lived assets of these subsidiaries totaled $121.7 million and $108.4 million at September 30, 2004 and 2003, respectively. Domestic operations account for the remaining net external sales, operating profits and long-lived assets. The Administrative Segment’s expenses do not include any significant foreign operations. No single geographic area outside the United States was significant relative to consolidated net external sales or consolidated long-lived assets.

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Export sales and sales to any individual customer were each less than 10% of consolidated sales to unaffiliated customers during all periods presented. As a result of the acquisitions of Duron, PSB and Kinlita, the Company’s segment identifiable assets changed significantly since December 31, 2003. The identifiable assets by segment at September 30, 2004 are as follows:

Note K—HEALTH CARE, PENSION AND OTHER BENEFITS

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

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FSP No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” the effects of the subsidy resulted in a $21.4 million reduction of the accumulated postretirement benefit obligation (APBO) for benefits attributed to past service, which will be recognized prospectively beginning July 1, 2004. In the third quarter of 2004, the effects of the subsidy resulted in a $0.8 million reduction of the net periodic postretirement benefit cost, which consisted of $0.5 million amortization of the actuarial experience gain and $0.3 million reduction in interest cost.

During the third quarter, the Company made a contribution of $0.4 million to a defined benefit pension plan acquired with Duron. In addition, the Company is required to contribute an additional $1.1 million to the plan in 2005.

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For further details on the Company’s health care, pension and other benefits, see Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

NOTE L—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 historical experience. 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. The unaccrued maximum of the estimated range of possible outcomes is $99.6 million higher than the accrued amount at September 30, 2004. 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, 2004 and 2003 were accruals for extended environmental-related activities of $107.8 million and $101.5 million, respectively. Estimated costs of current investigation and remediation activities of $25.7 million and $23.5 million are included in Other accruals at September 30, 2004 and 2003, respectively.

Three of the Company’s current and former manufacturing sites account for a significant portion of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at September 30, 2004. Included in the accruals of $133.5 million at September 30, 2004 is $68.4 million related directly to these three sites. In the aggregate unaccrued exposure of $99.6 million at September 30, 2004, $35.6 million relates to the three 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 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 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Note M—IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On March 31, 2004, the FASB issued an Exposure Draft, “Share-Based Payment,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APBO No. 25 and generally would require instead that such transactions be accounted for using a fair-value-

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based method. The proposed statement would require the tax benefit associated with these share based payments to be classified as financing activities in the statement of cash flows rather than operating activities as currently permitted. While the final statement is subject to change, it is currently anticipated that it will become effective for periods beginning after June 15, 2005. The Company is in the process of evaluating this proposal.

In April 2004, the Emerging Issues Task Force (EITF) issued EITF No. 03-6, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF No. 03-6 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The pronouncement also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF No. 03-6 is effective for fiscal periods beginning after March 31, 2004. Adoption of this pronouncement had no significant effect on the Company’s reported earnings per share.

In May 2004, the FASB issued FSP No. 106-2, which requires measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost to reflect the effects of the Act, supersedes FSP No. 106-1. FSP No. 106-2 is effective for interim or annual periods beginning after June 15, 2004. See Note K for the effect of FSP No. 106-2.

Note N—INCOME TAXES

The effective tax rates for the third quarter and first nine months of 2004 and 2003 were 35.0 percent and 36.5 percent, respectively. The reduction in the tax rate was due to numerous favorable factors including the impact of employee benefit related programs offset, in part, by an increase in the Company’s state effective tax rate.

Note O—RECLASSIFICATION

Certain amounts in the 2003 financial statements have been reclassified to conform with the 2004 presentation.

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

OVERVIEW

Consolidated net sales increased $174.0 million, or 11.6 percent, for the third quarter of 2004 to $1.68 billion from $1.50 billion in the third quarter last year and increased $491.4 million, or 11.9 percent, for the first nine months of 2004 to $4.61 billion from $4.12 billion in the first nine months of 2003. Diluted net income per common share was $.92 per share in the third quarter of 2004 compared to $.82 per share in 2003 and $2.14 per share in the first nine months of 2004 versus $1.77 per share last year. The financial results include the operations of three acquisitions completed at various times since the third quarter of 2003 and the operations of two larger acquisitions, Duron and PSB, included beginning with the month of September 2004. The acquisitions increased consolidated net sales 4.0 percent, consolidated net income 2.1 percent and diluted net income per share $.02 per share in the third quarter. In the first nine months of 2004, the acquisitions increased consolidated net sales 2.3 percent, net income 1.6 percent and diluted net income per share $.03 per share.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The consolidated financial statements and accompanying footnotes included in this report have been prepared in accordance with accounting principles generally accepted in the United States with certain amounts based on management’s best estimates and judgments. To determine appropriate carrying values of assets and liabilities that are not readily available from other sources, management uses assumptions based on historical results and other factors that they believe are reasonable. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions or from using materially different assumptions. However, management currently believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely.

There have been no significant changes in critical accounting policies or management estimates since the year ended December 31, 2003. Changes in the Company’s accruals for environmental remediation-related activities since the year ended December 31, 2003 are disclosed in Note L. Changes in the Company’s accruals for qualified exit costs since the year ended December 31, 2003 are disclosed in Note F. A comprehensive discussion of the Company’s critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

FINANCIAL CONDITION

Cash and cash equivalents decreased $205.6 million during the first nine months of 2004. Net operating cash of $357.8 million and short-term borrowings of $368.0 million were used primarily for business acquisitions of $552.1 million and treasury stock purchases of $203.4 million. Cash and cash equivalents was further reduced for capital expenditures of $76.4 million,

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the payment of long-term debt of $72.1 million and the payment of cash dividends of $72.9 million, which were partially offset by proceeds from the exercise of stock options of $66.6 million. The Company had unused maximum borrowing availability of $288.0 million at September 30, 2004 under the commercial paper program that is backed by the Company’s revolving credit agreement. At September 30, 2004, the Company’s current ratio was 1.07, compared to 1.49 at December 31, 2003. The decrease in this ratio was due primarily to the decrease in cash and cash equivalents and the increase in short-term borrowings associated with the Company’s third quarter acquisitions.

Since September 30, 2003, cash generated by operations of $639.6 million was used primarily for capital expenditures of $105.0 million, treasury stock purchases of $301.5 million and acquisitions of businesses of $599.6 million, which were offset by $368.0 million of short-term borrowings. Proceeds from the exercise of stock options of $93.9 million offset cash dividends paid of $95.4 million.

Capital expenditures during the first nine months of 2004 primarily represented expenditures associated with 28 new store openings and normal equipment replacement in the Paint Stores Segment and capacity and service improvements in the Consumer Segment. We do not anticipate any further need for specific external financing to support our capital expenditure programs during the remainder of 2004.

During the third quarter of 2004, the Company purchased 1,800,000 shares of its common stock for treasury purposes through open market purchases, which brings the total number of shares purchased in 2004 to 5,150,000. The Company acquires shares of its common stock for general corporate purposes and, depending upon its cash position and market conditions, the Company may acquire additional shares of its common stock in the future. The Company had remaining authorization at September 30, 2004 to purchase 11,873,000 shares of its common stock.

The Company’s past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is a defendant in a number of legal proceedings, including purported class actions, separate actions brought by the State of Rhode Island, 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 are seeking recovery 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 practices and consumer protection laws, enterprise liability, market share liability, 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 believes that the litigation is without merit and is vigorously defending such 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.

During September 2002, a jury trial commenced in the first phase of the action brought by the State of Rhode Island against the Company and the other defendants. The sole issue before the

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court in this first phase was whether lead pigment in paint constitutes a public nuisance under Rhode Island law. This first phase did not consider the issues of liability or damages, if any, related to the public nuisance claim. In October 2002, 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. This was the first legal proceeding against the Company to go to trial relating to the Company’s lead pigment and lead-based paint litigation. The State of Rhode Island has decided to retry the case and a trial has been scheduled for April 2005. The Company believes it is possible that additional legal proceedings could be scheduled for trial in subsequent years in other jurisdictions.

Litigation is inherently subject to many uncertainties. 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 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 and to overturn 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 affect 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 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. However, based upon, among other things, the outcome of such litigation to date, management does not currently believe that the costs or potential liability ultimately determined to be attributable to the Company arising out of such litigation will have a material adverse effect on the Company’s results of operations, liquidity or financial condition.

The operations of the Company, like those of other companies in the same industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.

Depreciation of capital expenditures and other expenses related to ongoing environmental compliance measures are included in the normal operating expenses of conducting business. The Company’s capital expenditures, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company’s financial condition, liquidity, cash flow or results of operations during the first nine months of 2004. Management does not expect that such capital expenditures, depreciation and other expenses will be material to the Company’s financial condition, liquidity, cash flow or results of operations in 2004.

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The Company is involved with environmental investigation and remediation activities at some of its current and former sites (including sites which were previously owned and/or operated by businesses acquired by the Company). In addition, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the investigation and remediation of environmental contamination and hazardous waste at a number of third-party sites, primarily Superfund sites. The Company may be similarly designated with respect to additional third-party sites in the future.

The Company accrues for estimated costs of investigation and remediation activities at its current, former 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 based on currently available facts regarding each site. The Company accrues a specific estimated amount when such an amount and a time frame in which the costs will be incurred can be reasonably determined. 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 accrued by the Company in accordance with applicable accounting rules and interpretations. The Company continuously assesses its potential liability for investigation and remediation activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated. At September 30, 2004 and 2003, the Company had accruals for environmental-related activities of $133.5 million and $125.0 million, respectively.

Due to the uncertainties surrounding environmental investigation and remediation activities, the Company’s liability may result in costs that are significantly higher than currently accrued. If the Company’s future loss contingency is ultimately determined to be at the maximum of the range of possible outcomes for every site for which costs can be reasonably estimated, the Company’s aggregate accruals for environmental-related activities would be $99.6 million higher than the accruals at September 30, 2004.

Three of the Company’s current and former manufacturing sites, described below, account for a significant portion of the accrual for environmental-related activities and the unaccrued maximum of the estimated range of possible outcomes at September 30, 2004. Included in the accruals of $133.5 million at September 30, 2004 is $68.4 million related directly to these three sites. In the aggregate unaccrued exposure of $99.6 million at September 30, 2004, $35.6 million relates to the three 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.

The first of these sites is a former manufacturing facility in New Jersey that is in the early investigative stage of the environmental-related process. Although contamination exists at the site and adjacent areas, the extent and magnitude of the contamination has not yet been fully quantified. Due to the uncertainties of the scope and magnitude of contamination and the degree of remediation that may be necessary relating to this site, it is reasonably likely that further extensive investigation may be required and that extensive remedial actions may be necessary not only at the former manufacturing site but along an adjacent waterway. Depending on the extent of the additional investigation and remedial actions necessary, the ultimate liability for

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this site may exceed the amount currently accrued and the maximum of the range of reasonably possible outcomes currently estimated by management.

The second site is a current manufacturing facility located in Illinois. The environmental issues at this site have been determined to be associated with historical operations. While the majority of the investigative work has been completed at this site and some remedial actions taken, agreement on a proposed remedial action plan has not been obtained from the appropriate governmental agency. The third site is a current manufacturing facility in California. Similar to the Illinois site noted above, the environmental issues at this site have been determined to be associated with historical operations. The majority of the investigative activities have been completed at this site, some remedial actions have been taken and a proposed remedial action plan has been formulated but currently no clean up goals have been approved by the lead governmental agency. In both the Illinois and California sites, the potential liabilities relate to clean-up goals that have not yet been established and the degree of remedial actions that may be necessary to achieve these goals.

Management cannot presently estimate the 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 governmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.

The Company’s contractual obligations and commercial commitments changed in the first nine months of 2004 primarily as a result of the acquisitions of Duron and PSB. The following table summarizes the additional contractual obligations and commercial commitments associated with these acquisitions as of September 30, 2004:

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(Thousands of dollars)

1 Primarily relates to open purchase orders for raw materials at September 30, 2004

Changes to the Company’s accrual for product warranty claims in the first nine months of 2004 are disclosed in Note G.

RESULTS OF OPERATIONS

Shown below are net sales and the percentage change for the third quarter and first nine months by reportable segment for 2004 and 2003:

Consolidated net sales increased in the third quarter and first nine months of 2004 due primarily to continuing strong domestic architectural paint sales and improving sales and market conditions in domestic industrial maintenance and product finishes markets. Consolidated net sales include the operations of three acquisitions completed at various times since the third quarter of 2003 and the operations of two larger acquisitions, Duron and PSB, included beginning with the month of September 2004. The acquisitions increased consolidated net sales 4.0 percent in the third quarter and 2.3 percent for the first nine months of 2004.

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Net sales in the Paint Stores Segment increased in the third quarter and first nine months due to continuing strong domestic architectural paint sales to contractor and do-it-yourself customers. The acquisition of Duron increased Paint Stores Segment sales 3.2 percent in the third quarter and 1.2 percent in the first nine months. Industrial maintenance and product finishes sales continued to improve. Comparable-store sales, which are sales from stores open for more than twelve calendar months, increased 8.9 percent in the third quarter and 9.9 percent in the first nine months.

Net sales of the Consumer Segment increased in the quarter due primarily to a 7.8 percent favorable impact of sales from acquisitions that were partially offset by sales declines due to inventory adjustments at some of our retail customers and elimination of a paint program with a retail customer. In the first nine months of 2004, the increased net sales of this Segment were due primarily to a 6.0 percent favorable impact of sales from acquisitions in addition to new product programs.

The Automotive Finishes Segment’s net sales increased due to new product introductions, improving international sales and the April 2004 acquisition of a majority interest in a foreign automotive coatings company that increased sales 3.2 percent in the third quarter and 2.1 percent in the first nine months over last year. Currency exchange fluctuations relative to last year had only minor impacts on net sales of this Segment in the third quarter and first nine months of 2004.

The International Coatings Segment’s third quarter sales improved due to improving sales in South America and the United Kingdom. During the first nine months of 2004, a highly competitive market constrained sales in South America. Favorable currency exchange fluctuations relative to last year increased net sales for the Segment in U. S. dollars by 3.8 percent in the third quarter and 10.0 percent for the first nine months.

Shown below are operating profit and the percent change for the third quarter and first nine months by reportable segment for 2004 and 2003:

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Consolidated operating profit increased partly due to the change in gross profit, which increased $64.9 million and $190.4 million in the third quarter and first nine months of 2004, respectively. As a percent of sales, consolidated gross profit decreased to 44.3 percent in the third quarter of 2004 from 45.2 percent in the third quarter of 2003 and to 44.1 percent for the first nine months of 2004 from 44.8 percent for the first nine months of 2003. The decrease in the gross profit percentages for the quarter and first nine months of 2004 were primarily related to a $2.7 million provision for qualified exit costs for two closed facilities and raw material cost increases that could not be totally offset by improved manufacturing absorption. The Paint Stores Segment’s gross profit for the third quarter of 2004 increased $65.7 million due primarily to $47.7 million generated from an overall increase in sales volume and by acquisition profitability. For the first nine months of 2004, gross profit of the Paint Stores Segment increased $158.2 million due primarily to $137.4 million generated from an overall increase in sales volume and by acquisition profitability and other factors. The Consumer Segment’s gross profit for the third quarter of 2004 decreased $9.5 million due to increasing raw material costs and lower core business sales volume which was partly offset by acquisition gross profit of $6.4 million. For the first nine months of 2004, the Consumer Segment’s gross profit increased $8.3 million due primarily to an $11.1 million increase from acquisitions, which was offset by increased raw material costs. The Automotive Finishes Segment’s gross profit for the quarter and the first nine months of 2004 increased $6.4 million and $19.0 million, respectively, due to the sales increase, sales of higher margin new products, improvements in the international business units and the Kinlita acquisition. The International Coatings Segment’s gross profit for the third quarter and first nine months of 2004 increased by $2.4 million and $9.3 million, respectively, primarily as a result of higher sales volumes.

Consolidated operating profit was also favorably influenced by selling, general and administrative expenses, which as a percent of sales decreased to 31.4 percent in the third quarter of 2004 from 31.9 percent in the third quarter of 2003 and decreased to 33.1 percent in the first

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nine months of 2004 from 34.1 percent in the first nine months of 2003. Consolidated selling, general and administrative expenses increased $47.0 million and $121.5 million compared to last year for the third quarter and the first nine months, respectively. In the Paint Stores Segment, increased spending of $38.3 million in the third quarter and $86.8 million for the first nine months was due primarily to $13.3 million from acquisitions and the incremental expenses associated with increased sales and new and acquired stores. The Consumer Segment’s SG&A spending, including acquisition SG&A, was flat compared to last year and up slightly in the first nine months of 2004 due primarily to continued cost control. The Automotive Segment’s SG&A expense as a percent of sales decreased in the third quarter due to lower expenses associated with the Chinese acquisition but increased in the first nine months of 2004 due primarily to incremental expenses associated with new stores. SG&A expense as a percent of sales for the International Coatings Segment in the third quarter and first nine months of 2004 improved due to increased sales volumes and tight expense control.

The effective tax rates for the third quarter and first nine months of 2004 and 2003 were 35.0 percent and 36.5 percent, respectively. The reduction in the tax rate was due to numerous favorable factors including the impact of employee benefit related programs offset, in part, by an increase in the Company’s state effective tax rate.

Net income increased 10.4 percent to $132.9 million in the third quarter of 2004 and 19.0 percent to $310.8 million in the first nine months of 2004. Diluted net income per common share in the third quarter of 2004 was $.92 per share compared to $.82 per share in 2003 and $2.14 per share in the first nine months of 2004 versus $1.77 per share last year. The financial results include the operations of three acquisitions completed at various times since the third quarter of 2003 and the operations of two larger acquisitions, Duron and PSB, included beginning with the month of September 2004. The acquisitions increased consolidated net income 2.1 percent and diluted net income per share $.02 per share in the third quarter of 2004. In the first nine months of 2004, the acquisitions increased net income 1.6 percent and diluted net income per share $.03 per share.

Management considers a measurement that is not in accordance with accounting principles generally accepted in the United States a useful measurement of the operational profitability of the Company. Some investment professionals also utilize such a measurement as an indicator of the value of profits and cash that are generated strictly from operating activities, putting aside working capital and certain other balance sheet changes. For this measurement, management increases net income for significant non-operating and non-cash expense items to arrive at an amount known as “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA). The reader is cautioned that the following value for EBITDA should not be compared to other entities unknowingly. EBITDA should not be considered an alternative to net income or cash flows from operating activities as an indicator of operating performance or as a measure of liquidity. The reader should refer to the determination of net income and cash flows from operating activities in accordance with accounting principles generally accepted in the United States disclosed in the Statements of Consolidated Income and Statements of Consolidated Cash Flows. EBITDA as used by management is calculated as follows:

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management’s current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and the costs and potential liability for environmental-related matters and the lead pigment and lead-based paint litigation. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “expects,” “anticipates,” “believes,” “will,” “will likely result,” “will continue,” “plans to” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements and from the Company’s historical results and experience.

These risks, uncertainties and other factors include such things as: (a) general business conditions, strengths of retail and manufacturing economies and the growth in the coatings industry; (b) competitive factors, including pricing pressures and product innovation and quality; (c) changes in raw material availability and pricing; (d) changes in the Company’s relationships with customers and suppliers; (e) the ability of the Company to attain cost savings from productivity initiatives; (f) the ability of the Company to successfully integrate past and future acquisitions into its existing operations, as well as the performance of the businesses acquired, including the acquisitions of Duron, Inc. and Paint Sundry Brands Corporation; (g) changes in general domestic economic conditions such as inflation rates, interest rates and tax rates; (h) risks and uncertainties associated with the Company’s expansion into and its operations in China, South America and other foreign markets, including inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions, unrest and other external economic and political factors; (i) the achievement of growth in developing markets, such as China, Mexico and South America; (j) increasingly stringent domestic and foreign governmental regulations including those affecting the environment; (k) inherent uncertainties involved in assessing the Company’s potential liability for environmental remediation-related activities; (l) other changes in governmental policies, laws and regulations, including changes in accounting policies and standards and taxation requirements (such as new tax laws and new or revised tax law interpretations); (m) the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation and the affect of any legislation and administrative regulations relating thereto; and (n) unusual weather conditions.

Readers are cautioned that it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results and that the above list should not be considered to be a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk associated with interest rates and value changes in foreign currencies. The Company utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company has partially hedged risks associated with fixed interest rate debt by entering into various interest rate swap agreements. The Company does not believe that any potential loss related to interest rate exposure would have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company enters into foreign currency option and forward contracts to hedge against value changes in foreign currency. The Company believes it may experience continuing losses from foreign currency translation. However, the Company does not expect currency translation, transaction or hedging contract losses to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. There were no material changes in the Company’s exposure to market risk since the disclosure included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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Item 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chairman and Chief Executive Officer and our Senior Vice President — Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chairman and Chief Executive Officer and our Senior Vice President — Finance and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be disclosed by us in our periodic SEC reports. There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

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

A summary of the repurchase activity for the Company’s third quarter is as follows:

(1)

All shares were purchased through the Company’s 20.0 million share repurchase program publicly announced on October 24, 2003. There is no expiration date specified for the program. The Company intends to repurchase stock under the program in the future. There were no shares delivered to satisfy the exercise price and/or tax withholding obligations by employees who exercised stock options during the third quarter.

Item 5. Other Information.

          During the fiscal quarter ended September 30, 2004, the Audit Committee of the Board of Directors of the Company approved certain non-audit services to be performed by Ernst & Young LLP, the Company’s independent auditors. These non-audit services were approved within categories related to other advisory and compliance services.

Item 6. Exhibits.

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SIGNATURES

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

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INDEX TO EXHIBITS

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