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Letter to the Editor

Sherwin-Williams Q2 2006 Net Income Up 20%

Consolidated net income increased $31.4 million, or 20.5 percent, to $184.6 million in the quarter and $61.7 million, or 26.1 percent, to $298.3 million in the first six months. As a percent to net sales, consolidated net income improved to 8.7 percent from 7.8 percent in the quarter and to 7.7 percent from 6.8 percent in the first six months due primarily to improved operations. Diluted net income per common share increased 23.1 percent in the quarter to $1.33 per share from $1.08 per share in 2005 and 30.1 percent in the first six months to $2.16 per share from $1.66 per share last year.

Effective January 1, 2006, the company changed its reportable operating segments based on changes in its management structure to the following segments: Paint Stores Group, Consumer Group, and Global Group. Historical business segment information has been updated to reflect this change in reportable operating segments.

Net sales in the Paint Stores Group Segment increased $140.5 million, or 11.8 percent, to $1.33 billion in the quarter and $320.2 million, or 15.5 percent, to $2.38 billion for the first six months due primarily to continuing strong domestic architectural paint sales to contractor and do-it-yourself (DIY) customers and improved industrial maintenance product sales. Net sales from stores open for more than twelve calendar months increased 9.6 percent in the quarter and 13.4 percent in the first six months. Paint Stores Group Segment operating profit increased $34.5 million, or 18.9 percent, to $217.2 million in the quarter and $72.8 million, or 28.3 percent, to $330.5 million in the first six months. Operating profit as a percent to net sales increased to 16.3 percent from 15.4 percent in the quarter and to 13.9 percent from 12.5 percent in the first six months due primarily to increased paint sales volume and effective SG&A expense control.

Net sales of the Consumer Group Segment in the quarter decreased $13.6 million, or 3.3 percent, to $400.9 million and in the first six months decreased $10.0 million, or 1.4 percent, to $730.8 million. These sales decreases were due to the elimination of a portion of a paint program with a large retail customer partially offset by increased paint sales volume and selling price increases. Operating profit of this Segment increased $11.3 million, or 17.3 percent, to $76.3 million in the quarter and $15.5 million, or 13.2 percent, to $133.0 million in the first six months. As a percent to net sales, Consumer Group Segment operating profit increased to 19.0 percent from 15.7 percent in the quarter and 18.2 percent from 15.9 percent in the first six months due to selling price increases, tight spending control and better factory utilization resulting from higher volume shipments to the Paint Stores Group Segment that offset continuing raw material cost increases.

The Global Group Segment's net sales in the quarter increased $37.7 million, or 10.4 percent, to $398.8 million and in the first six months increased $84.2 million, or 12.1 percent, to $779.4 million when stated in U.S. dollars. This Segment's net sales stated in local currency increased by 7.8 percent in the quarter and by 8.6 percent in the first six months due primarily to architectural paint selling price increases and volume gains in Mexico and South America and improved automotive and product finishes sales. Operating profit of this Segment improved $8.6 million, or 33.7 percent, to $34.0 million in the quarter and $20.3 million, or 43.8 percent, to $66.5 million in the first six months. Operating profit as a percent to net sales increased to 8.5 percent from 7.1 percent in the quarter and to 8.5 percent from 6.7 percent in the first six months. This Segment's operating profit was favorably impacted by increased sales, improved operating efficiencies related to additional manufacturing volume and expense control. There was no significant impact on operating profit in the quarter due to currency exchange fluctuations.

Commenting on the second quarter results, Christopher M. Connor, Chairman, President and Chief Executive Officer, said, "We are pleased that all our operating segments continue to achieve operating profit growth on a year-over-year basis. We are encouraged by the ongoing positive sales results generated by the Paint Stores Group and Global Group Segments. Integration of the Duron and Paint Sundry Brands acquisitions continues to go well, and those businesses are exceeding our expectations of both net sales and operating profit. Our management teams will continue to emphasize tight control over selling, general and administrative expenses as another means to improve operating profit.

"We expect to achieve continued growth in net operating cash flow in part by maintaining control over working capital.... We will continue to opportunistically acquire our stock through open market purchases. During the quarter, we acquired 850,000 shares of our common stock and at the end of the quarter had remaining authorization to purchase 17,171,000 shares.

"During the third quarter of 2006, we anticipate achieving an increase in consolidated net sales between 6and 9 percent over last year's third quarter. With sales at that level, we expect diluted net income per common share for the third quarter to be in the range of $1.23 to $1.28 per share compared to $1.07 per share last year. For the full year 2006, we anticipate that the percentage increase in our consolidated net sales will be in the high-single to low-double digits over 2005. With annual sales at that level, we estimate diluted net income per common share for 2006 will be in the range of $4.00 to $4.10 per share, including an estimated $.08 per share charge for the additional expense relating to stock options, compared to $3.28 per share earned in 2005."

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