Fitch Affirms Sherwin-Williams' IDR at 'A'; Outlook Stable

Fitch Ratings has affirmed its ratings for The Sherwin-Williams Company (NYSE: SHW), including the company's Issuer Default Rating (IDR) at 'A'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

The rating and Outlook for SHW are based on the company's leading market position in the architectural coatings industry, the company's unique distribution platform, the breadth and depth of its product offerings, SHW's focus on painting contractors and property maintenance managers, solid free cash flow generation and strong management team. Risk factors include lead-based paint litigation cases involving SHW, the cyclicality of the company's end markets, volatile raw material costs and SHW's relatively aggressive growth strategy.

SHW has demonstrated that it is capable of managing working capital and lowering expenses to generate robust cash flow, maintain strong credit metrics and build liquidity during periods of economic pressure. Leverage as measured by the ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) as calculated by Fitch was 1.2 times (x) for the latest 12 months (LTM) ending June 30, 2011, consistent with its leverage target. Interest coverage was 18.1x for the June 30, 2011 LTM period, compared with 13.7x during 2010 and 22.4x during 2009 and 16.1x during 2008. FFO interest coverage was 13.4x during the LTM period versus 10x for fiscal 2010 and 17.4x for fiscal 2009. Fitch expects SHW to maintain these strong credit metrics through 2012.

Cash flow generation also remains solid with free cash flow totaling $276.3 million for the LTM period ending June 30, 2011. Free cash flow totaled $425 million during 2010, $605.3 million during 2009, $593.9 million during 2008 and $546.3 million during 2007.

SHW maintains ample liquidity with cash of $71.6 million and approximately $750 million of availability under its commercial paper program and its various revolving and letters of credit facilities as of June 30, 2011. On July 8, 2011, SHW entered into a new $1.05 billion five-year unsecured revolving credit agreement with a syndicate of banks. This facility replaces the company's existing $500 million credit agreement, which was scheduled to expire in January 2013. The company should have continued access to the revolver as Fitch expects SHW to have sufficient cushion under its financial covenant.

SHW has a long track record of adhering to a disciplined financial strategy, and Fitch expects this to continue. Fitch believes that the company will remain disciplined in its uses of cash, balancing share repurchases with selective acquisition opportunities. Fitch also expects SHW to maintain its targeted debt to EBITDA in the 1.0x range, although SHW may be slightly above this level during certain periods when the company increases short-term borrowings to fund working capital. Additionally, the company's leverage may also go above this level if it makes a sizeable acquisition. However, Fitch expects SHW to return to its target leverage within a reasonable period of time following the acquisition.

SHW seeks to expand its distribution platform by opening new stores and pursuing acquisition opportunities. In a solidly expanding economy, management plans to expand the store base at an average of 3% per year (100+ stores annually). However, the pace of store expansion has been slower over the past three and a half years as demand slowed and the company closed redundant stores from previous acquisitions. Fitch believes that store growth will remain below the 3% per year level over the next 18 months as demand remains lackluster.

The company was active with acquisitions in 2010, completing three acquisitions for a total investment of $298.2 million. Spending on acquisitions totaled $15.4 million in 2009, $68.7 million in 2008, and $282.4 million in 2007. Fitch expects SHW to continue to pursue acquisitions that would enhance its domestic controlled distribution platform, provide the company with new technologies and grow its presence in international markets.

SHW has a network of 3,390 company-operated paint stores and 564 company-operated branches as of Dec. 31, 2010. The company is unique in that most of its competitors distribute their products through 'Big Box' retailers, hardware stores and mass merchandisers. The networks of competitor paint companies that distribute through company-owned stores are not as extensive as that of SHW. Fitch views this as an advantage, as the company can directly control marketing, merchandising, service, and price decisions at its stores. Additionally, SHW also distributes through 'Big Box' Home Centers and mass merchandisers, primarily reaching the do-it-yourself (DIY) customer segment. The company estimates that about 70% of its sales are through its controlled distribution platform, with the remaining 30% through independent retailers.

Fitch's ratings on SHW take into account the cyclicality of the company's end markets. Residential, commercial and industrial construction are each cyclical and can be influenced by economic trends. SHW's historic earnings stability has been driven by its diversification; historically, weakness in residential demand has been offset by strength in the commercial and industrial sectors, and vice versa. This has not been the case over the past few years, wherein most of SHW's end markets were in decline simultaneously, although at different stages of correction. With the recent softening in the economy and lowered economic growth expectations for 2011 and 2012, the weak operating environment is likely to continue over the next year and a half.

SHW's margins have been negatively affected by increasing raw materials costs. The company's gross margins for the second quarter ended June 30, 2011 declined 200 basis points to 43.4% compared with 45.4% last year. The company and other paint manufacturers have implemented several price increases to offset the inflation of input costs. Fitch believes that coatings manufacturers are likely to realize most of the pricing increases that have been implemented. Nevertheless, operating margins are expected to continue to be under pressure in the intermediate term as there is usually a 9-12 month lag before these price increases are fully realized.

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, the state of Ohio and various cities in 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 case, all of these legal proceedings have been concluded in favor of the company and other defendants at various stages in the proceedings. The trial for the Santa Clara case is set to begin in September 2012. The potential liability related to this legal proceeding cannot be determined at this time.

In addition to public nuisance claim litigation, SHW and other companies are also defendants in a number of legal proceedings seeking monetary damages and other relief from alleged personal injuries. Last year, a Mississippi jury ruled that SHW was liable for the illnesses of a Mississippi boy who allegedly ingested lead-contaminated paint chips. The Jefferson County Circuit Court jury awarded $7 million in damages. While the monetary award is not by itself significant, this may set some precedent for future cases. The company appealed the verdict to the Mississippi Supreme court and is awaiting a decision.

Fitch has affirmed the following ratings for SHW with a Stable Outlook:

--IDR at 'A';

--Revolving bank credit facilities at 'A';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F1';

--Commercial paper (CP) at 'F1'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 26, 2011)

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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