During 1996, the Paint Stores Segment integrated a number of acquired businesses. The Segment obtained 27 stores as part of the Pratt & Lambert United, Inc. (Pratt & Lambert) acquisition and also completed various other acquisitions, including Pro-Line Paint Company, Seagrave Coatings Corporation, Mercury Paint Company and Brod-Dugan Company. The Pro-Line and Seagrave acquisitions provide the Segment with expanded presence in the industrial and marine markets, while the Mercury and Brod-Dugan acquisitions add 25 stores selling well-known and respected brands to contractors and retail customers. 

Coatings Division  
In the United States, the Coatings Division manufactures paint and paint-related products for do-it-yourself customers, professional painters, contractors, industrial and commercial maintenance accounts, and manufacturers of factory finished products. Sherwin-Williams ® branded architectural and industrial finishes are manufactured exclusively for the Paint Stores Segment. Labels, color cards, traffic paint, adhesives, private label and other branded products are manufactured for the Paint Stores Segment, the Consumer Brands Division and other divisions of the Company. Competitive factors for the Division are product innovation, manufactured product quality, service, distribution and price. Domestic competitors of the Division consist of other coatings manufacturers located throughout the United States. There are approximately 900 such manufacturers at the regional and national levels. The Coatings Division continues to strive to be the lowest cost producer of high quality coatings to gain an advantage over its competitors.  

Worldwide, there are many competitors in each of the foreign markets served by the Division as it manufactures, distributes and sells its products through wholly- owned subsidiaries, joint ventures and licensees of technology, trademarks and trade names. During 1996, the Division assumed the management of the architectural paints and coatings business of Globo S.A. Tintas e Pigmentos located in Brazil and the industrial coatings portion of the Stierling Group of companies located in the Republic of Chile, after the Company's acquisition of such businesses. At December 31, 1996, the Division included 9 subsidiaries and joint ventures in 8 foreign countries and 37 licensing agreements in 30 foreign countries. The majority of the sales from licensees and subsidiaries are in South America, the Division's strongest international market. New licensing agreements were signed in the Dominican Republic and Vietnam in 1996. In addition, new licensees in Argentina, China and Greece were obtained through the Pratt&ampLambert acquisition. In 1997, the Division will continue to develop new business internationally by following a predetermined regional approach for the establishment of subsidiaries, joint ventures and licensees in selected countries.  

During 1996, the Coatings Division focused on integrating the operations of Pratt&ampLambert and several smaller domestic acquisitions into its own operations.  

The integration benefits included consolidation and overhead cost synergies while producing record gallon output. The Division's priorities for foreign acquisitions were to lower the cost of production through manufacturing efficiencies, better manufactured product quality, and improved service and distribution. The Division also continued to expand its powder coatings operations during 1996, completing construction of a new plant in Harrisburg, Pennsylvania and obtaining a new plant as part of the Pratt&ampLambert transaction. The Division's first powder coatings plant in Fort Wayne, Indiana obtained ISO 9001 certification of its quality control system.  

In 1997, the Division will continue to integrate the manufacturing facilities obtained in 1996 as well as the manufacturing facility the Division obtained in January 1997 as part of the Thompson Minwax Holding Corp. (Thompson Minwax) acquisition. The integration of the acquired plants into the existing organization requires an analysis of the strategic fit of each of the Division's facilities, acquired and existing, in relation to the total manufacturing capability of the Division. Those facilities that do not fit well into the strategic plan will be closed and their production transferred to more efficient, more strategically located plants. As part of the analysis of the strategic fit of each facility, the Coatings Division will complete the closing of certain non-strategic facilities in 1997, while increasing the capacity and efficiency of other facilities. When the rationalization is completed, the Division will undergo a complete logistics and product sourcing review to further improve the efficiency of the manufacturing and distribution network. Throughout 1997, the Division also plans to continue its heightened research and development activities through new process developments that bring the manufacturing of products closer to the end user and through increased support of new product introductions. 

In 1997, the Division will introduce several new products, including the launch of a new line of paints under the Martha Stewart ™ label in early spring. In addition, the acquisition of Thompson Minwax will add the full line of Thompson's ® exterior stains and sealants to enhance the Division's position in the market for both wood stains and concrete coatings. These products are an excellent balance with the Division's existing Cuprinol ® wood stains and H&C ® concrete coatings lines. The acquisition of Thompson Minwax will also assist the Division in expanding internationally, as it will add a line of interior varnishes and exterior stains under the Ronseal ™ brand name in the United Kingdom and Ireland. Marketing programs for 1997 will target these new lines in addition to continued advertising of the Division's Dutch Boy ® , Pratt & Lambert ® and other brands. 

Automotive Division 
The Automotive Division develops, manufactures and markets motor vehicle finish and refinish products under the Sherwin-Williams ® and other branded labels in the United States and Canada through its network of 135 company-operated branches at December 31, 1996. The branches are supported by a direct sales staff. Products are also marketed through independent jobbers and wholesale distributors. The Division is the sole distributor of Standox ® branded vehicle refinishing paints in the United States and Canada for American Standox, Inc., a joint venture. The Division sells directly to independent automotive body shops, automotive dealerships, fleet owners and refinishers, production shops, body builders and manufacturers requiring a factory finish (OEM). A subsidiary in Jamaica generally markets a full line of products. Products manufactured in Kingston, Jamaica are sold through 9 stores and other dealers and by a direct sales force to independent dealers, painters, contractors, automotive body shops and industrial and commercial maintenance accounts in Jamaica. A portion of the income for the Division comes from the licensing of technology, trademarks and trade names to foreign companies. The Division has 12 licensees in 14 foreign countries, including a new agreement signed in Indonesia in 1996. Key competitive factors for the Automotive Division are technology, product quality, distribution and service. The Automotive Division has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. Strong distribution and high quality products have been the Division’s greatest competitive advantages.  

The Division's international operations grew substantially in 1996. Productos Quimicos y Pinturas, S.A. de C.V. and its affiliated companies were acquired in January 1996, expanding the Division's presence in the Mexican market with the highly recognized Excelo ™ brand products. In May 1996, Lazzuril Tintas S/A, a Brazilian automotive coatings company, was acquired. Late in 1996, the Division assumed the management of the automotive coatings business of the Stierling Group of companies, a leading producer of automotive coatings in Chile. The addition of these businesses in Mexico and South America will positively impact the Division's name recognition in these areas, providing the opportunity for future growth. 

Transportation Services Division 
The Transportation Services Division provides warehousing, truckload freight, pool assembly, freight brokerage and consolidation services primarily for the Company and for certain external manufacturers, distributors and retailers throughout the United States and Canada. This Division provides the Company with total logistics service support which allows increased delivery schedules, lower field inventory levels and fewer out-of-stocks. 

The Division spent the majority of 1996 integrating and consolidating the distribution centers obtained through the Pratt & Lambert acquisition into its existing distribution network. Consolidation efforts were successful, allowing the Division to achieve logistic and distribution synergies while continuing to meet strong demand. In its ongoing endeavor to improve distribution efficiency, a state-of-the- art truck routing software package was installed during 1996. This routing package represents a computerized fleet planning device which provides optimal loading, delivery and route information based on daily distribution requirements, thereby lowering overall costs. 

Diversified Brands Division 
The Diversified Brands Division competes in the following areas: retail and wholesale consumer aerosols custom and industrial aerosols paint applicators and cleaning products. The Division participates in the retail and wholesale paint, automotive, homecare products, institutional, insecticide and industrial markets. A wide variety of aerosol products are filled, packaged and distributed to regional, national and international customers. Products are marketed through mass merchandisers, home centers, automotive chains and maintenance distribution channels in the United States, Canada, Mexico and Brazil. Approximately 6.2 percent of the Division’s total sales in 1996 represented aerosols and paint applicators sold to the Paint Stores Segment. There are various primary competitors in each of the Division’s product lines. The main competitive factors are technical know-how, quality, service and price. Superior quality products, excellent regulatory-complying products, technical leadership positions in electronic commerce and strong customer relationships have enabled the Division to distinguish itself from the competition. 

Other Segment 
The Other Segment is responsible for the acquisition, development, leasing and management of properties for use by the Company and others generally within the United States. Obtaining real estate in the proper location at the appropriate cost is a critical component for achieving the desired operating success, particularly for paint stores and distribution service centers. This Segment has many competitors consisting of other real estate owners, developers and managers in areas where we currently hold property. The main competitive factors are the availability of property and price.  

At the end of 1996, the Retail Properties Division owned or leased 221 properties, representing over 1,700,000 square feet of space, which are conducive to the sale of paint and associated products. Such properties include 140 freestanding buildings, for exclusive use by the Paint Stores Segment, and 81 multi-tenant properties, utilized when the basic needs of the paint store can be met and where external rental opportunities can be profitably operated. The paint store must be easily accessible to professional painters and contractors with sufficient access to pickup and delivery areas. Multi-tenant properties are usually smaller “strip” shopping centers with adequate parking and, generally, the paint store will be located at the end of the shopping area for the most convenient access. In 1997, the Division does not anticipate significant growth in the number of owned retail properties needed by the Paint Stores Segment. The occupancy rate for external space was 86.6 percent at December 31, 1996.  

The Non-Retail Properties Division owned or leased 29 properties at the end of 1996 consisting of office buildings, idle manufacturing facilities, distribution service centers and vacant land. Occasionally, such properties are acquired or developed to provide the lowest cost alternative for expansion of distribution operations. Locations that have been utilized profitably in the past which can no longer contribute to the Company’s future plans are offered for sale or lease. At the end of 1996, three idle or vacant properties obtained in the acquisition of Pratt&ampLambert were under contract for sale, with settlement to occur in early 1997. One of the Division's largest tenants terminated its office space lease as of December 31, 1996, vacating over 300,000 square feet of office and storage space. While lease commitments have already been obtained for over 60 percent of this space, the vacancy will adversely impact the Non-Retail Properties Division in 1997. 

Net external sales, operating profits, identifiable assets, depreciation and operating margins include continuing operations only for 1987. 

Operating profit is total revenue, including realized profit on intersegment transfers, less operating costs and expenses. Adjusting for special credits in 1989 and special charges in 1988, operating profit of the Paint Stores Segment increased 7.8 percent from 1989 to 1990 and 7.7 percent from 1988 to 1989. Corporate expenses include interest which is unrelated to real estate leasing activities, certain provisions for disposition and termination of operations and environmental remediation which are not directly associated with or allocable to any operating segment, and other adjustments. 

Identifiable assets are those directly identified with each segment's operations. Corporate assets consist primarily of cash, investments, deferred pension assets and headquarters' property, plant and equipment. 

The operating margin for each segment is based upon total external sales and intersegment transfers. Intersegment transfers are accounted for at values comparable to normal unaffiliated customer sales. 

Export sales, sales of foreign subsidiaries and sales to any individual customer were each less than 10% of consolidated sales to unaffiliated customers during all years presented.