Coatings Segment 
The five divisions within the Coatings Segment (Coatings, Consumer Brands, Automotive, Transportation Services and Diversified Brands) participated in the manufacture, distribution and/or sale of coatings and related products. In 1998, the Coatings and Consumer Brands Divisions have been consolidated to form one division responsible for technical, manufacturing and selling of products to the dealer, home center and mass merchandiser markets. 

The Coatings Segment employs a variety of trade names and trademarks in pursuit of its business. Sherwin-Williams®, Thompson’s®, Dutch Boy®, Kem-Tone®, Cuprinol®, Pratt & Lambert®, Globo ™ ,Andina ™ , H&C®, Martin-Senour®, Laz-zuril™ , Excelo ™ , Western®, Krylon®, Rust Tough®, Colorgin ™ , Rubberset®, Sprayon®, Dupli-Color®, Minwax®, Cello®, White Lightning®, Formby’s®, Red Devil®, Tri-Flow ™, Marson™ and Ronseal™ are some of the trade names and trademarks that have high national and international customer recognition and collectively contribute significantly to the sales of the Segment. The Segment has sales to certain customers that, individually, may be a significant portion of its revenues. However, the loss of any single customer would not have a material adverse effect on the overall business of the Segment. All technical expenditures sponsored by the Company occurred in the Coatings Segment. The expenditures for research and development appear on page 24 of this report. 

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 and controlled-branded architectural and industrial finishes are manufactured for the Paint Stores Segment. Labels, color cards, traffic paint, adhesives, private label and other branded products were manufactured for the Paint Stores Segment, the Consumer Brands Division and other divisions of the Company. Competitive factors for the Division are product innovation, product quality, service, distribution and price. Domestic competitors of the Division consist of other coatings manufacturers located throughout the United States. There are approximately 800 such manufacturers at the regional and national levels. The Coatings Division continues to strive to be the lowest cost supplier of high quality coatings in order 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. At December 31, 1997, the Division included 8 subsidiaries and 3 joint ventures in 9 foreign countries and 34 licensing agreements in 26 foreign countries. The majority of the sales from licensees and subsidiaries are in South America, the Division’s most important international market. A new licensing agreement was signed in Thailand in 1997. In 1998, the Division will continue to develop new business internationally by following a predetermined regional approach for the establishment of sub-sidiaries, joint ventures and licensees in selected countries. 

During 1997, the Coatings Division’s efforts were focused on the rationalization of its existing facilities, primarily the transfer of production from one of its Chicago manufacturing facilities to other facilities in order to obtain improved efficiency. As a result of these changes, the ongoing integration of acquired businesses and new products for the Consumer Brands Division, the Division struggled with service and production problems in some of its manufacturing areas. In spite of these issues, the Division was able to improve overall productivity per gallon at the plant level. The Division’s expansion of its powder coatings operations continued in 1997 with the addition of facilities in Arlington, Texas, Ontario, California and Spar-tanburg, South Carolina. Continued quality efforts at these plants were demonstrated by ISO 9001 certification at the Harrisburg, Pennsylvania plant and QS certification (automotive) at the Fort Wayne, Indiana plant - the first manufacturing plant of the Company to obtain such certification. 

Expansion through acquisitions also continued in 1997. In addition to Thompson Minwax Holding Corp. (Thompson Minwax), the acquisition of Sumare Industria Quimica, S.A. in February 1997 provided accelerated entry into the Brazilian industrial maintenance and product finishes coatings market. The acquisition of Pinturas Andina S.A. in June 1997 provided further expansion into the Chilean architectural coatings market. The Coatings Division’s growth the past several years, both internally and through acquisitions, has brought significant challenges throughout the year but has also provided many future opportunities for continued improvement. 

In 1998, the Coatings Division will embark on a year of change. The Product Finishes Business Unit has been transferred to the Paint Stores Segment, certain caulks and sealants’ business will transfer to the Diversified Brands Division, and the Divi-sion’s remaining operations will be consolidated with those of the Consumer Brands Division. The newly-consolidated business will operate as the Coatings Division. This consolidation is expected to create improved efficiency by allowing the Coatings Division to be more responsive to the demands of, and changes in, the marketplace. The Division’s priorities will include the development of common goals and the elimination of duplicate duties in efforts to obtain overall enhanced quality and service for its customers. Internationally, the Division plans to consolidate production in Chile in a new facility, expand production capacity in Brazil and launch a new industrial coatings program in Argentina.

Automotive Division 
The Automotive Division develops, manufactures and markets motor vehicle finish and refinish products under Sherwin-Williams® and other branded labels in the United States, Canada, Mexico and other countries. Through its network of 135 company-operated branches (as of December 31, 1997), supported by a direct sales staff, 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. Products are also marketed through independent jobbers and wholesale distributors. The Division sold its joint venture interest in American Standox, Inc. in January 1998 and has retained the right to continue distributing Standox® branded vehicle refinishing paints to certain customers on a non-exclusive basis. 

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. 

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.

A subsidiary in Jamaica manufactures and markets products that are sold through 10 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 recent years, the Division has further expanded its international presence through acquisitions in Mexico, Brazil and Chile. These acquired international automotive operations performed well during 1997, and the Division plans further market penetration in these areas in the future. Additionally, the Division has 14 licensees of automotive technology in 14 foreign countries.

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 successfully integrated the transportation and distribution functions of Thompson Minwax during 1997 while maintaining quality service. A supply chain management system, Centralized Truckload Man-agement, was implemented in 1997. This system tenders and monitors all truck load business via electronic data interchange, allowing for real-time tracking of in-transit truck load shipments and providing an enhanced technological measurement of carrier performance. The Division also experienced an improved safety record during the year, lowering its overall incident rate for recordable accidents. 

Diversified Brands Division 
The Diversified Brands Division competes in the following areas: retail and wholesale consumer aerosols; custom, industrial and automotive aerosols; interior stains, varnishes and wood finishing products; 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, independent dealers, industrial maintenance distributors and grocery stores in the United States, Canada, Mexico, Brazil and Chile. Approximately 7.8 percent of the Division’s total sales in 1997 represented aerosols, paint applicators and interior stains sold to the Paint Stores Segment. In 1997, in its Cleaning Solutions Group, the Division lost some powdered detergent sales due to its unwillingness to match a competitor’s price, and it incurred operating difficulties. Despite these problems, the Division was able to post significant improvements in 1997 over 1996. There are various primary competitors in each of the Division’s product lines. The main competitive factors are technical expertise, quality, service and price. Superior quality products, excellent regulatory-complying products, breadth of product line, technical leadership 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 1997, the Retail Properties Division owned or leased 220 properties, representing over 1,800,000 square feet of space, which are conducive to the sale of paint and associated products. Such properties include 134 freestanding buildings, for exclusive use by the Paint Stores Segment, and 86 multi-tenant properties, utilized when the basic needs of the paint store can be met and where external rental opportunities can be profitably operated. 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. The paint store must be easily accessible to professional painters and contractors with sufficient access to pickup and delivery areas. In 1998, 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 81.1 percent at December 31, 1997. 

The Non-Retail Properties Division owned or leased 27 properties at the end of 1997 consisting of office buildings, distribution service centers, idle manufacturing facilities 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. By the end of 1997, the Division had obtained lease commitments for all of the office space vacated by a former large tenant as of December 31, 1996. This space will be fully occupied by March 31, 1998. In addition, it was able to obtain a tax credit for the rehabilitation of the building containing this space, resulting in a 20% tax credit on all capital expenditures made to the building over a five-year period.

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. 

Net external sales and operating profits of consolidated foreign subsidiaries were $550 million and $54 million, respectively, for 1997. Identifiable assets of consolidated foreign subsidiaries totaled $240 million at December 31, 1997. Domestic operations account for the remaining net external sales, operating profits and identifiable assets. Corporate expenses and identifiable assets 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 identifiable assets. Consolidated foreign operations were not material for any year prior to 1997. 

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