Q.E.P. Co., Inc.

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Q.E.P. Co., Inc.

1081 Hollard Drive
Boca Raton, Florida 33487
U.S.A.
Telephone: (561) 994-5550
Fax: (561) 241-2830
Web site: http://www.qep.com

Public Company
Incorporated: 1979
Employees: 441
Sales: $143.3 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: QEPC
NAIC: 332212 Hand and Edge Tool Manufacturing

Q.E.P. Co., Inc. is a publicly traded company based in Boca Raton, Florida, that manufactures, distributes, and markets some 3,000 flooring tools and accessories for both the do-it-yourself and professional installer markets in the United States and approximately 50 other countries. The company has carved out a unique niche in the home improvement field and has no serious challengers. Its products are used in surface preparation and the installation of carpet, ceramic tile, vinyl, and wood flooring. They are sold under several brand names—Q.E.P., Roberts, Q-Set, Elastiment, Vitrex, Fresh, and O'Tool—and include trowels, tile cutters, wet saws, spacers, nippers, carpet trimmers and cutters, flooring adhesives, seaming tape, tack strip, knives, dry set powders, and grouts. Although Q.E.P. manufactures many of its own products, it also relies on 250 different suppliers to provide the rest. Most of the company's sales come from two customers, Home Depot, accounting for 46.4 percent of sales in 2004, and Lowe's with 13.2 percent. Q.E.P. is headed by its founder, Lewis Gould, who along with his family owns about half of the company.

Company Founding in 1979

By his own admission, Gould, who preferred to spend his spare time as a ham radio operator, stumbled into the home improvement industry. As a businessman he was more familiar with decorative telephones, an area he came to know while serving as vice-president of Saxton Products, a New York wire and cable company that decided to diversify. In 1979 Gould struck out on his own to sell electronics, forming a company he named Q.E.P., which stood for Quality Electronic Products. Instead of going high-tech, however, he decided, along with his wife Susan, to spend $10,000 for a new bathtub-edging company, which sold a kit to cover the grout around the edge of a bathtub. He converted his one-car garage in New City, New York, 20 minutes north of Manhattan, into a makeshift assembly line to package the edging kit. Gould traveled on sales calls, leaving his wife and 10-year-old son, Leonard, to package the kits and box the orders. UPS provided the shipping, but the driver, according to Leonard's recollection, refused to carry the boxes to the truck, making the wife and son do the heavy lifting. It was a humble beginning, but the bathtub-edging kit proved popular.

Distributors began asking Gould if he could supply them with tile tools, needed by floor installers. Having no idea what tile tools were, Gould began to educate himself, learning what was needed to do ceramic tiling: wet saws, tile cutters, trowels, spaces, sponges, and tile nippers. Thus Q.E.P. moved even further away from electronics as Gould began meeting customer demand by adding more and more flooring tools and accessories. The most significant break for the company came in 1982 when Home Depot, which would revolutionize the home improvement industry, made Q.E.P. its flooring products supplier. Home Depot asked Q.E.P. to produce a tile tools kit in a package with instructions. Gould tried to comply with the request but lacked the necessary funding. Home Depot's founder, Bernie Marcus, stepped in and helped the company secure a loan that provided the working capital Q.E.P. needed in order to grow and keep pace with Home Depot's needs in flooring products. In 1993 Q.E.P. added another giant customer in the home improvement industry, Lowe's, which became the company's second largest account. In 1996 Q.E.P. added Builder's Square, a Kmart division, as a full distribution customer.

Q.E.P., which relocated to Boca Raton in the 1980s, also began to make acquisitions to fill out its product lines and fuel further growth. In 1994 it paid $580,000 for O'Tool Company, a Henderson, New York, company that offered concrete, masonry, stone, plaster, and drywall tools, and accompanying supplies. Later in the year Q.E.P. added Marion Tool Corporation, based in Marion, Indiana, paying $425,547, and early in 1995 it acquired Andrews Enterprises at a cost of $67,500.

Taking the Company Public in 1996

In 1996 Q.E.P. was at a crossroads and needed to decide how to fund further growth. Gould told South Florida Business Journal in a 1998 company profile, "I thought the best way was to have a well-funded public company, so that our customers could see we had made a commitment over a long period of time to grow with them and have access to capital markets." The offering, lead underwritten by Irvine, California-based Cruttenden Roth Incorporated, was completed in September 1996. All told, one million shares offered by the company and 200,000 shares by the principal shareholders were sold at a price of $8.50 per share. Some of the money raised was soon put to use consolidating three locations into a single Boca Raton facility, which would serve as the new corporate headquarters, a manufacturing plant, and distribution center serving the eastern United States. As a result of improved efficiency, Q.E.P. would be able to achieve lower per-unit costs.

In 1997 Q.E.P. completed its most significant acquisition to date, paying $12.35 million in cash and stock for Roberts Consolidated Industries, Inc. of City of Industry, California. Roberts, founded in 1938, was a leading manufacturer and marketer of flooring installation tools and related supplies, specializing in such soft surfaces as carpeting as opposed to Q.E.P.'s strength in hard-surface flooring tools. The businesses complemented one another and allowed both entities to take advantage of the other's distribution channels and broaden their customer bases. The Roberts brand name also was highly valuable to Q.E.P. In addition Q.E.P. added operations in Mexico, Missouri, and Toronto, Canada. In January 1998 Q.E.P. followed up with the purchase of the outstanding shares of Roberts, Holland BV, at a cost of $1.6 million and the assumption of approximately $1.5 million in debt. The Rotterdam-based company held a license to market flooring tools and supplies in 49 countries under the "Roberts" trade name. It also operated subsidiaries in France, Germany, and the United Kingdom, affording Q.E.P. an opportunity to expand its customer base in Europe and other international markets. According to Gould, the Roberts deal gave Q.E.P. "critical mass." According to the Palm Beach Post, the acquisition "rounded out Q.E.P.'s product line and made it the monster of flooring-tool products."

Q.E.P. had now established itself as a major consolidator in its niche and was starting to gain some recognition. It made the 1997 Florida 100 List as well as the "Top 100 Hot Growth Small Corporations" list compiled by Business Week. Wall Street, on the other hand, had yet to warm up to the company, preoccupied with high-tech and Internet ventures. Q.E.P. stock traded below its initial offering price, and was so close to book value that the company could not effectively make use of it in acquisitions, forcing it to be a cash buyer. Some suggested that Q.E.P. should change its name, taking advantage of the far more recognizable Roberts brand, but Gould believed that all that was necessary was more of a public relations effort. He told the South Florida Business Journal in February 1998, "We have to get our story out and do the road shows. The difficulty is you still have to run the business at home. That's hard to manage."

Over the next few years, Q.E.P. continued to pursue its consolidation strategy. In July 1998 it closed on the acquisition of Novafonte, Limitada, a Santiago, Chile-based manufacturer, distributor, and installer of ceramic tile and ceramic tile accessories. The addition of Novafonte helped Q.E.P. in the South American market and provided more momentum in the company's quest to become the world's dominant player in flooring installation products, as well as to establish a presence in all of the markets where Home Depot, Lowe's, and its other major customers operated. Days later Q.E.P. completed a deal halfway around the globe, acquiring two Australian flooring companies: Neon Australia Pty. Ltd. and Accessories Marketing Pty. Ltd. Neon Australia served the carpet industry and was a major producer of flooring tapes and metals. Accessories Marketing supplied the Australian marketplace with a wide variety of tools and installation products for all types of flooring. The two companies were combined as Q.E.P. Australia and instantly became a dominant company in Australia for flooring products. The business was supplemented later in 1999 with the acquisition of Trade Mates Pty, Ltd., an Australian distributor of ceramic tile tools. Another significant development in 1999 was the acquisition of Boiardi Products Corp., a Little Falls, New Jersey, company with nearly 40 years of experience in such flooring products as thin-set mortars, grouts, self-leveling concrete toppings, and crack-suppressing waterproof membranes. In addition to supplying products and expertise to projects in the United States, Boiardi did work in the Middle East and Far East. In December 1999 Q.E.P. also acquired Zocalis S.R.L., a Buenos Aires, Argentina-based company that manufactured and distributed ceramic tile, metal and plastic trims, and profiles to the Argentinean flooring market.

Company Perspectives:

QEP strives to supply our customers with the most comprehensive flooring installation products available and our broad product line sets us apart from the competition. Whether you are a professional floor covering installer or a "weekend warrior," QEP has the right tools for quality installations.

More Acquisitions in 2000

Several more acquisitions followed in 2000. In March Q.E.P. added to its Australian business by picking up Southern Tile Agencies Ltd. Pty., maker of ceramic tile installation products such as trowels and kneepads. In that same month, Q.E.P. bought Stone Mountain Manufacturing Company of Georgia, a Calhoun, Georgia, manufacturer of dry set powders and grouts needed for ceramic tile installation. Several weeks later, Q.E.P. added Stone Mountain Manufacturing Company of Florida, a Fort Pierce, Florida, company that made dry set powders and adhesives of ceramic tile installation. Another significant development in 2000 was the decision to close an outdated distribution center in City of Industry, California, upon the expiration of a lease, and to move into a modern 117,000-square-foot facility located in Henderson, Nevada. The new site would serve as the primary distribution center for the western United States and would also support manufacturing to help Q.E.P. keep pace with its domestic growth.

In 2000 Q.E.P. posted sales of $113.6 million, which produced a profit of $3.2 million. Business would flatten out over the next two years, and the company refrained from making further acquisitions during this time. Sales fell slightly to $113 million in 2001, and dropped to $109.7 million in 2002, with net income totaling $1.4 million in 2001 and $2.1 million in 2002. Reduced profits in 2001 were the result of charges taken after closing the City of Industry facility and downsizing a Dutch subsidiary. Although the economy was struggling, Q.E.P. would begin to benefit from a trend that saw people foregoing vacations but showing an increased interest in investing money to improve their homes, which for most people was their biggest asset. Investors were beginning to take notice of a company that was still able to make money when so many other businesses were suffering severe losses. In the summer of 2003 shares of Q.E.P., which had been trading around $5 more than doubled, due mostly to the decision of institutional investors for the first time to recognize Q.E.P.'s potential. The company held a dominant position in a unique niche in the home-improvement market, one that was not likely to be challenged. According to Larry Rader, a partner in LAR Management, which bought a stake in the company, "In technology, there's always some idiot in a garage who can make something better than you. But who's going to design a new trowel or go into the trowel business?"

In 2003 revenues totaled $129.3 million and grew to $143.3 million in 2004. Net income increased to nearly $3.5 million in fiscal 2004. Q.E.P. also began to renew its consolidation efforts. In January 2004 it acquired two companies: Vitrex Ltd., a British maker of ceramic tiles, tools, and protective equipment, and Dublin, Ireland-based Purchistics, which distributed ceramic tools throughout Europe. In March 2004 Q.E.P. added Crestwin Trade Supplies Pty, Ltd., an Australian distributor of flooring tools. Q.E.P. also was taking steps to stimulate sales internally. To take further advantage of a home-improvement trend, and to help address customer questions about how to use the tools Q.E.P. sold, the company added a do-it-yourself interactive manual for laying carpets and tiles to its web site. Included were the stock numbers for the tool needed to complete a project, in the hope that visitors to the site would then seek out those items at a Home Depot, Lowe's, or elsewhere. Moreover, in 2003 Q.E.P. launched a new product line called Fresh, geared toward women do-it-yourselfers. The line was initially composed of 11 different kits of tools to complete painting and wallpapering projects. Each tool featured an ergonomic handle and bright colors. What was especially important to the company was that by focusing on women, Fresh opened up a new distribution channel, that of mass-market retailers including supermarkets. After 25 years in operation Q.E.P. retained an entrepreneurial spirit and gave every indication that it was just beginning to realize its true potential.

Principal Subsidiaries

Roberts Consolidated Industries, Inc.; Q.E.P.–O'Tool, Inc.; Boiardi Products Corporation; Marion Tool Corporation; Q.E.P. Stone Holdings, Inc.; Q.E.P. Zocalus Holding L.L.C.; Q.E.P. Aust. Pty. Limited; Roberts Holland B.V.

Key Dates:

1979:: The company is formed.
1982:: Home Depot becomes a customer.
1993:: Lowe's is added as a customer.
1996:: The company is taken public.
1997:: Roberts Consolidated Industries, Inc. is acquired.
2003:: The company adds do-it-yourself interactive manuals to its web site and launches a new product line, Fresh, geared toward women do-it-yourselfers.