Bonded Motors IPO

BONDED MOTORS’ headquarters and factory building in South Central Los Angeles doesn’t draw many investment bankers. South Central spawned Los Angeles’ 1992 riots. Bonded Motors’ fences are topped with razor wire. Broken-down cars dot the streets. Groups of unemployed men loiter nearby.

But in April Bonded Motors Inc. went public. As part of their due diligence, a handful of nervous bankers had to visit the company’s place of business. What they saw was grimy and low-tech. Bonded Motors’ business is remanufacturing car and light truck engines. Workers take the metal cores of broken engines, retool worn surfaces and then refit them with new pistons and other parts. Oil frequently splatters on visitors. Some of the investment bankers, says Aaron Landon, Bonded’s founder and chief executive, “weren’t too happy with what happened to their $500 shoes.”
It’s not pretty, but it is profitable. Bonded Motors sold $13 million worth of remanufactured engines last year and netted $1.3 million (65 cents a share), 20% more than it made the year before. In April Commonwealth Associates, a small New York underwriter with a few blemishes on its record, managed to sell one-third of the company to the public for $5.9 million, with all proceeds being added to Bonded’s capital. The new shares are up slightly from the 5 7/8 offering price, to a recent 7 1/4.
How can a company in the heart of the inner city turn in such solid numbers? Landon’s reply: By using what the inner city has to offer.

South Central has plenty of old cars, and old car engines are Bonded Motors’ raw material. Lots of local moonlighters cruise nearby junkyards for engines, then show up at Bonded looking to resell them. Most businesses wouldn’t like having men who are covered in engine grease and drive beat-up pickup trucks hanging around the shop. Landon loves them: They are his best suppliers. He picks up used engines from them for half of what he pays organized resellers.

Are some of the engines filched? It’s impossible to tell with most old engines, and Landon doesn’t ask too many questions.
Landon likes the neighborhood’s labor force, too. Bred on southern California’s car culture, many of Bonded’s employees have been retooling old engines since they were teenagers. Noting that the area’s unemployment rate is nearly 17%, Bonded’s chief financial officer, Paul Sullivan, says: “We have a very, very dedicated work force who respect a good job when they see it.” Turnover among Bonded Motors’ 220 employees is under 3%, and firing for cause is rare. There is no need to advertise job openings; word-of-mouth brings in five qualified applicants for every new spot.
Hiring locally has another advantage: South Central Los Angeles is part of a state “revitalization zone,” which qualifies Bonded for tax credits for each new neighborhood hire. This year Landon expects his company to get nearly $600,000 in state tax credits, much more than it can use. With California’s onerous 9.3% corporate tax rate, the credits add about 6% to Bonded’s bottom line every year.
A testament to the power of lower taxes as a cure for inner-city unemployment? You bet. The extra money has helped fund expansion of Bonded’s factory into nearby buildings and has increased the company’s distribution reach.
What’s more, if Bonded had to pay the same tax rate as it would have to in the suburbs, its aftertax profit margins might not have impressed investors enough to let it go public in the first place.

Landon expects even more tax help from federal credits aimed at moving people off the government dole. With the large number of welfare recipients in its labor pool, the company figures that its effective federal tax rate could drop from 34% to 28% next year.

There is more to Bonded’s success than just its inner-city location. Much of the company’s growth is fueled by the rapid consolidation in the retail auto parts market (Forbes, Mar. 11). Big stores such as AutoZone and Pep Boys (Manny, Moe & Jack) are chasing small-fries out of business. These big chains want bigger suppliers, like Bonded.
Landon, 54, has been rebuilding engines since he was in high school. Fresh out of the nearby University of Southern California with an undergraduate business degree in 1964, Landon took a $150,000 loan to start a small rebuild shop.
For the next 20 years he was much like the small engine-remanufacturers that still dot South Central, selling to local garages. But Landon was one of the few to bet big on retail consolidation. Now four large chains account for 72% of his company’s sales.
While the retail market has consolidated, the $3 billion engine-remanufacturing business remains fragmented. Landon is looking to acquire, which is one reason he raised public money in April, and may soon raise some more.
A secondary offering should be easier than the first. Landon couldn’t get a single appointment in Los Angeles for the IPO road show, which he blames on South Central’s bad image. Most of the original investors were found on the East Coast. “There was neither sympathy nor compassion,” says Paul Sullivan of potential investors’ response to the company’s promise of providing jobs in the inner city. “But they did like the numbers.