Service Corporation International Business Information, Profile, and History

History of Service Corporation International

Service Corporation International (SCI) is the largest owner and operator of funeral homes and cemeteries in North America, possessing 655 funeral homes and 163 cemeteries in 37 states, the District of Columbia, and four Canadian provinces at the end of 1991. The company was founded in 1962, when Robert Waltrip was inspired by McDonald's revolution of the food industry. Despite detractors, Waltrip decided to create a chain of funeral homes starting from a single, family-owned Houston funeral home. He knew that by establishing full service centers in major cities he could lower overhead by sharing vehicles, personnel, and other goods and services among his homes. First offering public stock on the American Stock Exchange in 1969 and on the New York Stock Exchange in 1974, SCI began paying dividends in 1973.

SCI began implementing its strategy of aggressive expansion in 1970, when it made its first three major acquisitions, purchasing a total of 30 homes in the United States and Canada. Setting a course that ran contrary to the tradition that funeral homes should be relatively small businesses, the company continued to expand, increasing its ownership to 106 funeral homes in 1972 and 276 by 1982. In order to acquire privately owned homes, the company employed a team to meet the particular financial needs of each individual seller. Deals often included a tailored combination of common or preferred stock, cash, and secured long-term debt.

As a result, SCI's operating income rose almost 40 percent to $2.3 million, or 68 cents a share, in 1971. The growth spurt was principally caused by the acquisition of Kinney Services' 28 funeral homes and related businesses in New York City and Miami. This gave SCI the ability to service about 15 percent of New York's funeral needs. SCI also agreed to pay Kinney's parent company, Time Warner, $9,483,000 for 12 years in exchange for a 40-year noncompetitive pact. Although SCI planned to pay the $11.8 million over 12 years, the cost was to be amortized over 40 years. This agreement was altered in 1977, when the company prepaid $11.1 million of the mortgage and extended payment terms on $5.1 million in subordinated debt. The change increased cash flow by $570,000 per year--almost 17 cents a share--while reducing earnings by about $355,000 a year. In the new agreement, the annual payments on the 40-year competition agreement were prolonged to nine years from seven, and the life of the covenant was reduced to 15 years.

By 1975 the company operated 161 homes with full service hubs to facilitate equipment and personnel sharing in seven major cities in the United States and Canada. SCI had posted increased earnings and revenues each year since 1968, with acquisitions accounting for approximately two-thirds of the rise in net income from 1970 to 1975. SCI subsequently built funeral homes from the ground up, though until 1975 the company had never built an entirely new funeral home. Roughly eight percent of SCI's revenues came from cemetery operations, dropping to $6 million in 1975 from a 1973 high of $8.9 million. The corporation sold seven cemeteries--essentially real estate deals--in 1973 and 1975 because ground maintenance was not as lucrative as the service aspect of the funeral business.

Prosperity for SCI faltered in 1973, however, when the Federal Trade Commission (FTC) began a nonpublic investigation of the funeral service and cemetery industry to determine whether any industry practices were unfair or deceptive. Two years later the FTC ordered SCI to make refunds to overcharged patrons between 1971 and 1975 for various services and products, including flowers, cremation, and obituary notices. The complaint alleged that several of the company's 139 funeral home subsidiaries overstated the amounts paid to third party providers for their funeral customers. Although SCI did not admit that any deceptive or illegal acts had been committed, the company complied with the consent order so as to avoid costly litigation. SCI estimated resulting reparation costs to come between $135,000 and $175,000 per customer.

At the same time, the FTC proposed a broad trade rule to redress abuses detected among 22,000 funeral homes operating in the country. The rule restricted funeral directors from picking up or embalming corpses without family consent, requiring a casket for cremation or refusing to provide inexpensive containers, and failing to adequately advertise funeral service prices. The reform also required mortuaries to provide a listing of prices for services, caskets, and other items, making it clear that these were not mandatory sundries.

In February 1976, the FTC dropped the previous complaint and consent order, but it then filed a new complaint that included the previous allegations while also asserting that SCI paid medical examiners to help them generate business. Payment also allegedly went to morgue and hospital employees or police who let the company know when particular deaths occurred. The complaint contended that in certain cases the company had received kickbacks, agent's commissions, volume discounts, or other rebates without sharing the benefits with customers. Furthermore, accusations were made that certain funeral directors misinformed customers that various rubber gaskets or sealing devices on caskets would prevent natural decomposition and that directors were coercing people into purchasing crematory caskets by implying that state law made the funerary boxes requisite. Although the location of these activities was not specified, an FTC source revealed that the charges occurred in the New York City area and probably in other major cities as well.

SCI refuted each and every allegation, countering--as quoted in a Wall Street Journal article--that the FTC's actions were 'illegal, unwarranted, malicious and damaging' to the firm. The company filed suit against the FTC on February 10, 1976, in Washington, D.C. However, the suit was dropped within the year, and in November of 1976 SCI's consent order--regarding the initial allegations--was rendered effective by the FTC. The commission and company were never able to agree about the allegations of the second complaint, but the information within was nonetheless passed on to local law officials. In 1984 the FTC finally required SCI and other funeral homes to provide customers with an itemized list of charges.

Other problems arose for SCI in 1979, when a group of dissident shareholders brought suit against the company, charging that it was conducting suspicious business tactics; the action was dismissed in February of 1980. Although their allegations were found to be without merit, a special committee of SCI's board investigated those allegations and did indeed find questionable travel expenses and corporate perquisites, as well as unmonitored advances on company funds. As a result of the investigation, Waltrip and President B. B. Hollingsworth, Jr., repaid $75,716 to SCI, and the company plane and house in Steamboat Springs, Colorado, were sold. The shareholders were dissatisfied, saying not enough was recovered from Waltrip and Hollingsworth, but they agreed to settle the suit because the dubious practices had stopped. The suit cost SCI $50,000 in attorney's fees, which were incurred by the shareholders.

During these difficult years of legal battles with the FTC and others, SCI was headed by Hollingsworth, who stepped into the presidency in 1975 as Sam P. Douglass, president since 1964, moved into both the chairmanship of the executive committee and a position as director. Waltrip remained the chairman and chief executive officer.

Hollingsworth, however, also helped to lead the company's further expansion during his tenure. One major acquisition under Hollingsworth came in 1981, when SCI gained control of IFS Industries--the second largest company in the funeral service industry, with 91 homes and 22 cemeteries in 18 states and three Canadian provinces--in a tax-free swap of stock. After the buy out, SCI stood as an industry giant, yet its 276 homes accounted for only four percent of the industry's entire revenues, reflecting the fact that the funeral home industry continued to be dominated by small businesses.

From 1977 to 1982, SCI's earnings rose by 26 percent annually, with 1982 revenues hitting $135 million. SCI's typical home grossed $540,000 each year in 1982--four times the industry average. SCI owned most of the land underlying its funeral homes, and in 1982 it owned about 4,300 acres of cemetery land, most of which was carried on the books at prices typical for the 1950s or 1960s. Because of this, SCI was able to profit through various real estate deals. For example, in 1980 SCI exchanged a five-acre piece of property in Houston's posh Galleria area for a 20 percent block of its stock owned by American General Life Insurance Company. SCI thus acquired $11 million worth of its own stock in a tax-free exchange for property that on paper was worth a mere $1.6 million.

Although SCI did not buy a single cemetery in 1981, revenues in that area rose 45 percent because 70 percent of those sales came from people purchasing plots for future use. Such cemetery plot sales are not to be confused with SCI's program of 'pre-need' sales of funeral services, which started in 1977. In this program, SCI created a trust fund with customer payments accrued over five years. The fund was eventually redeemed for funeral services at the time of the client's death. For a time, the company also issued insurance policies redeemable for funeral services, but by 1990 this sort of pre-payment plan was executed only through a third party and the company itself only issued trusts. SCI began selling the package on two principals: relieving the bereaved of decision-making burdens and reserving future services at present value. Though the company could not access the funds until a funeral was actually performed, all the investment profits earned from those funds were retained by SCI. In 1981, SCI sold nearly $24 million worth of such orders.

While some outsiders hypothesized that rising prices would force SCI to perform the ceremonies at a loss, Waltrip disagreed, since most of the accoutrement costs--like hearses and parlors--were fixed. For the buyer the program was not necessarily an economical idea. One might, even through cautious investment of the $1,900 funeral service price, yield a return greater than the relative value of the 'pre-need' purchase. Whatever the value for the buyer in cash or peace of mind, pre-sales created internal expansion and a pool of investment capital that SCI invested in other funeral homes and cemeteries.

During the 1980s SCI used this money to seek homes in particularly favorable locations such as retirement areas in Florida, where the corporation acquired 41 homes between 1972 and 1982, making Florida the company's largest operating base. SCI also pushed development in Texas, Oklahoma, Colorado, and California. The company initiated a program of placing funeral homes on cemetery grounds, and by 1982 it was operating 18 such combination sites. From 1984 to 1989, sales from prearranged funerals increased 400 percent, becoming a $300 million dollar annual business. Nevertheless, in 1989 the company estimated that after write-offs SCI earned next to nothing on total sales of $450 million.

In an effort to offset such performances, SCI explored several new ventures during the 1980s. For example, the company branched out into flower shops in 1982 and began providing flowers in 15 homes and at 15 free-standing stores. Waltrip had planned to create a fast-flowers chain--again along the lines of McDonald's operation--but the shops were sold in 1986 because of management difficulties.

SCI acquired St. Louis-based Amedco in a $131 million stock deal in 1986. After disposing of Amedco's medical and steel businesses, SCI operated the nation's second largest maker of caskets and a leading supplier of embalming fluids, burial clothing, and mortuary furniture. The company intended not only to supply its own facilities, but to attract outside buyers, too. By offering volume discounts to private mortuaries on group insurance, auto leasing, and other products, Waltrip hoped to form the 'True Value hardware of the funeral-service industry,' as he told Business Week. The flaw in the plan was that smaller businesses refused to buy anything from their giant competitor. By 1987 the Amedco purchase caused SCI stock to plummet. By 1989 Amedco sales were off by 25 percent and SCI promptly struck a deal to sell the liability for $62 million in 1990. SCI also put its two insurance agencies up for sale, one of which was sold by 1990.

A less problematic investment was SCI's 1988 founding of Provident Services, Inc., a company designed to provide capital financing to independent funeral homes and cemeteries. Although the new venture was in competition with banks and other loan institutions of greater financial means, SCI believed that Provident would become a substantial competitor in the sector. Provident's analysts would be capable of providing a more accurate assessment of funeral home and industry loans due to the company's close affiliation to the field.

An unusual development in the company's history occurred in 1987, when Marc Feith, an employee of Hillenbrand Industries Inc.--the number one casket maker and a new competitor to SCI in the pre-need funeral business--approached Waltrip with corporate secrets to sell. Waltrip immediately contacted the FBI, who captured Feith, himself a former FBI agent. Feith subsequently confessed to having repeatedly sifted through SCI trash to find information relating to corporate activities. Hillenbrand claimed Feith did the trash searches of his own volition, but Feith asserted that several Hillenbrand executives had assigned him such projects. Interestingly, Hillenbrand's legal council did not dispute the legality of Feith's work. SCI sued Hillenbrand for theft of trade secrets and additionally charged the competitor with fraud because of alleged deceptions during 1983 negotiations in which Hillenbrand considered supplying SCI with funeral equipment. The suit was settled in 1988 under undisclosed terms.

The 1990s marked the beginning of a new era for SCI. Hollingsworth ended his long tenure as head of SCI in 1990, when L. William Heiligbrodt was named president and chief operating officer. Waltrip remained chairman and chief executive officer. The following year, SCI relocated its cemetery operations headquarters to Houston, so that the two parts of the businesses might operate more closely. The company also absorbed 182 acquired funeral homes, including three large businesses--Pierce Brothers, the Sentinel Group, and the Arlington Corporation. These were added to a group of 164 prestigious homes--including New York City's Frank E. Campbell and Riverside Memorial Chapel--and 18 cemeteries which have been recognized as the finest heritage properties in the United States.

SCI continued to focus on its core businesses in the early 1990s. In addition to expansion through acquisition, SCI anticipated that prearranged funerals and Provident services would be sources of the internal expansion, and potential for corporate growth was encouraging.

Principal Subsidiaries: SCI has declined to release the names of the company's subsidiaries.