Service Corporation International Business Information, Profile, and History

Company Perspectives:

In a business that addresses one of life's inevitable occurrences, SCI is committed to service, compassion, and respect. Every day, the Company and its employees around the world work to maintain their position of leadership by creating positive memories of final tribute for families and those they love.

History of Service Corporation International

Service Corporation International (SCI) is the largest owner and operator of funeral homes and cemeteries in the world. It operates over 2,500 funeral homes, some 460 cemeteries, and more than 150 crematoria. The company also does some related business in products like funeral urns, flowers, caskets, and burial garments. Most of its business is in the United States and Canada, though the company also maintains a substantial presence in Europe. The company helped consolidate the so-called death care industry, running formerly independent funeral homes in clusters that share personnel and equipment. In 2002, the company was still headed by its founder, Robert Waltrip. Waltrip envisioned the new direction of the formerly fragmented death care industry, and by the early 1990s he had grown his company to three times that of its next nearest competitor. At its peak, SCI owned more than 4,500 funeral homes and cemeteries, spread throughout 20 countries on five continents. As of 1999, the company began to shed acquisitions and focus on internal growth. The company still reaches approximately 75 percent of the population of the United States through its own network and franchised affiliates.

A New Way of Running the Industry in the 1970s

Service Corporation International was founded by Robert L. Waltrip, a Houston funeral director. Waltrip was born in 1931 and grew up in an apartment above his family's funeral parlor. He took over the business at the age of 20, when his father died. By 1962, Waltrip was a licensed funeral director with a chain of three funeral homes in Houston. That year, he founded SCI with the intention of running a larger chain of homes with a standardized business plan, something along the lines of the McDonald's restaurant chain. He soon acquired several prominent funeral homes in major urban markets, including Blake-Lamb in Chicago and Joseph Gawler's Sons in Washington, D.C. SCI kept the original family names on the homes but instituted more efficient business practices. By 1970, SCI began implementing a strategy of more aggressive expansion, when it purchased 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. Where SCI had several homes in one market, it ran them as a "cluster." Using this strategy, no longer did each funeral home need its own hearse. Instead, the cluster operated a fleet of hearses from a central location. The clusters also shared embalming operations and personnel. This eliminated much of the down time in the business, where people had to be kept on the payroll but might have nothing to do between funerals. Under the cluster arrangement, employees worked for whatever SCI funeral home in the area needed them, bringing an efficiency that traditionally family-run businesses could not imitate.

The company began selling shares to the public in 1970, debuting on the American Stock Exchange. 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. In 1974, SCI moved to the more prestigious New York Stock Exchange. 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 8 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.

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 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.

New Ventures in the 1980s

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 buyout, SCI stood as an industry giant, yet its 276 homes accounted for only 4 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 principles: 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, since it was perfectly feasible that the cautious investment of the $1,900 funeral service price could 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 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 also to attract outside buyers. 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.

Worldwide Expansion in the 1990s

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 among the finest heritage properties in the United States.

The SCI chain included over 1,500 funeral homes and cemeteries by the early 1990s, and the company had revenues of around $1.1 billion. The largest death services company in the United States by far, SCI began to acquire funeral homes abroad. SCI invested approximately $1 billion in the early 1990s for overseas expansion. It quickly snapped up leading funeral homes in France, England, and Australia and made inroads into other markets such as Italy, Singapore, and the Czech Republic. Though funeral customs were different country by country, Waltrip was sure that SCI's methods could work abroad as well. The cost of an American funeral had gone up substantially since the 1970s, tripling in price by the 1990s. Where more inexpensive funerals were the norm in England and France, SCI began offering a more lavish line of urns and caskets, not so much raising prices as making higher-priced options available. By mid-1996, it seemed that its operations abroad were working as planned. The company's overall funeral revenue rose 75 percent for the first quarter of 1996, and SCI's share price was trading at over $50.

Later that year, SCI made a hostile bid for the world's second-largest funeral home operator, the Canadian firm Loewen Group Inc. Loewen had imitated SCI's strategy of buying up North American funeral homes, and competition had driven the price of acquisitions up. There was apparently fierce animosity between Robert Waltrip and Loewen Group's founder Ray Loewen. Loewen, who controlled 15 percent of his company's stock, opposed the deal and began making more acquisitions and offering his top management expensive severance packages in order to drive up the cost of the merger. Several months after making its first offer, SCI withdrew, and Loewen went its own way. But SCI had been forced to dump some of its assets in order to fend off antitrust charges had the deal gone through.

By the late 1990s, it was clear that something had happened in the death services industry, and SCI was no longer the profitable company it had been. The company had had profit margins of around 25 percent since the late 1970s, while the death rate had gone up a steady 1 percent annually. But demographers noted by 1998 that the death rate was actually decreasing as advances in medical treatment allowed people to survive longer. This meant that SCI's market was now shrinking. And the long trend to consolidate in the funeral home industry had brought prices up so much that growth through acquisition was no longer as economical as it had been. In 1998, SCI actually broke up its management group that had spearheaded acquisitions, shifting executives into other areas. The company had lower than expected profits for the fourth quarter of that year. After its stock price dropped by more than 40 percent, SCI's president Heiligbrodt resigned. A string of top executives left the company in the next year, including Robert Waltrip's son. The company was led by Jerald Pullins in 1999, when SCI was named the worst one-year performer out of selected companies tracked by the Wall Street Journal. SCI's stock had fallen so low that an investment of $1000 in company stock at the beginning of 1999 would have been worth only $187 by the end of the year.

Pullins tried to streamline the company, bringing down the number of operating clusters in the United States to only 87, from 200. The company advised its funeral directors to push lower-cost funerals in order to keep consumers who might go elsewhere. SCI brought out a new program in 1999 called Dignity Memorial, which offered customers a one-price package deal at the low end of the price range. Meanwhile, the company had accumulated a load of debt because of its acquisitions. SCI discontinued paying dividends to stockholders in 1999 in order to address the debt problem, and it began selling off assets. In 2001, the company announced plans to sell over 400 funeral homes, as well as more than 100 cemeteries. Pullins articulated a three-part plan to turn the company around, with its first aim to pay down SCI's $3.3 billion debt and to increase cash flow and cut expenses.

Pullins resigned in July, 2002, and chairman Robert Waltrip took over his duties. Several weeks later, the company announced a succession plan, spelling out who would lead the company over the next several years. By that time, SCI had significantly pared its operations. Where it had once been active in 20 countries, it now operated in only eight. Its number of funeral homes had fallen almost by half, to around 2,500. Its nearest competitor, Loewen Group (now known as Alderwoods Group), was in bankruptcy proceedings, possibly having overcommitted itself after the hostile takeover bid. SCI endeavored to weather the hard times, planning future growth to emerge internally, instead of through acquisition. SCI began marketing its Dignity Memorial package as a national corporate brand name, giving its funeral homes a cohesive image they had not hitherto possessed.

Principal Subsidiaries: Equity Corp. International; SCI Financial Services Inc.

Principal Competitors: Stewart Enterprises, Inc.; Carriage Services, Inc.; Alderwoods Group Inc.

Chronology

• Key Dates:
• 1962: Robert Waltrip incorporates SCI.
• 1970: The company goes public.
• 1974: SCI stock moves to the New York exchange.
• 1981: The company buys IFS Industries.
• 1990: Overseas expansion begins.
• 1996: SCI tries to take over competitor Loewen Group.
• 1999: The company's stock price declines to its lowest point.