A Close Reading of the Theatre Facts 2017 Survey
Theatre Facts 2017[1], the annual survey of the fiscal state of the not-for-profit professional theatre in the United States, declares that the 129 Trend Theatres[2] in the survey “… were on solid footing overall from 2013 through 2017.”[3] However, a much gloomier conclusion can be drawn from a close reading.
Deeply Troubling Areas: Attendance and Illiquidity
There is considerable negative data reported in the survey concerning ticket income, the most important source of earned income:
Total ticket income in 2017 was equal to the lowest percentage of total expense in the 5-year period, only 36.3%.[4]
Total “… audience figures for resident performances over the span of the 5-year period were 2.5% lower...”[5]
The average percent of paid in-residence capacity utilization was in slow decline over the five years ending at a low of 62.1% in 2017.[6]
“The number of main series performances per production averaged 27 to 29 each year, trending downward”[7] over five years.
“The average number of subscribers peaked in 2013 and 2014, falling to a 5-year low and overall 11.2% decrease by 2017.”..…“The percentage of available seats sold to subscribers gradually slid from 25.9% to 24.6% over the period.”[8]
But much more troubling than declining ticket activity was the poor financial condition reported by the Trend Theatres in the 2017 survey. Illiquidity, as reflected on the theatres’ Statements of Financial Condition, was pervasive and in many cases acute. Specifically:
In every year under review, roughly two-thirds of surveyed theatres experienced negative working capital.[9]
“Half of the Trend Theatres had negative working capital in every year.”[10]
“Average working capital of 119 [11] theatres was negative in each of the five years and finished at a 5-year low in 2017.”[12]
“Twenty-eight theatres had working capital that became increasingly negative over time.[13]
Six theatres annually reported negative working capital greater than $10 million…[14]
“At best over the 5-year period, 16 theatres met the …” traditionally recommended ratio of working capital to total expense of +25%.[15] This occurred in both 2015 and 2017. However, those 16 theatres represented only 13% (roughly 1 in 10) of the 119 theatres that submitted balance sheets in the 2017 survey.
The survey candidly acknowledges the consequences of this illiquidity. “Negative working capital indicates that a theatre is borrowing funds (e.g., dipping into deferred subscription revenue, delaying payables, taking out loans, tapping lines of credit, etc.) to meet its daily operating needs.”[16] As the report clearly states, “Working capital is a fundamental building block of a theatre’s capital structure and reflects the unrestricted resources available to meet day-to-day cash needs and obligations.”[17] Furthermore, the report says that the frequency of reported negative working capital “… suggests that many theatres encounter serious cash flow crunches and may face serious financial trouble.”[18] More frankly, one can say these working capital data signal that many American theatres skate at or near a financial precipice and are not on a solid footing.
Hopeful Signs?
The survey finds support for its claim of solid footing in the data concerning Change in Unrestricted Net Assets (CUNA) found in the Trend Theatres’ Statements of Activities, i.e., income statements. CUNA may be thought of as the “bottom line”, i.e., the net result of total unrestricted revenues minus total expenses as defined by generally accepted accounting principles (GAAP). The survey states, “The CUNA trend was positive. Although 5% more theatres ran a positive bottom line in 2013 than in 2017, severely negative CUNA occurred with less frequency in 2017 than in 2013.”[19]
While the foregoing is correct, it should be emphasized that 47%, not quite half of the reporting theatres, had negative CUNA.[20]
Moreover, the text of the report acknowledges there actually is a flaw in relying on CUNA for judging whether a theatre has achieved satisfactory operating results. It states, “It is important to remember that CUNA includes both operating and non-operating activity related to unrestricted funds, such as unrealized capital gains and losses, exceptional contributed income for theatres in capital campaigns, and depreciation.”[21] [Emphasis added.] So, CUNA as reported in GAAP statements is of little or no use if one wants to determine the success of current results. Though correctly included in the computation of CUNA, the previously mentioned contributions for capital campaigns and unrealized capital gains and losses have nothing to do with the current year’s operating results. We note that fifty-one of the Trend Theatres—40%—were in a capital campaign in 2017[22] and many theatres have capital gains and losses. Thus, actual operating results are obscured in the survey thanks to standard GAAP reporting. The CUNA derived from current operations, which is what every theatre should really care about, is simply not reported by the survey. This means that increases in the number of theatres reporting positive CUNA as noted in the survey is not at all a cause for cheer. It is very safe to assume if we could remove the effect of endowment campaigns and capital gains from CUNA, the percentage of Trend theatres reporting negative operating results would far exceed 47%.
As the report goes on to state, working capital “… is a better indicator of a theatre’s operating position than CUNA, which includes non-operating activity and doesn’t reflect the theatre’s savings or outstanding obligations.”[23] [Emphasis added.] Working capital tells us many Trend Theatres are in sorry financial condition. Many theatres are “building-rich”, “endowment-rich” or both and yet unable to pay current bills in a timely fashion.
Another upbeat comment in the report comes in the “Conclusion” section: “Over the 5-year period between 2013 and 2017, earned and contributed income growth both exceeded that of expenses.”[24] While true, this overlooks two facts: first, earned income growth was achieved through ticket price increases, not attendance growth; second, contributed income is frequently overstated due to capital campaigns that do not benefit operations.
Simply put, the survey’s observation that the industry is on solid footing based on 5-year data is not justified.
10-Year Review
What of the longer term? Theatre Facts 2017 also makes 10-year comparisons for the 94 theatres, a smaller cohort that participated in the survey in every year from 2008 to 2017. At first glance, there are some positive trends reported in the 10-year data with regard to contributed income. “Growth in average unrestricted contributed income reached 19.7% over the 10-year period largely driven by total individual contributions.”[25] “Even with a 10% decrease in 2017, average total individual contributions rose by 34.6% over the 10- year period. Growth in trustee giving was a robust 63%, and that of non-trustee individuals was 22%.”[26]
Unfortunately, as with 5-year data, the amount of trustee and other individual giving for plant and equipment capital campaigns was not isolated when reporting unrestricted contributed income. A large portion of campaign money was undoubtedly directed to that use. The key point here, once again, is that such contributions should not be included when analyzing how current operations actually fared! This blurring of operating results is pervasive in the 10-year data as … “All but 23 of the [94] theatres conducted a capital campaign at some point during the period.”[27] Thus, 76% of the reporting theatres are obscuring 10-year operating results.
Like the 5-year information, 10-year data contains grim news with regard to attendance and illiquidity. Notable negative 10-year statistics include:
“Average subscription income trended downward, a decline of 13.3% despite 15% growth in the average subscription price per ticket. …The aggregate number of subscription tickets sold (i.e., number of subscribers x number of tickets per package sold) was highest in 2008, the first year of the period, and decreased steadily over time for an overall 20% drop.”[28]
“… the average number of single tickets sold was virtually the same at the beginning and end of the 10-year period: roughly 57,700 in 2008 and 57,900 in 2017.”[29]
Paid in-residence capacity utilization declined from 72.0% in 2008[30] to 62.1% in 2017.[31] These ticket data are even more disheartening when one considers the total population of the United States increased about 7% between 2008 and 2017.
“…total attendance was 2% lower in 2017 than in 2008…”[32]
The 10-year decline in the relative value of ticket income has been great. In 2017, total ticket income offset 36.3 % of total expense[33] versus 43.1% in 2008.[34] While the former pertains to only 105 theatres (versus 129 in 2017), and therefore differences in the population of the two cohorts exist, these percentage figures are sufficiently comparable.
These ticket data are even more disheartening when considered in the context of the total population of the United States, which increased about 7% between 2008 and 2017.
“Corporate contributions were 25.0% lower over time.”[35]
“Federal funding was at its highest 10-year level in 2010. Overall, however, it was 43% lower in 2017 than in 2008.”[36]
Finally, … “Average working capital was negative each of the 10 years. It ended the period at its lowest average of -$3.0 million in 2017.”[37] Many theatres have been living and continue to live from hand to mouth.
A detailed reading of the 10-year data in the survey leads one to even greater concern about the fiscal state of the not-for-profit theatre than does the 5-year information. The trends revealed in the data cannot continue indefinitely. As a first step towards improvement, it is important to acknowledge the status quo.