2010  2011  
Price:  15.15  EPS  $1.56  $3.55  
Shares Out. (in M):  143  P/E  9.7x  n/a  
Market Cap (in $M):  2,164  P/FCF  7.8x  n/a  
Net Debt (in $M):  1,043  EBIT  468  272  
TEV ($):  3,207  TEV/EBIT  6.9x  n/a  
Borrow Cost:  NA 
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The forprofit education companies have been among the worst performing stocks over the past 18 months due to increased regulatory scrutiny on Wall Street. While it may be tempting to view them as onceinalifetime bargain, a closer analysis of the impact on proposed regulatory changes reveals that several of the more vulnerable stocks may continue to decline. Based on my analysis, the stock that remains the most exposed to further weakness is Education Management (EDMC). Below is an analysis of four forprofit companies, which demonstrates that all the companies analyzed are affected but EDMC fares by far the worst.
The industry's fortunes over the next 1224 months hinge almost entirely on a single 'binary event.' The binary event is the Department of Education's recently proposed 'gainful employment' initiative, which ties a program's tuition to a debttoincome ratio of 8% based on likely postgraduate employment. The Department of Education will decide in the coming weeks whether to: 1.) proceed with its proposal in the current form; 2.) modify the proposal to less onerous terms; or 3.) drop the gainful employment proposal and instead simply tighten the definition of and guidelines for gainful employment. Despite the significance of this event, Wall Street sellside analysts have offered little fundamental analysis to determine what the actual impact of gainful employment would be on the profitability of the companies and the valuations of the stocks.
The twin factors one must examine with the forprofit education companies and gainful employment are: probability and outcome. This analysis makes no effort to 'handicap' the probability of gainful employment. It focuses solely on the potential outcome the rule would have on the revenues and profits of four companies: Apollo Group (APOL), ITT Educational Services (ESI), Education Management (EDMC) and Corinthian Colleges (COCO). I will go into great detail to 'show the work' of the analysis, and I openly invite Club members to offer recommendations on refining the work. It uses the best available data on Bureau of Labor Statistics on employment classifications and disclosure/estimates on APOL, EDMC, COCO and ESI's student population mix. Predicting outcomes with incomplete data sets is inherently imprecise. The outcome, based on this analyst, is a considerably negative one for all four companies: the industry's profitability would be significantly hindered by the gainful employment proposal, particularly for hightuition providers such as ESI and EDMC.
Before going into the full explanation and findings of the analysis, I will summarize the findings:
Below is a summary of the estimated impact on gainful employment as currently proposed on the four companies' previous full fiscal year results  to use forwardyear earnings estimates would add an additional layer of speculation to the analysis. The analysis uses two different scenarios:
Scenarios 
Apollo Group 
ITT Educational Services 
Education Management 
Corinthian Colleges 

Price 
$42.10 
Price 
$80.00 
Price 
$15.23 
Price 
$9.28 

Most Recent Year Earnings 
Revenues 
3,974,202 
Revenues 
1,319,194 
Revenues 
2,011,458 
Revenues 
1,307,825 
Ebitda 
1,220,503 
Ebitda 
513,700 
Ebitda 
431,289 
Ebitda 
173,571 

EPS 
$4.26 
EPS 
$7.91 
EPS 
$0.87 
EPS 
$0.81 

P/E 
9.9x 
P/E 
10.1x 
P/E 
17.5x 
P/E 
11.4x 

Scenario #1 8% debt to income, no change in operational efficiency or enrollment 
Revenues 
3,090,149 
Revenues 
776,263 
Revenues 
1,211,699 
Revenues 
1,095,317 
Ebitda 
336,450 
Ebitda 
(29,231) 
Ebitda 
(368,470) 
Ebitda 
(38,937) 

EPS 
$0.88 
EPS 
($1.36) 
EPS 
($5.30) 
EPS 
($1.09) 

P/E 
47.7x 
P/E 
n/a 
P/E 
n/a 
P/E 
n/a 

Scenario #2: 8% debtto income, 20% reduction in marketing spending. 
Revenues 
3,090,149 
Revenues 
776,263 
Revenues 
1,211,699 
Revenues 
1,095,317 
Ebitda 
737,638 
Ebitda 
106,414 
Ebitda 
(308,320) 
Ebitda 
87,293 

EPS 
$2.42 
EPS 
$1.37 
EPS 
($4.05) 
EPS 
$0.21 

P/E 
17.4x 
P/E 
58.2x 
P/E 
n/a 
P/E 
43.3x 
The analysis also examined the potential impact of gainful employment if the Department of Education modified the proposal to a 10% debttoincome ratio. Some concession from the Department of Education is a distinct possibility, including a relaxation of the debttoincome standard employed in determining the calculation. Again, the analysis uses two scenarios:
Scenarios 
Apollo Group 
ITT Educational Services 
Education Management 
Corinthian Colleges 

Price 
$42.10 
Price 
$80.00 
Price 
$15.23 
Price 
$9.28 

Most Recent Year Earnings 
Revenues 
3,974,202 
Revenues 
1,319,194 
Revenues 
2,011,458 
Revenues 
1,307,825 
Ebitda 
1,220,503 
Ebitda 
513,700 
Ebitda 
431,289 
Ebitda 
173,571 

EPS 
$4.26 
EPS 
$7.91 
EPS 
$0.87 
EPS 
$0.81 

P/E 
9.9x 
P/E 
10.1x 
P/E 
17.5x 
P/E 
11.4x 

Scenario #1 10% debt to income, no change in operational efficiency or enrollment 
Revenues 
3,589,099 
Revenues 
955,902 
Revenues 
1,271,849 
Revenues 
1,165,077 
Ebitda 
835,400 
Ebitda 
150,408 
Ebitda 
(308,320) 
Ebitda 
30,823 

EPS 
$2.79 
EPS 
$2.09 
EPS 
($4.79) 
EPS 
($0.29) 

P/E 
15.1x 
P/E 
38.2x 
P/E 
n/a 
P/E 
n/a 

Scenario #2: 10% debtto income, 20% reduction in marketing spending. 
Revenues 
3,589,099 
Revenues 
955,902 
Revenues 
1,271,849 
Revenues 
1,165,077 
Ebitda 
1,236,588 
Ebitda 
286,053 
Ebitda 
(159,514) 
Ebitda 
157,052 

EPS 
$4.32 
EPS 
$4.31 
EPS 
($3.55) 
EPS 
$0.70 

P/E 
9.7x 
P/E 
18.6x 
P/E 
n/a 
P/E 
13.3x 
The conclusions of the analysis are evident, but the reader may require greater clarity on how this analysis was conducted. Before a companyspecific explanation, I will explain the overall inputs required for the analysis. The research comprises a twopart analysis. First, it analyzes forprofit companies' tuitions in relation to the debttoincome ratio required by the Department's proposed change and determines how tuition levels need to change to adhere to the proposed new standard. Second, it estimates what the impact of these changes would be to the companies' income statement in the most recent reported fiscal year.
Gainful Employment Impact on Tuition
The first portion comprises essentially six components: tuition, salary, debtservicing requirements, debt levels, programs and enrollment.
Company Specific Analysis
Education Management (EDMC) Assumptions and Analysis: Education Management, which reported 136,500 students for the year ended December 2009, fares the worst in this analysis. In this analysis, EDMC loses money in every scenario. Before detailing the analysis, a few assumptions merit explanation:
Earnings Impact from Gainful Employment Scenarios: The table below shows the estimated impact of gainful employment on EDMC's 2009 results. The tables show four scenarios: an 8% debttoincome ratio with no operational changes by EDMC; a 10% debttoincome ratio with no operational changes; an 8% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed; and a 10% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed.
EDMC FY09 Actual Results 
FY09 assuming 8% d/i ratio, with no other changes 
FY09 assuming 10% d/i ratio with no other changes 
FY09 assuming 8% d/i ratio, 20% cut in ad spend 
FY09 assuming 10% d/i ratio, 20% cut in ad spend 

Results 
FY09 
Results 
8%FY09 
Delta 
Results 
10%FY09 
Delta 
Results 
8% + cuts 
Delta 
Results 
10% + cuts 
Delta 
Sales 
2,011,458 
Sales 
1,211,699 
(39.8%) 
Sales 
1,271,849 
(36.8%) 
Sales 
1,211,699 
(39.8%) 
Sales 
1,271,849 
(36.8%) 
Ebitda 
431,289 
Ebitda 
(368,470) 
(185.4%) 
Ebitda 
(308,320) 
(171.5%) 
Ebitda 
(219,664) 
(150.9%) 
Ebitda 
(159,514) 
(137.0%) 
Ebit 
319,000 
Ebit 
(480,759) 
(250.7%) 
Ebit 
(420,609) 
(231.9%) 
Ebit 
(331,953) 
(204.1%) 
Ebit 
(271,803) 
(185.2%) 
Pretax 
165,431 
Pretax 
(634,328) 
(483.4%) 
Pretax 
(574,178) 
(447.1%) 
Pretax 
(485,522) 
(393.5%) 
Pretax 
(425,372) 
(357.1%) 
Net 
104,243 
Net 
(634,328) 
(708.5%) 
Net 
(574,178) 
(650.8%) 
Net 
(485,522) 
(565.8%) 
Net 
(425,372) 
(508.1%) 
EPS 
$0.87 
EPS 
($5.30) 
(708.5%) 
EPS 
($4.79) 
(650.8%) 
EPS 
($4.05) 
(565.8%) 
EPS 
($3.55) 
(508.1%) 
P/E 
25.2x 
P/E 
n/a 

P/E 
n/a 

P/E 
n/a 

P/E 
n/a 

EDMC Program Examples: Below are three examples of the analysis I conducted on Education Management's programs. I analyzed the revenue implications on 34 programs.
Bachelor's  Advertising 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$85,140 
$85,140 
Cost per year 
$21,285 
$21,285 
Assumed financed 
72.0% 
72.0% 
Estimated current debt 
$61,301 
$61,301 
Estimated nonfinanced 
$23,839 
$23,839 
Estimated peryear debt service 
$8,465 
$8,465 
Assumed salary per BLS 25^{th} percentile (SOC Code: 112021, Advertising/Promo. managers) 
$54,500 
$54,500 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$4,360 
$5,450 
Required starting salary 
$105,818 
$91,238 
Salary differential 
($51,318) 
($36,738) 
Debt differential per year 
($4,105) 
($3,674) 
Assumed new tuition under gainful employment 
$55,411 
$58,537 
Difference in tuition 
($29,729) 
($26,603) 
Difference in tuition per year 
($7,432) 
($6,651) 
Assumed students enrolled 
6,115 
6,115 
Assumed revenue loss from program under gainful employment 
($45.4m) 
($40.7m) 
Bachelor's  Interior Design 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$85,140 
$85,140 
Cost per year 
$21,285 
$21,285 
Assumed financed 
72.0% 
72.0% 
Estimated current debt 
$61,301 
$61,301 
Estimated nonfinanced 
$23,839 
$23,839 
Estimated peryear debt service 
$8,465 
$8,465 
Assumed salary per BLS 25^{th} percentile (SOC Code: 271025, Interior Designers) 
$34,620 
$34,620 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$2,770 
$3,462 
Required starting salary 
$105,818 
$91,238 
Salary differential 
($71,198) 
($56,618) 
Debt differential per year 
($5,696) 
($5,662) 
Assumed new tuition under gainful employment 
$43,895 
$44,141 
Difference in tuition 
($41,245) 
($40,999) 
Difference in tuition per year 
($10,311) 
($10,250) 
Assumed students enrolled 
5,533 
5,533 
Assumed revenue loss from program under gainful employment 
($57.1m) 
($56.7m) 
Associate's  Culinary Management 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$49,192 
$49,192 
Cost per year 
$24,596 
$24,596 
Assumed financed 
72.0% 
72.0% 
Estimated current debt 
$35,418 
$35,418 
Estimated nonfinanced 
$13,774 
$13,774 
Estimated peryear debt service 
$4,891 
$4,891 
Assumed salary per BLS 25^{th} percentile (SOC Code: 119051,Food service managers) 
$36,670 
$36,670 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$2,934 
$3,667 
Required starting salary 
$61,139 
$52,716 
Salary differential 
($24,469) 
($16,046) 
Debt differential per year 
($1,958) 
($1,605) 
Assumed new tuition under gainful employment 
$35,017 
$37,573 
Difference in tuition 
($14,175) 
($11,619) 
Difference in tuition per year 
($7,088) 
($5,810) 
Assumed students enrolled 
4,545 
4,545 
Assumed revenue loss from program under gainful employment 
($32.2m) 
($26.4m) 
Apollo Group (APOL) Analysis and Assumption: Apollo Group, which reported 443,000 students for the fiscal year ended in August 2009, registers a decline in profitability under most assumptions in the analysis. There are several assumptions to discuss:
Earnings Impact from Gainful Employment Scenarios: The table below shows the estimated impact of gainful employment on APOL's FY09 results. The tables show four scenarios: an 8% debttoincome ratio with no operational changes by APOL; a 10% debttoincome ratio with no operational changes; an 8% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed; and a 10% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed.
APOL FY09 Actual Results 
FY09 assuming 8% d/i ratio, with no other changes 
FY09 assuming 10% d/i ratio with no other changes 
FY09 assuming 8% d/i ratio, 20% cut in ad spend 
FY09 assuming 10% d/i ratio, 20% cut in ad spend 

Results 
FY09 
Results 
8%FY09 
Delta 
Results 
10%FY09 
Delta 
Results 
8% + cuts 
Delta 
Results 
10% + cuts 
Delta 
Sales 
3,974,202 
Sales 
3,090,149 
(22.2%) 
Sales 
3,589,099 
(9.7%) 
Sales 
3,090,149 
(22.2%) 
Sales 
3,589,099 
(9.7%) 
Ebitda 
1,220,503 
Ebitda 
336,450 
(72.4%) 
Ebitda 
835,400 
(31.6%) 
Ebitda 
737,638 
(39.6%) 
Ebitda 
1,236,588 
1.3% 
Ebit 
1,119,960 
Ebit 
235,907 
(78.9%) 
Ebit 
734,857 
(34.4%) 
Ebit 
637,095 
(43.1%) 
Ebit 
1,136,045 
1.4% 
Pretax 
1,120,315 
Pretax 
236,262 
(78.9%) 
Pretax 
735,212 
(34.4%) 
Pretax 
637,450 
(43.1%) 
Pretax 
1,136,400 
1.4% 
Net 
678,819 
Net 
140,720 
(79.3%) 
Net 
444,532 
(34.5%) 
Net 
385,445 
(43.2%) 
Net 
689,256 
1.5% 
EPS 
$4.26 
EPS 
$0.88 
(79.3%) 
EPS 
$2.79 
(34.5%) 
EPS 
$2.42 
(43.2%) 
EPS 
$4.32 
1.5% 
P/E 
12.8x 
P/E 
61.6x 

P/E 
19.5x 

P/E 
22.5x 

P/E 
12.6x 

APOL Program Examples: Below are three examples of the analysis I conducted on Apollo's programs. I analyzed the revenue implications on 29 programs.
Business & Mgmt, B.A., Online 
8% Debt to income ratio 
10% Debt to income ratio 

Tuition 
$63,600 
$63,600 

Cost per year 
$15,900 
$15,900 

Assumed financed 
77% 
77% 

Estimated current debt 
$48,972 
$48,972 

Estimated nonfinanced 
$14,628 
$14,628 

Estimated peryear debt service 
$6,763 
$6,763 

Assumed salary per BLS 25^{th} percentile (SOC Code: 132011, Accountants) 
$45,900 
$45,900 

Debt to income ratio 
8% 
10% 

Acceptable peryear debt load, per BLS salary 
$3,672 
$4,590 

Required starting salary 
$84,536 
$67,629 

Salary differential 
($38,636) 
($21,729) 

Debt differential per year 
($3,091) 
($2,173) 

Assumed new tuition under gainful employment 
$41,218 
$47,866 

Difference in tuition 
($22,382) 
($15,734) 

Difference in tuition per year 
($5,595) 
($3,934) 

Assumed students enrolled 
6,135 
6,135 

Assumed revenue loss from program under gainful employment 
($34.3m) 
($24.1m) 

Nursing, B.A. 
8% Debt to income ratio 
10% Debt to income ratio 

Tuition 
$49,200 
$49,200 

Cost per year 
$12,300 
$12,300 

Assumed financed 
77% 
77% 

Estimated current debt 
$37,884 
$37,884 

Estimated nonfinanced 
$11,316 
$11,316 

Estimated peryear debt service 
$5,232 
$5,232 

Assumed salary per BLS 25^{th} percentile (SOC Code: 291111, Registered nurse) 
$51,640 
$51,640 

Debt to income ratio 
8% 
10% 

Acceptable peryear debt load, per BLS salary 
$4,131 
$5,164 

Required starting salary 
$65,396 
$49,445 

Salary differential 
($13,756) 
$2,195 

Debt differential per year 
($1,100) 
$219 

Assumed new tuition under gainful employment 
$41,231 
$49,200 

Difference in tuition 
($7,969) 
$0 

Difference in tuition per year 
($1,992) 
$0 

Assumed students enrolled 
11,452 
11,452 

Assumed revenue loss from program under gainful employment 
($22.8m) 
$0 

Information Technology, Associates 
8% Debt to income ratio 
10% Debt to income ratio 

Tuition 
$20,700 
$20,700 

Cost per year 
$10,350 
$10,350 

Assumed financed 
77% 
77% 

Estimated current debt 
$15,939 
$15,939 

Estimated nonfinanced 
$4,761 
$4,761 

Estimated peryear debt service 
$2,201 
$2,201 

Assumed salary per BLS 25^{th} percentile (SOC Code: 439011, Computer Ops.) 
$27,830 
$27,830 

Debt to income ratio 
8% 
10% 

Acceptable peryear debt load, per BLS salary 
$2,226 
$2,783 

Required starting salary 
$27,514 
$22,011 

Salary differential 
$316 
$5,819 

Debt differential per year 
$25 
$582 

Assumed new tuition under gainful employment 
$20,700 
$20,700 

Difference in tuition 
$0 
$0 

Difference in tuition per year 
$0 
$0 

Assumed students enrolled 
18,108 
18,108 

Assumed revenue loss from program under gainful employment 
$0 
$0 

ITT Educational Services (ESI) Assumptions and Analysis: ITT Educational Services, which reported 80,766 students for the year ended December 2009, suffers a sharp decline in its earnings under the various scenarios in the analysis. In this analysis, ESI loses money under the worst scenario, and in the other three scenarios would sport a P/E multiple between 24x and 75x. Before detailing the analysis, a few assumptions merit explanation:
Earnings Impact from Gainful Employment Scenarios: The table below shows the estimated impact of gainful employment on ESI's 2009 results. The tables show four scenarios: an 8% debttoincome ratio with no operational changes by ESI; a 10% debttoincome ratio with no operational changes; an 8% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed; and a 10% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed.
ESI FY09 Actual Results 
FY09 assuming 8% d/i ratio, with no other changes 
FY09 assuming 10% d/i ratio with no other changes 
FY09 assuming 8% d/i ratio, 20% cut in ad spend 
FY09 assuming 10% d/i ratio, 20% cut in ad spend 

Results 
FY09 
Results 
8%FY09 
Delta 
Results 
10%FY09 
Delta 
Results 
8% + cuts 
Delta 
Results 
10% + cuts 
Delta 
Sales 
1,319,194 
Sales 
776,263 
(41.2%) 
Sales 
955,902 
(27.5%) 
Sales 
776,263 
(41.2%) 
Sales 
955,902 
(27.5%) 
Ebitda 
513,700 
Ebitda 
(29,231) 
(105.7%) 
Ebitda 
150,408 
(70.7%) 
Ebitda 
106,414 
(79.3%) 
Ebitda 
286,053 
(44.3%) 
Ebit 
488,792 
Ebit 
(54,139) 
(111.1%) 
Ebit 
125,500 
(74.3%) 
Ebit 
81,506 
(83.3%) 
Ebit 
261,145 
(46.6%) 
Pretax 
491,357 
Pretax 
(51,574) 
(110.5%) 
Pretax 
128,065 
(73.9%) 
Pretax 
84,071 
(82.9%) 
Pretax 
263,710 
(46.3%) 
Net 
300,263 
Net 
(51,574) 
(117.2%) 
Net 
79,400 
(73.6%) 
Net 
52,124 
(82.6%) 
Net 
163,500 
(45.5%) 
EPS 
$7.91 
EPS 
($1.36) 
(117.2%) 
EPS 
$2.09 
(73.6%) 
EPS 
$1.37 
(82.6%) 
EPS 
$4.31 
(45.5%) 
P/E 
13.1x 
P/E 
n/a 

P/E 
49.6x 

P/E 
75.5x 

P/E 
24.1x 

ESI Program Examples: Below are three examples of the analysis I conducted on ITT Education Services' programs. I analyzed the revenue implications on 14 programs.
Paralegal Studies, Associates 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$47,328 
$47,328 
Cost per year 
$23,664 
$23,664 
Assumed financed 
68% 
68% 
Estimated current debt 
$32,183 
$32,183 
Estimated nonfinanced 
$15,145 
$15,145 
Estimated peryear debt service 
$4,444 
$4,444 
Assumed salary per BLS 25^{th} percentile (SOC Code: 439011, Computer Ops.) 
$36,080 
$36,080 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$2,886 
$3,608 
Required starting salary 
$55,555 
$44,444 
Salary differential 
($19,475) 
($8,364) 
Debt differential per year 
($1,558) 
($836) 
Assumed new tuition under gainful employment 
$36,086 
$38,422 
Difference in tuition 
($11,282) 
($8,906) 
Difference in tuition per year 
($5,641) 
($4,453) 
Assumed students enrolled 
4,200 
4,200 
Assumed revenue loss from program under gainful employment 
($23.7m) 
($18.7m) 
Criminal Justice, Associates 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$47,328 
$47,328 
Cost per year 
$23,664 
$23,664 
Assumed financed 
68% 
68% 
Estimated current debt 
$32,183 
$32,183 
Estimated nonfinanced 
$15,145 
$15,145 
Estimated peryear debt service 
$4,444 
$4,444 
Assumed salary per BLS 25^{th} percentile (SOC Code: 330000, Protective Service Workers) 
$23,480 
$23,480 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$1,878 
$2,348 
Required starting salary 
$55,555 
$44,444 
Salary differential 
($32,075) 
($20,964) 
Debt differential per year 
($2,566) 
($2,096) 
Assumed new tuition under gainful employment 
$28,747 
$32,148 
Difference in tuition 
($18,581) 
($15,180) 
Difference in tuition per year 
($9,290) 
($7,590) 
Assumed students enrolled 
4,200 
4,200 
Assumed revenue loss from program under gainful employment 
($39m) 
($31.9m) 
Data communications systems, B.A. 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$84,240 
$84,240 
Cost per year 
$21,060 
$21,060 
Assumed financed 
68% 
68% 
Estimated current debt 
$57,283 
$57,283 
Estimated nonfinanced 
$26,957 
$26,957 
Estimated peryear debt service 
$7,911 
$7,911 
Assumed salary per BLS 25^{th} percentile (SOC Code: 333051, Systems/data comm. analysts) 
$54,330 
$54,330 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$4,346 
$5,433 
Required starting salary 
$98,883 
$79,106 
Salary differential 
($44,553) 
($24,776) 
Debt differential per year 
($3,564) 
($2,478) 
Assumed new tuition under gainful employment 
$58,430 
$66,299 
Difference in tuition 
($25,810) 
($17,941) 
Difference in tuition per year 
($6,452) 
($4,481) 
Assumed students enrolled 
3,836 
3,836 
Assumed revenue loss from program under gainful employment 
($24.7m) 
($17.2m) 
Corinthian Colleges (COCO) Assumptions and Analysis: Corinthian Colleges, which reported 86,088 students for the fiscal year ended June 2009, loses money in the 8% and 10% debttoincome ratio scenarios without operational changes, but is profitable when it curtails its advertising spending. Before detailing the analysis, a few assumptions merit explanation:
Earnings Impact from Gainful Employment Scenarios: The table below shows the estimated impact of gainful employment on COCO's 2009 results. The tables show four scenarios: an 8% debttoincome ratio with no operational changes by COCO; a 10% debttoincome ratio with no operational changes; an 8% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed; and a 10% debttoincome ratio and a 20% reduction in selling/promotion costs and other operational changes discussed.
COCO FY09 Actual Results 
FY09 assuming 8% d/i ratio, with no other changes 
FY09 assuming 10% d/i ratio with no other changes 
FY09 assuming 8% d/i ratio, 20% cut in ad spend 
FY09 assuming 10% d/i ratio, 20% cut in ad spend 

Results 
FY09 
Results 
8%FY09 
Delta 
Results 
10%FY09 
Delta 
Results 
8% + cuts 
Delta 
Results 
10% + cuts 
Delta 
Sales 
1,307,825 
Sales 
1,095,317 
(39.8%) 
Sales 
1,165,077 
(36.8%) 
Sales 
1,095,317 
(39.8%) 
Sales 
1,165,077 
(36.8%) 
Ebitda 
173,571 
Ebitda 
(38,937) 
(185.4%) 
Ebitda 
30,823 
(171.5%) 
Ebitda 
87,293 
(150.9%) 
Ebitda 
157,052 
(137.0%) 
Ebit 
119,265 
Ebit 
(93,243) 
(250.7%) 
Ebit 
(23,483) 
(231.9%) 
Ebit 
32,987 
(204.1%) 
Ebit 
102,746 
(185.2%) 
Pretax 
117,143 
Pretax 
(95,365) 
(483.4%) 
Pretax 
(25,605) 
(447.1%) 
Pretax 
30,865 
(393.5%) 
Pretax 
100,624 
(357.1%) 
Net 
71,128 
Net 
(95,365) 
(708.5%) 
Net 
(25,605) 
(650.8%) 
Net 
18,766 
(565.8%) 
Net 
61,180 
(508.1%) 
EPS 
$0.81 
EPS 
($1.09) 
(708.5%) 
EPS 
($0.29) 
(650.8%) 
EPS 
$0.21 
(565.8%) 
EPS 
$0.70 
(508.1%) 
P/E 
17.8x 
P/E 
n/a 

P/E 
67.5x 

P/E 
n/a 

P/E 
20.7x 

COCO Program Examples: Below are three examples of the analysis I conducted on Education Management's programs. I analyzed the revenue implications on 34 programs.
Diploma  Dental Assistant 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$12,093 
$12,093 
Cost per year 
$8,062 
$8,062 
Assumed financed 
77.0% 
77.0% 
Estimated current debt 
$9,312 
$9,312 
Estimated nonfinanced 
$2,781 
$2,781 
Estimated peryear debt service 
$1,286 
$1,286 
Assumed salary per BLS 25^{th} percentile (SOC Code: 112021, Advertising/Promo. managers) 
$26,980 
$26,980 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$2,158 
$2,698 
Required starting salary 
$16,074 
$12,859 
Salary differential 
$10,906 
$14,121 
Debt differential per year 
$873 
$1,412 
Assumed new tuition under gainful employment 
$12,093 
$12,093 
Difference in tuition 
$0 
$0 
Difference in tuition per year 
$0 
$0 
Assumed students enrolled 
5,502 
5,502 
Assumed revenue loss from program under gainful employment 
$0 
$0 
Diploma  Residential HVAC Training Program 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$25,016 
$25,016 
Cost per year 
$16,677 
$16,677 
Assumed financed 
77.0% 
77.0% 
Estimated current debt 
$19,262 
$19,262 
Estimated nonfinanced 
$5,754 
$5,754 
Estimated peryear debt service 
$2,660 
$2,660 
Assumed salary per BLS 25^{th} percentile (SOC Code: 271025, Interior Designers) 
$25,910 
$25,910 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$2,073 
$2,591 
Required starting salary 
$33,251 
$26,601 
Salary differential 
($7,341) 
($691) 
Debt differential per year 
($587) 
($69) 
Assumed new tuition under gainful employment 
$20,763 
$24,516 
Difference in tuition 
($4,253) 
($500) 
Difference in tuition per year 
($2,835) 
($333) 
Assumed students enrolled 
2,755 
2,755 
Assumed revenue loss from program under gainful employment 
($7.8m) 
($917k) 
Associate's  Medical Assisting 
8% Debt to income ratio 
10% Debt to income ratio 
Tuition 
$38,784 
$38,784 
Cost per year 
$19,392 
$19,392 
Assumed financed 
77.0% 
77.0% 
Estimated current debt 
$29,864 
$29,864 
Estimated nonfinanced 
$8,920 
$8,920 
Estimated peryear debt service 
$4,124 
$4,124 
Assumed salary per BLS 25^{th} percentile (SOC Code: 119051,Food service managers) 
$23,700 
$23,700 
Debt to income ratio 
8% 
10% 
Acceptable peryear debt load, per BLS salary 
$1,896 
$2,370 
Required starting salary 
$51,551 
$41,241 
Salary differential 
($27,851) 
($17,541) 
Debt differential per year 
($2,228) 
($1,754) 
Assumed new tuition under gainful employment 
$22,650 
$26,082 
Difference in tuition 
($16,134) 
($12,702) 
Difference in tuition per year 
($8,067) 
($6,351) 
Assumed students enrolled 
7,873 
7,873 
Assumed revenue loss from program under gainful employment 
($63.5m) 
($50.0m) 
Additional Thoughts and Conclusions: The analysis, using the best available data on BLS employment classifications and disclosure/estimates on APOL, EDMC, COCO and ESI's student population mix, indicates that the industry's profitability would be significantly hindered by the Gainful Employment proposal, particularly for hightuition providers such as ESI and EDMC. Initiatives to reduce expenses would ameliorate earnings erosion, but not enough to justify current valuations. While the analysis doesn't consider what APOL, EDMC , COCO and ESI's growth trajectory would be if the Department's proposal on Gainful Employment takes effect, it is worth noting that the debttoincome proposal removes the key operating lever of price increases  effectively 100% of price increases drop to the operating profit line. Likewise, if promotion and selling costs have to get curtailed to maintain profitability, the growth trajectory of these businesses is also called into question. I estimate that 75%80% of revenue from new students drops to operating profits.
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