Steiner Leisure (STNR) 10-Q 2013 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from	_____________	To ______________
Commission File Number: 0-28972
STEINER LEISURE LIMITED (Exact name of registrant as specified in its charter)
Commonwealth of The Bahamas			98-0164731
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
Suite 104A, Saffrey Square
P.O. Box N-9306
Nassau, The Bahamas			Not Applicable
(Address of principal executive offices)			(Zip Code)
(242) 356-0006 (Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            [X]  Yes    [   ]  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X]  Yes         [  ]  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X]    Accelerated filer [  ]    Non-accelerated filer [  ]    Smaller reporting company [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).             [   ]  Yes    [X]  No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
On November 4, 2013, the registrant had 14,665,891 common shares, par value (U.S.) $.01 per share, outstanding.

STEINER LEISURE LIMITED
INDEX
PART I FINANCIAL INFORMATION			Page No.
ITEM 1.	Unaudited Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012			3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012			5
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012			6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012			7
	Notes to Condensed Consolidated Financial Statements			9
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			16
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk			30
ITEM 4.	Controls and Procedures			30
PART II OTHER INFORMATION
ITEM 1.		Legal Proceedings		31
ITEM 1A.		Risk Factors		31
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds		32
ITEM 6.		Exhibits		33
SIGNATURES AND CERTIFICATIONS				34

2

PART I - FINANCIAL INFORMATION
Item 1.Unaudited Financial Statements
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
	September 30,		December 31,
	2013		2012
ASSETS		(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	66,997	$	75,028
Accounts receivable, net		53,612		48,646
Accounts receivable - students, net		21,409		17,364
Inventories		63,575		51,293
Prepaid expenses and other current assets		18,780		16,268
Total current assets		224,373		208,599
PROPERTY AND EQUIPMENT, NET		106,553		100,545
GOODWILL		328,231		328,231
OTHER ASSETS:
Intangible assets, net		88,644		89,512
Other		24,389		20,695
Total other assets		113,033		110,207
Total assets	$	772,190	$	747,582
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	20,381	$	18,134
Accrued expenses		51,053		50,217
Current portion of long-term debt		2,231		24,750
Current portion of deferred rent		1,019		1,039
Current portion of deferred tuition revenue		25,091		22,613
Current portion of deferred revenue		84,347		72,330
Gift certificate liability		14,878		16,639
Total current liabilities		199,000		205,722
NON-CURRENT LIABILITIES:
Deferred income tax liabilities, net		38,738		36,128
Long-term debt, net of current portion		103,966		123,750
Long-term deferred rent		15,744		13,244
Long-term deferred tuition revenue		867		397
Long-term deferred revenue		21,087		18,082
Total non-current liabilities		180,402		191,601

(Continued)

3

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands)
	September 30,			December 31,
	2013			2012
		(Unaudited)
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares, $.0l par value; 10,000 shares authorized, none
issued and outstanding		--			--
Common shares, $.0l par value; 100,000 shares authorized, 23,848
issued in 2013 and 23,779 shares issued in 2012		239			238
Additional paid-in capital		186,945			178,712
Accumulated other comprehensive loss		(1,248	)		(1,946	)
Retained earnings		519,040			482,556
Treasury shares, at cost, 9,185 shares in 2013 and 9,124
shares in 2012		(312,188	)		(309,301	)
Total shareholders' equity		392,788			350,259
Total liabilities and shareholders' equity	$	772,190		$	747,582

The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets.

4

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)
(in thousands, except per share data)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2013			2012			2013			2012
REVENUES:
Services	$	148,323		$	144,664		$	444,635		$	426,909
Products		66,508			59,724			189,863			173,493
Total revenues		214,831			204,388			634,498			600,402
COST OF REVENUES:
Cost of services		126,732			119,999			367,939			345,363
Cost of products		43,783			43,186			126,467			122,481
Total cost of revenues		170,515			163,185			494,406			467,844
Gross profit		44,316			41,203			140,092			132,558
OPERATING EXPENSES:
Administrative		11,526			11,618			38,667			35,309
Salary and payroll taxes		18,533			13,796			56,455			46,721
Total operating expenses		30,059			25,414			95,122			82,030
Income from operations		14,257			15,789			44,970			50,528
OTHER INCOME (EXPENSE), NET:
Interest expense		(899	)		(1,494	)		(3,455	)		(4,618	)
Other income		132			138			435			476
Total other income (expense), net		(767	)		(1,356	)		(3,020	)		(4,142	)
Income before provision for income taxes		13,490			14,433			41,950			46,386
PROVISION FOR INCOME TAXES		2,038			1,807			5,466			5,119
Net income	$	11,452		$	12,626		$	36,484		$	41,267
INCOME PER SHARE:
Basic	$	0.78		$	0.86		$	2.49		$	2.75
Diluted	$	0.77		$	0.85		$	2.46		$	2.72

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

5

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)
(in thousands)

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2013		2012		2013		2012
Net income	$	11,452	$	12,626	$	36,484	$	41,267
Other comprehensive income, net of taxes:
Foreign currency translation adjustments		1,993		1,219		698		1,652
Total other comprehensive income, net of taxes		1,993		1,219		698		1,652
Comprehensive income	$	13,445	$	13,845	$	37,182	$	42,919

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

6

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited, in thousands)

	Nine Months Ended
	September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	36,484		$	41,267
Adjustments to reconcile net income   to net cash provided by operating activities:
Depreciation and amortization		16,159			14,368
Loss on impairment of leasehold improvements		803			--
Stock-based compensation		7,207			6,520
Provision for doubtful accounts		3,261			2,025
Deferred income tax provision		2,610			2,610
Changes in:
Accounts receivable		(11,824	)		(9,209	)
Inventories		(12,126	)		(1,153	)
Prepaid expenses and other current assets		(2,508	)		(316	)
Other assets		(3,850	)		(6,016	)
Accounts payable		2,118			5,341
Accrued expenses		860			(8,234	)
Deferred tuition revenue		2,948			(576	)
Deferred revenue		15,022			19,705
Deferred rent		2,480			(353	)
Gift certificate liability		(1,756	)		(1,129	)
Net cash provided by operating activities		57,888			64,850
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(21,634	)		(23,702	)
Post-closing working capital adjustments related to acquisitions		--			3,614
Net cash used in investing activities		(21,634	)		(20,088	)

(Continued)

7

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited, in thousands)

	Nine Months Ended
	September 30,
	2013			2012
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares	$	(2,887	)	$	(33,173	)
Payments of long-term debt		(42,303	)		(22,375	)
Payments of debt issuance costs		(352	)		--
Proceeds from share option exercises		1,025			491
Net cash used in financing activities		(44,517	)		(55,057	)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH		232			1,005
NET DECREASE IN CASH
AND CASH EQUIVALENTS		(8,031	)		(9,290	)
CASH AND CASH EQUIVALENTS,
Beginning of period		75,028			62,645
CASH AND CASH EQUIVALENTS,
End of period	$	66,997		$	53,355
SUPPLEMENTAL DISCLOSURES OF    CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	2,559		$	3,518
Income taxes	$	3,166		$	3,885

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

8

STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013
(Unaudited)

(1) BASIS OF PRESENTATION OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

The accompanying unaudited condensed consolidated financial statements include the condensed consolidated balance sheets, statements of income, comprehensive income and cash flows of Steiner Leisure Limited (including its subsidiaries, "Steiner Leisure," the "Company," "we" and "our"). All significant intercompany items and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the SEC's rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations for the three and nine months ended September 30, 2013 and cash flows for the nine months then ended are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Annual Report"). The December 31, 2012 Condensed Consolidated Balance Sheet included herein was extracted from the December 31, 2012 audited Consolidated Balance Sheet included in the 2012 Annual Report.

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the assessment of the realization of accounts receivable, accounts receivable - students, recovery of long-lived assets and goodwill and other intangible assets, determination of deferred income taxes, including valuation allowances, useful lives of definite-lived intangible assets and property and equipment, determination of fair value of assets and liabilities in purchase price allocations, the determination of gift certificate breakage revenue, assumptions related to the determination of stock-based compensation, for Ideal Image Center revenue and related deferred customer acquisition costs, the determination of the average number of treatments provided, and the allocation of arrangement consideration between services and products for treatment packages that include our products.

(2) ORGANIZATION:

Steiner Leisure Limited, a worldwide provider and innovator in the fields of beauty, wellness and education, was incorporated in the Bahamas as a Bahamian international business company in 1995. In our facilities on cruise ships, at land-based spas, including at resorts and urban hotels, luxury Elemis® day spas, Bliss® premium urban day spas and at our Ideal Image centers (the "Centers"), we strive to create a relaxing and therapeutic environment where guests can receive beauty and body treatments of the highest quality. Our services include traditional and alternative massage, body and skin treatment options, fitness, acupuncture, medi-spa treatments and laser hair removal. We also develop and market premium quality beauty products which are sold at our facilities, through e-commerce and third party retail outlets and other channels. We also operate 12 post-secondary schools (comprised of a total of 31 campuses) located in Arizona, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, Pennsylvania, Texas, Utah, Virginia and Washington.

9

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Our significant accounting policies were described in Note 2 to our consolidated financial statements included in our 2012 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the nine months ended September 30, 2013, unless as described below.

(a) Principles of Consolidation and Basis of Presentation

We hold variable interests in physician-owned entities that provide medical services to the Centers' guests. These entities were set up for regulatory compliance purposes. We bear the benefits and risks of loss from operating those entities through contractual agreements. Our condensed consolidated financial statements include the operating results of those entities.

(b) Inventories

Inventories, consisting principally of beauty products, are stated at the lower of cost (first-in, first-out) or market. Manufactured finished goods include the cost of raw material, labor and overhead. Inventories consist of the following (in thousands):

		September 30,		December 31,
		2013		2012
Finished goods	$	57,192	$	46,711
Raw materials		6,383		4,582
	$	63,575	$	51,293

(c) Revenue Recognition

We recognize Centers' sales in relation to laser hair removal treatment packages sold at Company-owned and at physician-owned clinic locations. The packages provide for five initial treatments which occur at up to ten-week intervals and generally allow for up to four additional treatments, as necessary, to obtain the desired results. Centers' sales service revenue is recognized evenly over the average number of treatments provided, and is included in Services Revenues in our consolidated statements of income. Remaining revenue, net of related financing fees, relating to unperformed services is included in deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2013, some of our treatment packages included certain of our products. Treatment packages that are bundled with our products are considered multiple deliverable arrangements and, hence, require us to allocate revenue between services and products using either vendor specific objective evidence, third party evidence of selling price, or the best estimate of selling price. Because both our treatments and products are offered for sale separately, we allocate consideration received for treatment packages based upon their relative stand-alone selling prices. Revenues for the treatment component are deferred and recognized as discussed above. Revenues for the products are recognized when they are delivered. All costs directly related to the operation of both Company-owned and physician-owned center locations, such  as rent of the facilities, maintenance costs of our equipment, depreciation expense related to leaseholds and equipment, payroll costs of sales personnel and service providers and advertising costs are included in Cost of Services and certain of these costs are included in Cost of Products to the extent they relate to the sale of products in our condensed consolidated statements of income. All corporate related payroll and other corporate related expenses are included in Salary and Payroll and Administrative expenses in our condensed consolidated statements of income. 

We also receive royalties from Ideal Image franchisees. These royalties from franchised Ideal Image Center operations are recognized in the period earned and are recorded in Services Revenues in our condensed consolidated statements of income. There are no related direct costs associated with these royalties. 

10

(d) Income Taxes

A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized. The majority of our income is generated outside of the United States. We believe a large percentage of our shipboard services income is foreign-source income, not effectively connected to a business we conduct in the United States and, therefore, not subject to United States income taxation.

(e) Translation of Foreign Currencies

For currency exchange rate purposes, assets and liabilities of our foreign subsidiaries are translated at the rate of exchange in effect at the balance sheet date. Equity and other items are translated at historical rates and income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected in the Accumulated Other Comprehensive Loss caption of our Condensed Consolidated Balance Sheets. Foreign currency gains and losses resulting from transactions, including intercompany transactions, are included in the results of operations. The transaction gains (losses) included in the Administrative expenses caption of our Condensed Consolidated Statements of Income were approximately $1.1 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively, and approximately ($0.4 million) and $0.4 million for the nine months ended September 30, 2013 and 2012, respectively. The transaction gains (losses) in the Cost of Products caption of our Condensed Consolidated Statements of Income were approximately ($1.1 million) and ($0.5 million) for the three months ended September 30, 2013 and 2012, respectively, and approximately ($0.3 million) and ($1.1 million) for the nine months ended September 30, 2013 and 2012, respectively.

(f) Earnings Per Share

Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to basic earnings per share except that the denominator includes dilutive common share equivalents such as share options and restricted share units. Reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2013		2012		2013		2012
Net income	$	11,452	$	12,626	$	36,484	$	41,267
Weighted average shares outstanding used in    calculating basic earnings per share		14,661		14,698		14,648		14,982
Dilutive common share equivalents		251		203		178		201
Weighted average common and common share    equivalents used in calculating diluted earnings    per share		14,912		14,901		14,826		15,183
Income per common share:
Basic	$	0.78	$	0.86	$	2.49	$	2.75
Diluted	$	0.77	$	0.85	$	2.46	$	2.72
Options and restricted share units outstanding    which are not included in the calculation of    diluted earnings per share because their impact is    anti-dilutive		--		21		3		7

11

The Company issued approximately 7,000 of its common shares upon the exercise of share options during the three months ended September 30, 2013 and issued approximately 30,000 and 16,000 of its common shares upon exercise of share options during the nine months ended September 30, 2013 and 2012, respectively.

(g) Stock-Based Compensation

The Company granted approximately 30,000 and 11,000 restricted share units during the nine months ended September 30, 2013 and 2012, respectively. No other stock-based compensation was granted during the nine months ended September 30, 2013 and 2012, respectively.

(h) Recent Accounting Pronouncements

In January 2013, we adopted authoritative guidance issued in 2012 regarding the periodic impairment testing of indefinite-lived intangible assets.  The new guidance allows an entity to assess qualitative factors to determine if it is more-likely-than-not that indefinite-lived intangible assets might be impaired and, based on this assessment, to determine whether it is necessary to perform the quantitative impairment tests.  The adoption of this guidance did not have an impact on our consolidated financial statements.

In March 2013, we adopted authoritative guidance regarding the presentation of amounts reclassified from accumulated other comprehensive income (loss) to net income.  The new guidance requires an entity to present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income (loss) based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or interest expense).  We elected to present this information in a single note. See Note 7.Changes in Accumulated Other Comprehensive Loss for our disclosures required under this guidance.

In March 2013, amended guidance was issued regarding the release of cumulative translation adjustments into net income.  The new guidance provides clarification of when to release the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity.  This guidance will be effective for our interim and annual reporting periods beginning after December 15, 2013.  The adoption of this newly issued guidance is not expected to have a material impact on our consolidated financial statements, but will have an impact on the accounting for future sales of investments or changes in control of foreign entities.

(i) Fair Value Measurements

US GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy.  The three levels of inputs used to measure fair value are as follows:

• Level 1 - Quoted prices in active markets for identical assets and liabilities.

• Level 2 - Observable inputs other than quoted prices included in Level 1. This includes dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

In accordance with US GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis and nonrecurring basis. We have no assets or liabilities that are adjusted to fair value on a recurring basis. We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2013, or 2012.

12

Cash and cash equivalents is reflected in the accompanying Condensed Consolidated Financial Statements at cost, which approximated fair value estimated using Level 1 inputs as they are maintained with high-quality financial institutions and having original maturities of three months or less. The fair value of our term loan, which is the same as the carrying value, was estimated using Level 2 inputs based on quoted prices for those or similar instruments. The fair value of the term loan was determined using applicable interest rates as of September 30, 2013 and December 31, 2012 and approximate the carrying value of such debt.

(j) Seasonality

A significant portion of our revenues are generated from our cruise ship spa operations. Certain cruise lines, and, as a result, Steiner Leisure, have experienced varying degrees of seasonality as the demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays. Accordingly, generally the third quarter and holiday periods result in the highest revenue yields for us. Our product sales are strongest in the third and fourth quarters as a result of the December holiday shopping period.

(4) COMMITMENTS AND CONTINGENCIES:

(a) Legal Proceedings

From time to time, in the ordinary course of business, we are a party to various claims and legal proceedings. There have been no material changes with respect to legal proceedings previously reported in our annual report on Form 10-K for the year ended December 31, 2012, except as follows:

As previously reported, in April 2011, a complaint was filed in California Superior Court, Los Angeles Central Division, against Bliss World LLC and related entities (Yvette Ferrari v. Bliss World LLC, et al), seeking damages on behalf of an employee of Bliss claiming violations of various California requirements relating to the payment of wages. The action was presented as a class action. In July 2013, the parties to this action settled the matter for an amount that was not material to the Company's financial condition, results of operations or cash flows.

(5) LONG-TERM DEBT:

On June 21, 2013, we entered into an amendment to our credit facility. As a result, among other things, our restrictive payment limits were increased, certain of our financial covenants were modified, we received improved pricing on our interest rate and the maturity date of the term loan was extended from November 1, 2016 to June 21, 2018. In connection with entering into the amendment, we incurred $0.4 million of lender and third-party costs.

(6) SHAREHOLDERS' EQUITY:

On February 27, 2013, the Board of Directors (the "Board") of Steiner Leisure approved a new share repurchase plan under which up to $100.0 million of Steiner Leisure common shares can be purchased. In connection with the new repurchase authorization, the repurchase plan approved by the Board in February 2008 was terminated. During the nine months ended September 30, 2013 and 2012, respectively, we purchased approximately 61,000 and 723,000 shares, with a value of approximately $2.9 million and $33.2 million, respectively. Of those shares purchased, 12,000 and 21,000 shares for the nine months ended September 30, 2013 and 2012, respectively, were surrendered by our employees in connection with the vesting of restricted share units and used by us to satisfy payment of our minimum federal income tax withholding obligations in connection with these vestings. These share purchases were outside of our repurchase plan.

13

(7) CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS:

The following table presents the changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2013 (in thousands):

		Foreign Currency Translation Adjustments
Accumulated comprehensive loss at beginning of the year	$	(1,946	)
Other comprehensive loss before reclassifications		698
Amounts reclassified from accumulated other comprehensive loss		--
Net current-period other comprehensive loss		698
Ending balance	$	(1,248	)

All amounts are after tax. Amounts in parenthesis indicate debits.

(8) SEGMENT INFORMATION:

Our Maritime and Land-Based Spas operating segments are aggregated into a reportable segment based upon similar economic characteristics, products, services, customers and delivery methods. Additionally, the operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief executive officer in determining how to allocate the Company's resources and evaluate performance.

We operate in four reportable segments: (1) Spa Operations, which sells spa services and beauty products onboard cruise ships, on land at hotels and at day spas; (2) Products, which sells a variety of high quality beauty products to third parties through channels other than those above; (3) Schools, which offers programs in massage therapy and skin care; and (4) Laser Hair Removal, which sells laser hair removal services and certain of our products. Amounts included in "Other" include various corporate items such as unallocated overhead and intercompany transactions.

Information about our segments is as follows (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2013			2012			2013			2012
Revenues:
Spa Operations	$	126,489		$	129,041		$	378,157		$	382,914
Products		46,349			39,962			133,938			110,927
Schools		20,204			18,935			59,384			59,614
Laser Hair Removal		31,564			23,368			96,323			66,397
Other		(9,775	)		(6,918	)		(33,304	)		(19,450	)
Total	$	214,831		$	204,388		$	634,498		$	600,402
Income (loss) from Operations:
Spa Operations	$	11,428		$	9,497		$	32,507		$	31,238
Products		6,254			3,733			14,094			8,780
Schools		763			388			2,541			3,447
Laser Hair Removal		(4,274	)		829			233			6,452
Other		86			1,342			(4,405	)		611
Total	$	14,257		$	15,789		$	44,970		$	50,528

14

		September 30,			December 31,
		2013			2012
Identifiable Assets:
Spa Operations	$	214,014		$	210,757
Products		200,378			178,108
Schools		124,753			131,355
Laser Hair Removal		303,590			286,170
Other		(70,545	)		(58,808	)
Total	$	772,190		$	747,582

Included in Spa Operations, Products, Laser Hair Removal and Schools is goodwill of $51.0 million, $23.7 million, $195.1 million and $58.4 million, respectively, as of September 30, 2013 and December 31, 2012.

Products segment revenues excluding intercompany transactions was $35.8 million and $30.9 million for the three months ended September 30, 2013 and 2012, respectively, and $99.3 million and $89.8 million for the nine months ended September 30, 2013 and 2012, respectively.

(9) GEOGRAPHIC INFORMATION:

Set forth below is information relating to countries in which we have material operations. We are not able to identify the country of origin for the customers to which revenues from our cruise ship operations relate. Geographic information is as follows (in thousands):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2013		2012		2013		2012
Revenues:
United States	$	84,800	$	72,661	$	255,830	$	220,628
United Kingdom		19,493		17,667		52,267		48,570
Not connected to a country		103,151		106,134		303,687		305,295
Other		7,387		7,926		22,714		25,909
Total	$	214,831	$	204,388	$	634,498	$	600,402

		September 30,		December 31,
		2013		2012
Property and Equipment, net:
United States	$	82,139	$	75,156
United Kingdom		5,816		6,568
Not connected to a country		2,577		1,505
Other		16,021		17,316
Total	$	106,553	$	100,545

15

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Steiner Leisure Limited is a worldwide provider and innovator in the fields of health, wellness and education.  We operate our business through four reportable segments: Spa Operations, Products, Schools and Laser Hair Removal.

Through our Spa Operations segment, we offer massages and a variety of other body treatments, as well as a broad variety of beauty treatments to women, men and teenagers on cruise ships and at land-based spas. We conduct our activities pursuant to agreements with cruise lines and owners of our land-based venues that, generally, give us the exclusive right to offer these types of services at those venues. The cruise lines and land-based venue owners, generally, receive compensation based on a percentage of our revenues at these respective locations and, in certain cases, a minimum annual rental or combination of both.

Through our Products segment, we develop and sell a variety of high quality beauty products under our Elemis, La Thérapie™, Bliss, Remède® and Laboratoire Remède® brands, and also sell products of third parties, both under our packaging and labeling and otherwise. The ingredients for these products are produced for us by several suppliers, including premier European manufacturers. We sell our products at our shipboard and land-based spas pursuant to the same agreements under which we provide spa services at those locations, as well as through third party outlets and our catalogs and websites.

Through our Schools segment, we own and operate 12 post-secondary schools (comprised of a total of 31 campuses) located in Arizona, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, Pennsylvania, Texas, Utah, Virginia and Washington.  These schools offer programs in massage therapy and, in some cases, beauty and skin care, and train and qualify spa professionals for health and beauty positions. Among other things, in conjunction with skin care programs, we train the students at our schools in the use of our Elemis, Bliss and La Thérapie products. We offer full-time programs as well as part-time programs for students who work or who otherwise desire to take classes outside traditional education hours. Revenues from our massage and beauty schools, which consist almost entirely of student tuition payments, are derived to a significant extent from the proceeds of loans issued under the Title IV Programs, authorized by Title IV of the Higher Education Act of 1965 (the "HEA") and administered by the U.S. Department of Education (the "DOE"). We must comply with a number of regulatory requirements in order to maintain the eligibility of our students and prospective students for loans under these programs. New Rules of the DOE, effective July 1, 2011, increased our regulatory compliance obligations, have adversely affected our Schools segment's enrollments and continue to adversely affect our enrollment and our results of operations.

Through our Laser Hair Removal segment, we offer a non-invasive procedure for the removal of unwanted facial and body hair in a clinical setting. Ideal Image is a leader in the growing consumer healthcare category of laser hair removal. Ideal Image is subject to regulation in the states in which its facilities are located, related to, among other things, corporate entities such as Ideal Image "practicing medicine" and to the provision of the laser hair removal services.

We are continuing to expand our Laser Hair Removal segment. We anticipate opening a number of Centers in each of calendar years 2013, 2014 and 2015. These Centers will either be company-owned or physician-owned, depending on the jurisdiction in which the respective Center will be opened. In connection with the opening of each new Center, we incur expenses, among other things, for leasehold improvements, marketing and training of new personnel. Accordingly, even new Centers that are successful do not become cash flow positive until several months after opening.

16

Even after a new Center becomes cash flow positive, however, under applicable  US GAAP rules,  it takes an additional period of time for the positive cash flow (assuming the Center is successful) to be reflected in the operating income of the segment with respect to that Center. This is primarily because the services for which payments are received are not fully performed for a period of several months and revenue cannot be recognized until the related treatment is performed. Accordingly, operating income of the Laser Hair Removal segment trails behind the related cash flow of the segment. This applies to both new Centers and existing Centers. As more new Centers are opened, and, therefore, each new Center becomes a smaller portion of the segment as a whole, the trailing of operating income behind the related cash flows will decline because established Centers typically have a regular base of customers and receive new customers at a more regular rate than newly opened Centers and, therefore, have a stronger revenue base than new Centers.

A significant portion of our revenues are generated from our cruise ship operations. Accordingly, our success and our growth are dependent to a significant extent on the success and growth of the travel and leisure industry in general, and on the cruise industry in particular. Our hotel land-based spas are dependent on the hospitality industry for their success. These industries are subject to significant risks, described in our Annual Report on Form 10-K for the year ended December 31, 2012, that could affect our results of operations.

The success of the cruise and hospitality industries, as well as our business, is impacted by economic conditions. The economic slowdown experienced in recent years in the United States and other world economies have created a challenging environment for the cruise and hospitality industries and our business, including our retail beauty products sales. While economic conditions have shown some improvement, a number of European countries continue to experience adverse economic conditions related to unpaid debt obligations of certain of those countries. The impact on consumers of periodic increases in fuel costs have added to the continuation of this economic turmoil.

As a consequence of these economic conditions, our results of operations and financial condition for 2011, 2012 and the first nine months of 2013 were adversely affected. A worsening of the more severe aspects of the economic slowdown or continuing increases in fuel prices could have a material adverse effect on our services and product sales.

The cruise industry also is subject to risks specific to that industry. Among other things, the highly publicized January 2012 accident involving theCosta Concordia adversely affected cruise ship bookings in 2012 and the highly publicized February 2013Carnival Triumph fire and other recent mishaps involving cruise vessels have adversely affected cruise ship bookings in 2013. This has adversely affected us because cruise lines are discounting fairs in order to attract passengers, which has resulted in an increased number of passengers who are less likely to spend in our spas.

Other factors also can adversely affect our financial results. The U.S. Dollar has been weak in recent years against the U.K. Pound Sterling and the Euro. This weakness affected our results of operations because we pay for the administration of recruitment and training of our shipboard personnel and the ingredients and manufacturing of many of our products in U.K. Pounds Sterling and Euros, respectively.

Key Performance Indicators

Spa Operations. A measure of performance we have used in connection with our periodic financial disclosure relating to our cruise line operations is that of revenue per staff per day. In using that measure, we have differentiated between our revenue per staff per day on ships with large spas and other ships we serve. Our revenue per staff per day has been affected by the continuing requirement that we place additional non-revenue producing staff on ships with large spas to help maintain a high quality guest experience. We also utilize, as a measure of performance for our cruise line operations, our average revenue per week. We use these measures of performance because they assist us in determining the productivity of our staff, which we believe is a critical element of our operations. With respect to our land-based spas, we measure our performance primarily through average weekly revenue over applicable periods of time.

Schools. With respect to our massage and beauty schools, we measure performance primarily by revenues.

Products.With respect to sales of our products, other than on cruise ships and at our land-based spas, we measure performance by revenues.

17

Laser Hair Removal. With respect to our laser hair removal Centers, we measure performance primarily through average weekly revenue and number of new locations.

Growth

We seek to grow our business by attempting to obtain contracts for new cruise ships brought into service by our existing cruise line customers and for existing and new ships of other cruise lines, seeking new venues for our land-based spas, developing new products and services, seeking additional channels for the distribution of our retail products and seeking to increase the student enrollments at our post-secondary massage and beauty schools, including through the opening of new school campuses, and by opening new Ideal Image centers. We also consider growth, among other things, through appropriate strategic transactions, including acquisitions and joint ventures.

Critical Accounting Policies

Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances.

Our critical accounting policies are included in our 2012 Annual Report. We believe that there have been no significant changes during the nine months ended September 30, 2013 to the critical accounting policies disclosed in our 2012 Annual Report, except as described below.

Revenue Recognition

We recognize Centers' sales in relation to laser hair removal treatment packages sold at Company-owned and at physician-owned clinic locations. The packages provide for five initial treatments which occur at up to ten-week intervals and generally allow for up to four additional treatments, as necessary, to obtain the desired results. Centers' sales service revenue is recognized evenly over the average number of treatments provided, and is included in Services Revenues in our consolidated statements of income. Remaining revenue, net of related financing fees, relating to unperformed services is included in deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2013, some of our treatment packages included certain of our products. Treatment packages that are bundled with our products are considered multiple deliverable arrangements and, hence, require us to allocate revenue between services and products using either vendor specific objective evidence, third party evidence of selling price, or the best estimate of selling price. Because both our treatments and products are offered for sale separately, we allocate consideration received for treatment packages based upon their relative stand-alone selling prices. Revenues for the treatment component are deferred and recognized as discussed above. Revenues for the products are recognized when they are delivered. All costs directly related to the operation of both Company-owned and physician-owned center locations, such as rent of the facilities, maintenance costs of our equipment, depreciation expense related to leaseholds and equipment, payroll costs of sales personnel and service providers and advertising costs are included in Cost of Services and certain of these costs are in Cost of Products to the extent they relate to the sale of products in our consolidated statements of income. All corporate related payroll and other corporate related expenses are included in Salary and Payroll and Administrative expenses in our consolidated statements of income. 

We also receive royalties from Ideal Image franchisees. These royalties from franchised Ideal Image Center operations are recognized in the period earned and are recorded in Services Revenues in our consolidated statements of income. There are no related direct costs associated with these royalties. 

Recent Accounting Pronouncements

Refer to Note 3(h) to the Condensed Consolidated Financial Statements in this report for a discussion of recent accounting pronouncements.

18

Results of Operations

The following table sets forth for the periods indicated, certain selected income statement data expressed as a percentage of revenues:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Revenues:
Services	69.0	%	70.8	%	70.1	%	71.1	%
Products	31.0		29.2		29.9		28.9
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Cost of services	59.0		58.7		58.0		57.5
Cost of products	20.4		21.1		19.9		20.4
Total cost of revenues	79.4		79.8		77.9		77.9
Gross profit	20.6		20.2		22.1		22.1
Operating expenses:
Administrative	5.4		5.7		6.1		5.9
Salary and payroll taxes	8.6		6.8		8.9		7.8
Total operating expenses	14.0		12.5		15.0		13.7
Income from operations	6.6		7.7		7.1		8.4
Other income (expense), net:
Interest expense	(0.5	)	(0.7	)	(0.5	)	(0.8	)
Other income	0.1		0.1		0.1		0.1
Total other income (expense), net	(0.4	)	(0.6	)	(0.4	)	(0.7	)
Income before provision for     income taxes	6.2		7.1		6.7		7.7
Provision for income taxes	0.9		0.9		0.9		0.8
Net income	5.3	%	6.2	%	5.8	%	6.9	%

19

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

REVENUES

Revenues of our reportable segments for the three months ended September 30, 2013 and 2012, respectively, were as follows (in thousands):

		Three Months Ended September 30,					% Change
Revenue:		2013			2012
Spa Operations	$	126,489		$	129,041		(2.0%)
Products		46,349			39,962		16.0%
Schools		20,204			18,935		6.7%
Laser Hair Removal		31,564			23,368		35.1%
Other		(9,775	)		(6,918	)	N/A
Total	$	214,831		$	204,388		5.1%

Total revenues increased approximately 5.1%, or $10.4 million, to $214.8 million in the third quarter of 2013 from $204.4 million in the third quarter of 2012. Of this increase, $3.6 million was attributable to an increase in services revenues and $6.8 million was attributable to an increase in products revenues.

Spa Operations Revenues.Spa Operations segment revenues decreased approximately 2.0%, or $2.6 million, to $126.5 million in the third quarter of 2013 from $129.0 million in the third quarter of 2012. Average weekly revenues for our land-based spas decreased 0.6% to $27,497 in the third quarter of 2013 from $27,666 in the third quarter of 2012. We had an average of 2,706 shipboard staff members in service in the third quarter of 2013, compared to an average of 2,662 shipboard staff members in service in the third quarter of 2012. Revenues per shipboard staff per day decreased by 4.4% to $414 in the third quarter of 2013 from $433 in the third quarter of 2012. Average weekly revenues for our shipboard spas decreased by 3.8% to $49,938 in the third quarter of 2013 from $51,925 in the third quarter of 2012. The decreases in the key performance indicators referenced above were primarily attributable to increased discounting at our land-based spas to offset promotions from our competitors and increased discounting by cruise lines due to well publicized mishaps involving certain cruise ships, resulting in a significant number of customers who spent less money at our spas.

Products Revenues.Products segment revenues increased approximately 16.0% or $6.4 million to $46.4 million in the third quarter of 2013 from $40.0 million in the third quarter of 2012. This increase is primarily attributable to the sales of new products through third-party retail channels.

Schools Revenues.Schools segment revenues increased approximately 6.7%, or $1.3 million to $20.2 million in the third quarter of 2013 from $18.9 million in the third quarter of 2012. This increase in revenues was primarily attributable to increased student populations. The increase in student populations was primarily attributable to an increase in student enrollments.

Laser Hair Removal Revenues. The increase in revenues was primarily attributable to the opening of 20 new Centers in 2012, 20 new Centers in 2013, and the introduction of the sale of treatment packages that include certain of our products during the nine months ended September 30, 2013.

COST OF SERVICES

Cost of services increased $6.7 million to $126.7 million in the third quarter of 2013 from $120.0 million in the third quarter of 2012. Cost of services as a percentage of services revenues increased to 85.4% in the third quarter of 2013 from 83.0% in the third quarter of 2012. This increase was primarily due to the opening of 20 new Centers in 2013 and $0.8 million charge related to the impairment of leasehold improvements of a land-based spa where we elected not to exercise our renewal option because the spa was not performing at an acceptable level.

20

COST OF PRODUCTS

Cost of products increased $0.6 million to $43.8 million in the third quarter of 2013 from $43.2 million in the third quarter of 2012. Cost of products as a percentage of products revenue decreased to 65.8% in the third quarter of 2013 from 72.3% in the third quarter of 2012. This decrease was primarily attributable to more higher margin products being sold in the third quarter of 2013 compared to the third quarter of 2012.

OPERATING EXPENSES

Operating expenses increased $4.7 million to $30.1 million in the third quarter of 2013 from $25.4 million in the third quarter of 2012. Operating expenses as a percentage of revenues increased to 14.0% in the third quarter of 2013 from 12.5% in the third quarter of 2012. This increase was primarily attributable to the cost incurred to support 20 new Centers opened in 2012 and 20 new Centers opened in 2013 and the reversal in the third quarter of 2012 of accruals related to performance-based compensation that was not earned.

INCOME FROM OPERATIONS

Income from operations of our reportable segments for the three months ended September 30, 2013 and 2012, respectively, was as follows (in thousands):

		For the Three Months Ended September 30,			% Change
Income (loss) from Operations:		2013		2012
Spa Operations	$	11,428	$	9,497	20.3%
Products		6,254		3,733	67.5%
Schools		763		388	96.6%
Laser Hair Removal		(4,274	)	829	(615.6%)
Other		86		1,342	N/A
Total	$	14,257	$	15,789	(9.7%)

The increase in operating income in the Spa Operations segment was primarily attributable to improved cost efficiencies at our spas. The income from operations for the Products Segment increased due to the sale of higher margin products. The increase in the operating income in the Schools segment was primarily attributable to higher student populations. The higher student populations were attributable to increased student enrollments. The decrease in operating income in the Laser Hair Removal segment was primarily attributable to the cost associated with the opening of 20 new Centers in 2013.

OTHER INCOME (EXPENSE)

Other income (expense) decreased due to lower interest expense due to the additional payments made on our term loan.

PROVISION FOR INCOME TAXES

Provision for income taxes increased $0.2 million to $2.0 million in the third quarter of 2013 from $1.8 million in the third quarter of 2012. Provision for income taxes reflected an overall effective rate of 15.1% in the third quarter of 2013 compared to an overall effective rate of 12.5% in the third quarter of 2012. The increase was primarily due to the income earned in jurisdictions that tax our income representing a higher percentage of our total income earned in the third quarter of 2013 than such income represented in the third quarter of 2012 and the effect of losses in the Laser Hair Removal segment.

21

NET INCOME

Net income was $11.5 million in the third quarter of 2013 compared to $12.6 million in the third quarter of 2012. This decrease was primarily attributable to the costs involved in the opening of 20 new Laser Hair Removal Centers in 2013 and an $0.8 million impairment charge related to the leasehold improvements of a land-based spa where we elected not to exercise our renewal option.

22

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

REVENUES

Revenues of our reportable segments for the nine months ended September 30, 2013 and 2012, respectively, were as follows (in thousands):

		Nine Months Ended September 30,					% Change
Revenue:		2013			2012
Spa Operations	$	378,157		$	382,914		(1.2%)
Products		133,938			110,927		20.7%
Schools		59,384			59,614		(0.4%)
Laser Hair Removal		96,323			66,397		45.1%
Other		(33,304	)		(19,450	)	N/A
Total	$	634,498		$	600,402		5.7%

Total revenues increased approximately 5.7%, or $34.1 million, to $634.5 million in the nine months ended September 30, 2013 from $600.4 million in the nine months ended September 30, 2012. Of this increase, $17.7 million was attributable to an increase in services revenues and $16.4 million was attributable to a increase in products revenues.

Spa Operations Revenues.Spa Operations segment revenues decreased approximately 1.2%, or $4.7 million, to $378.2 million in the nine months ended September 30, 2013 from $382.9 million in the nine months ended September 30, 2012. Average weekly revenues for our land-based spas decreased 1.4% to $28,934 in the nine months ended September 30, 2013 from $29,339 in the nine months ended September 30, 2012. We had an average of 2,690 shipboard staff members in service in the nine months ended September 30, 2013, compared to an average of 2,653 shipboard staff members in service in the nine months ended September 30, 2012. Revenues per shipboard staff per day was $414 in the nine months ended September 30, 2013 and $420 in the nine months ended September 30, 2012. Average weekly revenues for our shipboard spas decreased by 1.7% to $50,263 in the nine months ended September 30, 2013 from $51,132 in the nine months ended September 30, 2012. The decreases in revenue and the key performance indicators referenced above were primarily attributable to increased discounting at our land-based spas to offset promotions from our competitors and increased discounting by cruise lines due to well publicized mishaps involving certain cruise ships resulting in a significant number of customers who spent less money at our spas.

Products Revenues.Products segment revenues increased approximately 20.7%, or $23.0 million to $133.9 million in the nine months ended September 30, 2013 from $110.9 million in the nine months ended September 30, 2012, respectively. This increase was primarily attributable to the sales of new products through third-party retail channels.

Schools Revenues.Schools segment revenues decreased approximately 0.4%, or $0.2 million to $59.4 million in the nine months ended September 30, 2013 from $59.6 million in the nine months ended September 30, 2012. This decrease in revenues was primarily attributable to decreased student population at our schools. The decreased student population was primarily attributable to less financial aid being available to prospective students as a result of changes to the applicable DOE student loan programs.

Laser Hair Removal Revenues. The increase in services revenues was attributable to the opening of 20 new Centers in 2012, 20 new Centers in 2013 and the introduction of the sale of treatment packages that include certain of our products during 2013.

COST OF SERVICES

Cost of services increased $22.5 million to $367.9 million in the nine months ended September 30, 2013 from $345.4 million in the nine months ended September 30, 2012. Cost of services as a percentage of services revenues increased to 82.8% in the nine months ended September 30, 2013 from 80.9% in the nine months ended September 30, 2012. This increase was primarily attributable to the opening of 20 new Centers in 2013.

23

COST OF PRODUCTS

Cost of products increased $4.0 million to $126.5 million in the nine months ended September 30, 2013 from $122.5 million in the nine months ended September 30, 2012. Cost of products as a percentage of products revenue decreased to 66.6% in the nine months ended September 30, 2013 from 70.6% in the nine months ended September 30, 2012. This decrease was primarily attributable to more higher margin products being sold in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

OPERATING EXPENSES

Operating expenses increased $13.1 million to $95.1 million in the nine months ended September 30, 2013 from $82.0 million in the nine months ended September 30, 2012. Operating expenses as a percentage of revenues increased to 15.0% in the nine months ended September 30, 2013 from 13.7% in the nine months ended September 30, 2012. These increases were primarily attributable to the costs incurred to open new Centers in the second half of 2012 and to open 20 new Centers in 2013, and the reversal in the third quarter of 2012 of accruals related to performance based compensation that was not earned.

INCOME FROM OPERATIONS

Income from operations of our reportable segments for the nine months ended September 30, 2013 and 2012, respectively, was as follows (in thousands):

		For the Nine Months Ended September 30,			% Change
Income (loss) from Operations:		2013		2012
Spa Operations	$	32,507	$	31,238	4.1%
Products		14,094		8,780	60.5%
Schools		2,541		3,447	(26.3%)
Laser Hair Removal		233		6,452	(96.4%)
Other		(4,405	)	611	N/A
Total	$	44,970	$	50,528	(11.0%)

The increase in operating income in the Spa Operations segment was primarily attributable to improved cost efficiencies at our spas. The income from operations for the Products Segment increased due to the sale of more higher margin products. The decrease in operating income in the Schools segment was primarily attributable to lower student populations. The decrease in the student populations was primarily attributable to less financial aid being available to prospective students as a result of changes to the applicable DOE student loan programs. The disparity in the decrease in revenues compared to the decrease in operating income in the Schools segment results from the fact that, irrespective of the number of students enrolled (and therefore the amount of revenues), rent and other fixed costs associated with our schools does not change. The decrease in operating income in the Laser Hair Removal segment was primarily attributable to the cost associated with the opening of 20 new Centers during 2013.

OTHER INCOME (EXPENSE)

Other income (expense) decreased due to lower interest expense as a result of additional payments made on our term loan.

PROVISION FOR INCOME TAXES

Provision for income taxes increased $0.4 million to $5.5 million in the nine months ended September 30, 2013 from $5.1 million in the nine months ended September 30, 2012. Provision for income taxes reflected an overall effective rate of 13.0% in the nine months ended September 30, 2013 and 11.0% in the nine months ended September 30, 2012, respectively. The increase was primarily due to the income earned in jurisdictions that tax our income representing a higher percentage of our total income earned in the nine months ended September 30, 2013 than such income represented in the nine months ended September 30, 2012 and the reduced income in the Laser Hair Removal segment.

24

NET INCOME

Net income was $36.5 million in the nine months ended September 30, 2013 compared to $41.3 million in the nine months ended September 30, 2012. This decrease was primarily attributable to declines in operating income in our Schools segment due primarily to lower enrollments and in the Laser Hair Removal segment due to costs associated with the opening of 20 new Centers in 2013.

25

Liquidity and Capital Resources

Sources and Uses of Cash

During the nine months ended September 30, 2013, net cash provided by operating activities was approximately $57.9 million, compared with $64.9 million for the nine months ended September 30, 2012. This decrease was primarily attributable to decreases in net income.

During the nine months ended September 30, 2013, cash used in investing activities was $21.6 million compared with $20.1 million for the nine months ended September 30, 2012. This increase was primarily attributable to the receipt of post-closing working capital amounts in connection with prior acquisitions.

During the nine months ended September 30, 2013, cash used in financing activities was $44.5 million compared with $55.1 million for the nine months ended September 30, 2012. This decrease in cash used in financing activities was primarily attributable to the purchase of fewer treasury shares during the nine months ended September 30, 2013 as compared to September 30, 2012, partially offset by an additional $20.0 million of payments that we made on our term loan.

Steiner Leisure had working capital of approximately $25.4 million at September 30, 2013, compared to working capital of approximately $2.9 million at December 31, 2012.

In February 2013, our Board approved a share repurchase plan under which up to $100.0 million of common shares can be purchased, and terminated the prior share repurchase plan. During the nine months ended September 30, 2013 and 2012, respectively, we purchased approximately 61,000 and 723,000 shares, with a value of approximately $2.9 million and $33.2 million, respectively. Of those shares purchased, 12,000 and 21,000 shares for the nine months ended September 30, 2013 and 2012, respectively, were surrendered by our employees in connection with the vesting of restricted share units and used by us to satisfy payment of our minimum federal income tax withholding obligations in connection with these vestings. These share purchases were outside of our repurchase plan.

For the remainder of 2013, we plan on opening 10 new Ideal Image laser hair removal Centers. In connection with the opening of those new Centers, we anticipate incurring capital expenditures of approximately $5.0 million.

26

Financing Activities

On November 1, 2011, we entered into a credit agreement for a new credit facility (the "Credit Facility"), through our wholly-owned Steiner U.S. Holdings, Inc. subsidiary (the "Borrower"), with a group of lenders including SunTrust Bank, our then existing lender. The Credit Facility, which was amended in 2012, consists of a $60.0 million revolving credit facility with a $5.0 million Swing Line sub-facility and a $5.0 million Letter of Credit sub-facility, with a termination date of November 1, 2016, and a term loan facility (referred to as the "Term Facility"), in the aggregate principal amount equal to $165.0 million with a maturity date of November 1, 2016.  Concurrently with the effectiveness of the Credit Facility, our then existing facility was terminated. On the closing of the Credit Facility, the entire amount of the Term Facility was drawn to finance a portion of the acquisition (the "Merger Transaction") of Ideal Image. In addition, extensions of credit under the Credit Facility were used to pay certain fees and expenses associated with the Credit Facility and the Merger Transaction and may, in the future, be used (i) for capital expenditures, (ii) to finance acquisitions permitted under the credit agreement and (iii) for working capital and general corporate purposes, including letters of credit.

Interest on borrowings under the Credit Facility accrues at either a base rate, an Adjusted LIBO Rate or an Index Rate, at Borrower's election, plus, in each case, an applicable margin.  In the case of Adjusted LIBO Rate Loans, the applicable margin ranges from 1.75% - 2.75% per annum, based upon the Company's and its subsidiaries' financial performance.  Unpaid principal, together with accrued and unpaid interest, is due on the maturity date, November 1, 2016. Interest on all outstanding Adjusted LIBO Rate loans is payable on the last day of each interest period applicable thereto, and, in the case of any Adjusted LIBO Rate loans having an interest period in excess of three (3) months or ninety (90) days, respectively, on each day which occurs every three (3) months or ninety (90) days, as the case may be, after the initial date of such interest period, and on the Revolving Commitment Termination Date (November 1, 2016, or earlier, pursuant to certain events, as described in the credit agreement) or the maturity date, as the case may be.  Interest on each base rate loan and LIBOR Index Rate Loan is payable monthly in arrears on the last day of each calendar month and on the maturity date of such Loan, and on the Revolving Commitment Termination Date.  Interest on any loan which is converted from one interest rate to another interest rate or which is repaid or prepaid is payable on the date of the conversion or on the date of any such repayment or prepayment (on the amount repaid or prepaid) of such loan. Principal under the Term Facility is payable in quarterly installments, which payments began on March 31, 2012. At September 30, 2013, our borrowing rate was 1.94%.

All of Borrower's obligations under the Credit Facility are unconditionally guaranteed by the Company and certain of its subsidiaries.  The obligations under the Credit Facility are secured by substantially all of our present and future assets.

The Credit Facility contains customary affirmative, negative and financial covenants, including limitations on dividends, capital expenditures and funded debt, and requirements to maintain prescribed interest expense and fixed charge coverage ratios. We are in compliance with these covenants as of the date of this report. Other limitations on capital expenditures, or on other operational matters, could apply in the future under the credit agreement.

On June 21, 2013, we entered into an amendment to our Credit Facility. As a result, among other things, our restrictive payment limits were increased, certain of our financial covenants were modified, we received improved pricing on our interest rate and the maturity date of the term loan was extended from November 1, 2016 to June 21, 2018. In connection with entering into the amendment, we incurred $0.4 million of lender and third-party costs.

We believe that cash generated from our operations is sufficient to satisfy the cash required to operate our current business for the next 12 months.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

27

Inflation and Economic Conditions

We do not believe that inflation has had a material adverse effect on our revenues or results of operations. However, public demand for activities, including cruises, is influenced by general economic conditions, including inflation. Periods of economic softness, such as has been experienced in recent years, particularly in North America where a substantial number of cruise passengers reside, could have a material adverse effect on the cruise industry and hospitality industry upon which we are dependent, and has had such an effect in recent years. Such a slowdown has adversely affected our results of operations and financial condition in recent years. Continuance of the more severe aspects of the recent adverse economic conditions, as well as continued fuel price increases, in North America and elsewhere could have a material adverse effect on our results of operations and financial condition during the period of such recurrence. Continued weakness in the U.S. Dollar compared to the U.K. Pound Sterling and the Euro also could have a material adverse effect on our results of operations and financial condition.

28

Cautionary Statement Regarding Forward-Looking Statements

From time to time, including in this report and other disclosures, we may issue "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements reflect our current views about future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We attempt, whenever possible, to identify these statements by using words like "will," "may," "could," "should," "would," "believe," "expect," "anticipate," "forecast," "future," "intend," "plan," "estimate" and similar expressions of future intent or the negative of such terms.

Such forward-looking statements include statements regarding:

• our future financial results;
• our proposed activities pursuant to agreements with cruise lines or land-based spa operators;
• our ability to secure renewals of agreements with cruise lines upon their expiration;
• scheduled introductions of new ships by cruise lines;
• our future land-based spa activities;
• our ability to generate sufficient cash flow from operations;
• the extent of the taxability of our income;
• the financial and other effects of acquisitions and new projects;
• our market sensitive financial instruments;
• our ability to increase sales of our products and to increase the retail distribution of our products;
• the profitability of one or more of our business segments;
• the number, anticipated opening dates, and anticipated costs related to new spas, schools and Ideal Image centers;
• the anticipated enrollments of students at our schools; and
• future channels for distribution of our products.

These risks and other risks are detailed in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC. That section contains important cautionary statements and a discussion of many of the factors that could materially affect the accuracy of our forward-looking statements and/or adversely affect our business, results of operations and financial condition.

Forward-looking statements should not be relied upon as predictions of actual results. Subject to any continuing obligations under applicable law, we expressly disclaim any obligation to disseminate, after the date of this report, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.

29

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

For a discussion of our market risks, refer to Part II, Item 7A. - Quantitative and Qualitative Disclosures about Market Risk is in our Annual Report.

Item 4.  Controls and Procedures

We carried out an evaluation, under the supervision, and with the participation, of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2013.

There has been no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

30

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, in the ordinary course of business, we are party to various claims and legal proceedings. There have been no material changes with respect to legal proceedings previously reported in our annual report on Form 10-K for the year ended December 31, 2012, except as follows:

As previously reported, in April 2011, a complaint was filed in California Superior Court, Los Angeles Central Division, against Bliss World LLC and related entities (Yvette Ferrari v. Bliss World LLC, et al), seeking damages on behalf of an employee of Bliss claiming violations of various California requirements relating to the payment of wages. The action was presented as a class action. In July 2013, the parties to this action settled the matter for an amount that was not material to the Company's financial condition, results of operations or cash flows.

Item 1A. Risk Factors

There were no material changes during the third quarter of 2013 in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our quarterly reports on Form 10-Q previously filed during 2013.

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information about purchases by Steiner Leisure of our common shares during the three month period ended September 30, 2013:

	Total Number of Shares Purchased(1)		Average Price Paid per Share(2)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
July 1, 2013 through July 30, 2013	--	$	--	--	$	97,743,884
August 1, 2013 through August 31, 2013	4,906		58.14	--		97,743,884
September 1, 2013 through September 30, 2013	--		--	--		97,743,884
Total	4,906	$	58.14	--	$	97,743,884

(1)   During the third quarter, no shares were purchased through the Company's only repurchase plan, which was approved on February 27, 2013 (the "Repurchase Plan") and replaced the then-existing plan. The Repurchase Plan authorizes the purchase of up to $100 million of our common shares in the open market or other transactions, of which $2,256,116 of our common shares have been purchased to date.

(2)  Includes commissions paid.

32

Item 6.	Exhibits
31.1			Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2			Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
*		Filed herewith.

33

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 8, 2013	STEINER LEISURE LIMITED
	(Registrant)
	/s/ Clive E. Warshaw
	Clive E. Warshaw Chairman of the Board
	/s/ Leonard I. Fluxman
	Leonard I. Fluxman President and Chief Executive Officer (Principal Executive Officer)
	/s/ Robert H. Lazar
	Robert H. Lazar Chief Accounting Officer (Principal Accounting Officer)

34

Exhibit Index

Exhibit Number	Description
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
*	Filed herewith.

35