Steiner Leisure (STNR) 10-Q 2014 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
☐	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 (§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, 2014, the registrant had 13,565,437 common shares, par value (U.S.) $.01 per share, outstanding.

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STEINER LEISURE LIMITED

INDEX

		Page No.
PART I FINANCIAL INFORMATION
ITEM 1.	Unaudited Financial Statement
	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements	7
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4.	Controls and Procedures	28
PART II OTHER INFORMATION
ITEM 1.	Legal Proceedings	29
ITEM 1A.	Risk Factors	29
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
ITEM 6.	Exhibits	31
SIGNATURES AND CERTIFICATIONS		32

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PART I - FINANCIAL INFORMATION

Item 1.Unaudited Financial Statements

STEINER LEISURE LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30,			December 31,
	2014			2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	34,496		$	75,252
Accounts receivable, net		56,608			53,105
Accounts receivable - students, net		24,859			15,665
Inventories		58,511			60,487
Prepaid expenses and other current assets		20,731			15,395
Total current assets		195,205			219,904
PROPERTY AND EQUIPMENT, net		110,317			114,724
GOODWILL		328,231			328,231
OTHER ASSETS:
Intangible assets, net		87,713			88,414
Deferred financing costs, net		2,670			3,317
Deferred customer acquisition costs		9,315			11,033
Other		17,515			10,690
Total other assets		117,213			113,454
Total assets	$	750,966		$	776,313
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	19,169		$	23,613
Accrued expenses		43,434			52,999
Current portion of deferred rent		989			1,113
Current portion of deferred tuition revenue		26,788			20,037
Current portion of deferred revenue		91,269			99,266
Gift certificate liability		14,856			16,448
Income taxes payable		1,973			1,687
Total current liabilities		198,478			215,163
NON-CURRENT LIABILITIES:
Deferred income tax liabilities, net		41,622			39,012
Long-term debt		96,081			93,139
Long-term deferred rent		16,373			16,513
Long-term deferred tuition revenue		554			388
Long-term deferred revenue		10,141			11,029
Total non-current liabilities		164,771			160,081
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,24,051 shares issued in 2014 and 23,982 shares issuedin 2013		241			240
Additional paid-in capital		195,561			188,541
Accumulated other comprehensive loss		(1,075	)		(258	)
Retained earnings		559,745			531,995
Treasury shares, at cost, 10,478 shares in 2014 and9,312 shares in 2013		(366,755	)		(319,449	)
Total shareholders' equity		387,717			401,069
Total liabilities and shareholders' equity	$	750,966		$	776,313

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

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STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(Unaudited)

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
REVENUES:
Services	$	149,389		$	148,323		$	451,098		$	444,635
Products		70,288			66,508			194,578			189,863
Total revenues		219,677			214,831			645,676			634,498
COST OF REVENUES:
Cost of services		126,452			126,732			378,546			367,939
Cost of products		44,561			43,783			128,851			126,467
Total cost of revenues		171,013			170,515			507,397			494,406
Gross profit		48,664			44,316			138,279			140,092
OPERATING EXPENSES:
Administrative		17,472			11,526			46,850			38,667
Salary and payroll taxes		16,419			18,533			56,762			56,455
Total operating expenses		33,891			30,059			103,612			95,122
Income from operations		14,773			14,257			34,667			44,970
OTHER INCOME (EXPENSE), NET:
Interest expense		(712	)		(899	)		(2,165	)		(3,455	)
Other income		202			132			671			435
Total other income (expense), net		(510	)		(767	)		(1,494	)		(3,020	)
Income before provision for income taxes		14,263			13,490			33,173			41,950
PROVISION FOR INCOME TAXES		2,157			2,038			5,423			5,466
Net income	$	12,106		$	11,452		$	27,750		$	36,484
INCOME PER SHARE:
Basic	$	0.88		$	0.78		$	1.94		$	2.49
Diluted	$	0.87		$	0.77		$	1.93		$	2.46

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

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STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(Unaudited)
(in thousands)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2014			2013		2014			2013
Net income	$	12,106		$	11,452	$	27,750		$	36,484
Other comprehensive income, net of taxes:
Foreign currency translation adjustments		(1,416	)		1,993		(817	)		698
Total other comprehensive income, net of taxes		(1,416	)		1,993		(817	)		698
Comprehensive income	$	10,690		$	13,445	$	26,933		$	37,182

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

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STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited, in thousands)

	Nine Months Ended
	September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	27,750		$	36,484
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,259			16,159
Loss on impairment of leasehold improvements		--			803
Stock-based compensation		6,955			7,207
Provision for doubtful accounts		6,391			3,261
Deferred income tax provision		2,610			2,610
Changes in:
Accounts receivableand accounts receivable - students		(19,816	)		(11,824	)
Inventories		1,717			(12,126	)
Prepaid expenses and other current assets		(5,362	)		(2,508	)
Other assets		(5,106	)		(3,850	)
Accounts payable		(4,335	)		2,118
Accrued expenses		(9,170	)		860
Deferred tuition revenue		6,917			2,948
Deferred revenue		(8,885	)		15,022
Deferred rent		(264	)		2,480
Gift certificate liability		(1,578	)		(1,756	)
Net cash provided by operating activities		16,083			57,888
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(12,182	)		(21,634	)
Net cash used in investing activities		(12,182	)		(21,634	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares		(47,306	)		(2,887	)
Proceeds from long-term debt		6,000			--
Payments of long-term debt		(3,058	)		(42,303	)
Payments of debt issuance costs		--			(352	)
Proceeds from share option exercises		63			1,025
Net cash used in financing activities		(44,301	)		(44,517	)
EFFECT OF EXCHANGE RATECHANGES ON CASH		(356	)		232
NET DECREASE IN CASHAND CASH EQUIVALENTS		(40,756	)		(8,031	)
CASH AND CASH EQUIVALENTS,Beginning of period		75,252			75,028
CASH AND CASH EQUIVALENTS,End of period	$	34,496		$	66,997
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,486		$	2,559
Income taxes	$	2,460		$	3,166

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

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STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014
(Unaudited)

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

The accompanying unaudited condensed consolidated financial statements for each period 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. accounting principles generally accepted in the United States (“U.S. GAAP”) 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, 2014 and cash flows for the nine months ended September 30, 2014 are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2014. 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, 2013 (the "2013 Annual Report"). The December 31, 2013 Condensed Consolidated Balance Sheet included herein was extracted from the December 31, 2013 audited Consolidated Balance Sheet included in our 2013 Annual Report.

The preparation of Consolidated Financial Statements in conformity with 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 receivables, accounts receivable-students, student notes receivable, and recovery of long-lived assets and goodwill and other intangible assets, the determination of deferred income taxes, including valuation allowances, the useful lives of definite-lived intangible assets and property and equipment, gift certificate breakage revenue, the assumptions related to the determination of share based compensation, and for Ideal Image Development, Inc. (“Ideal Image”) laser hair removal center (“Center”) sales 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 is a worldwide provider and innovator in the fields of beauty, wellness and education. Steiner Leisure 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 (referenced collectively below as “hotels”), luxury Elemis® day spas, Bliss® premium urban day spas and at our Ideal Image 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 32 campuses) located in Arizona, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, Pennsylvania, Texas, Utah, Virginia and Washington.

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(3)          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Our significant accounting policies were described in Note 2 to our consolidated financial statements included in our 2013 Annual Report. There have been no significant changes in our significant accounting policies for the nine months ended September 30, 2014, unless otherwise described below.

(a)  Principles of Consolidation and Basis of Presentation

We hold variable interests in physician-owned entities that provide medical services to our Ideal Image Centers’ guests. These entities were set up for regulatory compliance purposes. We bear the benefits and risks of loss from operating these entities through contractual agreements. Our consolidated financial statements include the operating results of these entities. The assets and liabilities of these entities are not material to the consolidated balance sheets.

(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,
	2014		2013
Finished goods	$	54,011	$	54,403
Raw materials		4,500		6,084
	$	58,511	$	60,487

(c)   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.

(d)  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 ($1.7 million) and $1.1 million for the three months ended September 30, 2014 and 2013, respectively, and approximately ($0.9 million) and ($0.4 million) for the nine months ended September 30, 2014 and 2013, respectively. The transaction gains (losses) in the Cost of Products caption of our Condensed Consolidated Statements of Income were approximately $0.9 million and, ($1.1 million), for the three months ended September 30, 2014 and 2013, respectively, and approximately $0.5 million and, ($0.3 million), for the nine months ended September 30, 2014 and 2013.

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(e)  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,
	2014		2013		2014		2013
Net income	$	12,106	$	11,452	$	27,750	$	36,484
Weighted average shares outstanding used in calculating basic earnings per share		13,771		14,661		14,299		14,648
Dilutive common share equivalents		112		251		94		178
Weighted average common and common share equivalents used in calculating diluted earnings per share		13,883		14,912		14,393		14,826
Income per common share:
Basic	$	0.88	$	0.78	$	1.94	$	2.49
Diluted	$	0.87	$	0.77	$	1.93	$	2.46
Options and restricted share units outstanding which are not included in the calculation of diluted earnings per share because their impact is anti-dilutive		123		--		78		3

No share options were issued during the three months ended September 30, 2014. 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 3,000 and 30,000 of its common shares upon exercise of share options during the nine months ended September 30, 2014 and 2013, respectively.

(f)   Stock-Based Compensation

The Company granted approximately 12,000 and 30,000 restricted share units during the nine months ended September 30, 2014 and 2013, respectively. No other stock-based compensation was granted during the nine months ended September 30, 2014 and 2013.

(g)  Recent Accounting Pronouncements

In April 2014, amended guidance was issued changing the requirements for reporting discontinued operations and enhancing the disclosures in this area. The new guidance requires a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The guidance will be effective prospectively for our interim and annual reporting periods beginning after December 15, 2014. We elected to early adopt this guidance in the current quarter. The adoption of this guidance did not have an impact on our reporting and disclosures.

9

In May 2014, amended guidance was issued to clarify the principles used to recognize revenue for all entities. The guidance is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not comprehensively addressed in the prior accounting guidance. This guidance must be applied using one of two retrospective application methods and will be effective for our interim and annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of the adoption of this newly issued guidance on our consolidated financial statements.

In August 2014, guidance was issued requiring management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance will be effective for our annual reporting period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this newly issued guidance is not expected to have an impact on our consolidated financial statements.

(h)  Fair Value Measurements

U.S. 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.

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, 2014, or 2013.

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 and revolving loans were estimated using Level 2 inputs based on quoted prices for those or similar instruments. The fair value of the term and revolving loans was determined using applicable interest rates as of September 30, 2014 and December 31, 2013 and approximates the carrying value of such debt because the underlying instruments were at variable rates that are repriced frequently. It is not practicable to estimate the fair value of the student receivables, since observable market data is not readily available and no reasonable estimation methodology exists.

(i)   Concentrations of Credit Risk

A roll-forward of the allowance for doubtful accounts for student notes receivables for the nine months ended September 30, 2014 is as follows (in thousands):

Balance at beginning of period	$	3,999
Provision		2,543
Write-offs		(2,875	)
Balance at end of period	$	3,667

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As of September 30, 2014, the delinquency status of gross notes receivable was as follows (in thousands):

Current	$	4,200
1-30		575
31-60		315
61-90		686
91+		237
	$	6,013

The Company offers interest-free extended payment terms to eligible Ideal Image customers. As part of this program, the customer agrees to pay the receivable due under the customer’s contract in equal monthly installments for a period ranging between 12 and 18 months. Revenue related to such receivables is recognized in accordance with our revenue recognition policy. We have established an allowance for the doubtful accounts for all these receivables for which revenue has already been recognized. Any future adjustment to the estimate of collectability of these receivables is recorded as an adjustment to bad debt expense.

Generally, a receivable balance is written off once it is determined to be uncollectible based on collection efforts. Set forth below is a roll-forward of the allowance for doubtful accounts for the nine months ended September 30, 2014 (in thousands):

Balance at beginning of period	$	317
Provision		1,416
Write-offs		(116	)
Balance at end of period	$	1,617

(j)  Seasonality

A significantportion of our revenues are generated from our cruise ship spa operations. Certain cruise lines, and, as a result, Steiner Leisure, has 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. Historically, the revenues of Ideal Image were weakest during the third quarter and, if this trend continues, this could offset to some extent the strength of our shipboard operations during the summer months. 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 2013 Annual Report.

(b)  Government Regulation - Schools

We have obtained accreditation and state approvals for our Arlington, Texas campus and have obtained approval from the U.S. Department of Education (the “DOE”) for the campus to participate in the student financial programs authorized by Title IV of the Higher Education Act of 1965 (the “Title IV Programs”), which are administered by the DOE. In order to be eligible to participate in the Title IV Programs, the campus must, among other things, meet DOE requirements for being considered “legally authorized” in the State of Texas, as discussed in our 2013 Annual Report at “Regulation – Schools – State Authorization Agencies.” If the DOE determines that a state agency’s approval does not comply with DOE requirements, the DOE has established a process under which the effective date of the requirements will be extended through June 30, 2015 if the state provides an explanation of how an additional one-year extension will permit the state to finalize its procedures so that the approvals provided to institutions comply with state authorization requirements and requests such extension.

The DOE has approved the Arlington campus to participate in the Title IV programs. The DOE had previously notified us on August 4, 2014 that it had denied the application for DOE approval of the Arlington campus to participate in the Title IV programs based on the DOE’s conclusion that documentation of the authorization from the Texas Department of State Health Services (“DSHS”) was insufficient to demonstrate compliance with DOE requirements and based on the documentation from DSHS not containing the required explanation or extension request as referenced above. We subsequently requested the DOE to reconsider its determination based in part on additional documentation that we provided. The DOE responded by granting an extension of the effective date of the state authorization rule requirements until June 30, 2015 and approving the Arlington campus to participate in the Title IV programs. If Texas does not change its law to clarify the authority of DSHS in a manner that complies with the state authorization rule by June 30, 2015, we could lose our authority to disburse Title IV funds to students enrolled at the Arlington campus and this would have a material adverse effect on our business, results of operations and financial condition.

We also have two other campuses in Texas (Dallas and Houston) that the DOE previously approved for Title IV participation in 2011 and in 2012, respectively, that have approvals from DSHS, and that have applied, as required, to the DOE for recertification to continue to participate in the Title IV Programs. Those two campuses, together with the Arlington campus, represent 13% of the total student population of our schools. The DOE has not yet reviewed the recertification applications for these two campuses. If the DOE does not apply the extension to the two campuses, the DOE could refuse to recertify our Dallas and Houston campuses for continued Title IV participation, and could attempt to seek repayment of federal aid funds disbursed to students at these campuses notwithstanding its prior approval of these campuses, which would have a material adverse effect on our business, results of operations and financial condition. If the DOE approves our Dallas and Houston campuses, but Texas does not change its law to clarify the authority of DSHS in a manner that complies with the state authorization rule of the DOE by June 30, 2015, we could lose our authority to disburse Title IV funds to students enrolled at these campuses, which would have a material adverse effect on our business, results of operations and financial condition.

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(5)          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 prior repurchase plan, approved by the Board in February 2008, was terminated. During the nine months ended September 30, 2014 and 2013, respectively, we purchased approximately 1,165,000 and 61,000 shares, with a value of approximately $47.3 million and $2.9 million, respectively. Of those shares purchased, 23,000 and 12,000 shares for the nine months ended September 30, 2014 and 2013, 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.

(6)          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, 2014 and 2013 (in thousands):

	Foreign Currency Translation Adjustments
	2014			2013
Accumulated comprehensive loss at beginning of the year	$	(258	)	$	(1,946	)
Other comprehensive income before reclassifications		(817	)		698
Amounts reclassified from accumulated other comprehensive loss		--			--
Net current-period other comprehensive gain (loss)		(817	)		698
Ending balance	$	(1,075	)	$	(1,248	)

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

(7)          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 and other services and certain of our products. Amounts included in "Other" include various corporate items such as unallocated overhead and intercompany transactions.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Revenues:
Spa Operations	$	110,613		$	126,489		$	342,377		$	378,157
Products		62,547			46,349			158,433			133,938
Schools		19,906			20,204			58,620			59,384
Laser Hair Removal		36,986			31,564			114,874			96,323
Other		(10,375	)		(9,775	)		(28,628	)		(33,304	)
Total	$	219,677		$	214,831		$	645,676		$	634,498
Income (loss) from Operations:
Spa Operations	$	10,158		$	11,428		$	28,433		$	32,507
Products		7,692			6,254			13,887			14,094
Schools		(44	)		763			(395	)		2,541
Laser Hair Removal		(2,476	)		(4,274	)		(5,129	)		233
Other		(557	)		86			(2,129	)		(4,405	)
Total	$	14,773		$	14,257		$	34,667		$	44,970

	September 30,			December 31,
	2014			2013
Identifiable Assets:
Spa Operations	$	189,845		$	212,176
Products		210,286			192,669
Schools		119,839			129,517
Laser Hair Removal		323,501			316,372
Other		(92,505	)		(74,421	)
Total	$	750,966		$	776,313

Included in Spa Operations, Products, Schools and Laser Hair Removal is goodwill of $51.0 million, $23.7 million, $58.4 million and $195.1 million, respectively, as of September 30, 2014 and December 31, 2013.

Products segment revenues excluding intercompany transactions was $41.8 million and $35.9 million for the three months ended September 30, 2014 and 2013, respectively, and $108.8 million and $99.3 million for the nine months ended September 30, 2014 and 2013, respectively.

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(8)          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,
	2014		2013		2014		2013
Revenues:
United States	$	91,902	$	84,800	$	272,562	$	255,830
United Kingdom		21,704		19,493		57,690		52,267
Not connected to a country		99,317		103,151		293,955		303,687
Other		6,754		7,387		21,469		22,714
Total	$	219,677	$	214,831	$	645,676	$	634,498

	September 30,		December 31,
	2014		2013
Property and Equipment, net:
United States	$	88,041	$	90,709
United Kingdom		6,239		6,189
Not connected to a country		2,167		2,431
Other		13,870		15,395
Total	$	110,317	$	114,724

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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, BlissLabs™, 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 our laser hair removal centers, 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 32 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, which is administered by 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. 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 that segment’s enrollment and our results of operations. We are taking steps to address this decline in enrollments through changes in our marketing strategy and tactics. However, we cannot assure you that these efforts will be successful in addressing this matter, and, if they are not successful, our results of operations and financial condition would be adversely affected.

Through our Laser Hair Removal segment, we offer a non-invasive procedure for the removal of unwanted facial and body hair and other services 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 evaluating whether to continue to expand our Laser Hair Removal segment. If we decide to expand this segment, the Centers will either be company-owned or physician-owned, depending on the applicable regulations in the jurisdiction in which the respective Center will be opened. In connection with the opening of any 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.

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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 after all payments have been received 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. To the extent that 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.

Beginning in the latter part of 2013, there has been a decline in the number of Ideal Image customer leads generated through our marketing efforts. We are taking steps to address this decline through changes in our marketing strategy and tactics. However, we cannot assure you that these efforts will be successful in addressing this matter, and, if they are not successful, our results of operations and financial condition would be adversely affected.

If our marketing, new services and other efforts to improve performance at Ideal Image do not result in improved financial performance there is a reasonable possibility of future impairment of goodwill and other intangible assets with indefinite lives and/or long-lived assets at the Ideal Image reporting unit.

A significant portion of our revenues are generated from our cruise ship operations. Historically, we have been able to renew almost all of our cruise line agreements that expired or were scheduled to expire. As of December 31, 2013, our agreement with Celebrity expired and we were notified that it would not be renewed. It is anticipated that the loss of this cruise line will adversely affect our earnings per share for 2014 in the amount of approximately $0.24 per share. The impact of the loss of the Celebrity agreement on earnings per share for the third quarter of 2014 was $0.09 per share and is expected to be $0.04 per share in the fourth quarter of 2014. These amounts were calculated based on the historical results of operating the Celebrity ships. To the extent that we fail to obtain in the future renewals of other major cruise line agreements, our results of operations and financial condition could be materially adversely affected.

In addition, 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, more fully described above, 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 theUnited 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 countries and business sectors continue to experience adverse economic conditions. The impact on consumers of periodic increases in fuel costs has added to the continuation of this economic adversity.

The weakened United States and other world economies in recent years, including the impact on consumers of high fuel costs and tighter credit, has had an adverse effect on the discretionary spending of consumers, including spending on cruise vacations and our services and products. In order for the cruise industry to maintain its market share in a difficult economic environment, cruise lines have at times offered discounted fares to prospective passengers. Passengers who are cruising solely due to discounted fares may reflect their cost consciousness by not spending on discretionary items, such as our services and products. These conditions have adversely affected our results of operations since 2009. Though discretionary spending of passengers on certain cruise lines has increased, the continuing economic challenges have also adversely affected the discretionary spending of cruise customers and potential customers. The recurrence, continuation or worsening of the more severe aspects of these challenging economic conditions, as well as further increases in fuel costs, could have a material adverse effect on the cruise industry and also could have a material adverse effect on our results of operations and financial condition for 2014 and thereafter during any such recurrence, continuation or worsening.

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 mishaps involving cruise vessels adversely affected cruise ship bookings in 2013. This has adversely affected us because cruise lines are discounting fares in order to attract passengers, which has resulted in an increased number of passengers who are less likely to spend in our spas. Publicity regarding other adverse occurrences onboard cruise ships also could adversely affect cruise ship bookings.

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Despite the general historic trend of growth in the volume of cruise passengers, in 2014 and future years, the economic environment worldwide could cause the number of cruise passengers to decline or be maintained through discounting, which could result in an increased number of passengers with limited discretionary spending ability. A significant and/or continuing decrease in passenger volume and/or discounting of fares could have a material adverse effect on our results of operations and financial condition.

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.

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

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

Laser Hair Removal. With respect to our Ideal Image Centers, we measure performance primarily through revenue.

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.

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.

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Our critical accounting policies are included in our 2013 Annual Report. We believe that there have been no significant changes during the nine months ended September 30, 2014 to the critical accounting policies disclosed in our 2013 Annual Report.

Recent Accounting Pronouncements

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

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,
	2014			2013			2014			2013
Revenues:
Services		68.0	%		69.0	%		69.9	%		70.1	%
Products		32.0			31.0			30.1			29.9
Total revenues		100.0			100.0			100.0			100.0
Cost of revenues:
Cost of services		57.5			59.0			58.6			58.0
Cost of products	20.3			20.4			20.0			19.9
Total cost of revenues		77.8			79.4			78.6			77.9
Gross profit		22.2			20.6			21.4			22.1
Operating expenses:
Administrative		8.0			5.4			7.3			6.1
Salary and payroll taxes		7.5			8.6			8.8			8.9
Total operating expenses		15.5			14.0			16.1			15.0
Income from operations		6.7			6.6			5.3			7.1
Other income (expense), net:
Interest expense		(0.3	)		(0.5	)		(0.3	)		(0.5	)
Other income		0.1			0.1			0.1			0.1
Total other income (expense), net		(0.2	)		(0.4	)		(0.2	)		(0.4	)
Income before provision for income taxes		6.5			6.2			5.1			6.7
Provision for income taxes		1.0			0.9			0.8			0.9
Net income		5.5	%		5.3	%		4.3	%		5.8	%

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Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

REVENUES

Revenues of our reportable segments for the three months ended September 30, 2014 and 2013, respectively, were as follows (in thousands):

	Three Months Ended September 30,						% Change
	2014			2013
Revenue:
Spa Operations	$	110,613		$	126,489			(12.6%)
Products		62,547			46,349			34.9%
Schools		19,906			20,204			(1.5%)
Laser Hair Removal		36,986			31,564			17.2%
Other		(10,375	)		(9,775	)	N/A
Total	$	219,677		$	214,831			2.3%

Total revenues increased approximately 2.3%, or $4.9 million, to $219.7 million in the third quarter of 2014 from $214.8 million in the third quarter of 2013. Of this increase, $1.1 million was attributable to an increase in services revenues and $3.8 million was attributable to an increase in products revenues.

Spa Operations Revenues. Spa Operations segment revenues decreased approximately 12.6%, or $15.9 million, to $110.6 million in the third quarter of 2014 from $126.5 million in the third quarter of 2013. Average weekly revenues for our land-based spas decreased 5.5% to $25,998 in the third quarter of 2014 from $27,497 in the third quarter of 2013. We had an average of 2,582 shipboard staff members in service in the third quarter of 2014, compared to an average of 2,706 shipboard staff members in service in the third quarter of 2013. Revenues per shipboard staff per day increased by 1.0% to $418 in the third quarter of 2014 from $414 in the third quarter of 2013. Average weekly revenues for our shipboard spas increased by 2.7% to $51,285 in the third quarter of 2014 from $49,938 in the third quarter of 2013. More than 50% of the decrease in revenues was attributable to the loss of the Celebrity agreement. The decrease in revenues for our land-based spas was due to increased discounting to offset promotions from our competitors.

Products Revenues. Products segment revenues increased approximately 34.9% or $16.2 million to $62.5 million in the third quarter of 2014 from $46.3 million in the third quarter of 2013. Excluding intercompany product sales, products revenues increased $5.9 million to $41.8 million for the three months ended September 30, 2014 from $35.9 in the three months ended September 30, 2013. This increase was primarily attributable to an increase in sales of existing and new products through third party channels in the United Kingdom and North America. This increase in demand for our products was primarily driven by the demand related to the upcoming holiday season.

Schools Revenues.Schools segment revenues decreased approximately 1.5%, or $0.3 million to $19.9 million in the third quarter of 2014 from $20.2 million in the third quarter of 2013. This decrease in revenues was primarily attributable to a decrease in student population at our schools as of January 1, 2014. Student population during a quarter (or other time period being discussed) is determined by the number of continuing students that are enrolled as of the beginning of the quarter combined with the number of new students that first become enrolled during that quarter, and as reduced by the number of students that graduate or otherwise cease to be enrolled at our schools as of the end of the quarter. As of December 31, 2013, which would be the starting point for 2014 enrollments, there were 3,719 students enrolled in our schools, a decrease of 188 students compared to the number of students at our schools as of December 31, 2012, the starting point for 2013 enrollments.

We believe that the decline in enrollments was attributable to the less effective performance results of our schools’ recruiting personnel in the fall of 2013 compared to the fall of 2012 which led to a lower population of students as of January 1, 2014. As of September 30, 2014, 4,645 students were enrolled in our schools compared to 4,586 enrolled in as of September 30, 2013. This increase in student populations was attributable to higher enrollments in the third quarter of 2014 as compared to the third quarter of 2013. The slight increase in the number of students at the end of the third quarter did not affect the lower revenues for the quarter compared to 2013 since the key determinant of revenues for any quarter during the year is the student population at the beginning of the year.

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Laser Hair Removal Revenues. The increase in revenues was primarily attributable to the opening of 29 new Centers in 2013 and the offering of new services, such as skin tightening, tattoo removal and BOTOX® Cosmetic, at our Centers that were not offered in the third quarter of 2013. Currently, we do not plan to open any more new Centers in 2014.

Cost of Services 

Cost of services decreased $0.2 million to $126.5 million in the third quarter of 2014 from $126.7 million in the third quarter of 2013. Cost of services as a percentage of services revenues decreased to 84.6% in the third quarter of 2014 from 85.4% in the third quarter of 2013. This decrease was primarily attributable to the improved performance of the Laser Hair Removal segment during the third quarter of 2014 compared to the third quarter of 2013.

COST OF PRODUCTS

Cost of products increased $0.8 million to $44.6 million in the third quarter of 2014 from $43.8 million in the third quarter of 2013. Cost of products as a percentage of products revenue decreased to 63.4% in the third quarter of 2014 from 65.8% in the third quarter of 2013. Excluding the impact of foreign exchange gains (losses), the cost of products as a percentage of products revenue in the third quarter of 2014 was generally equivalent to the third quarter of 2013.

Operating Expenses 

Operating expenses increased $3.8 million to $33.9 million in the third quarter of 2014 from $30.1 million in the third quarter of 2013. Operating expenses as a percentage of revenues increased to 15.4% in the third quarter of 2014 from 14.0% in the third quarter of 2013. This increase was primarily attributable to foreign exchange loss, increased marketing costs incurred to support 2014 sales initiatives and higher bad debt expense due to the expansion of in-house loan programs at our Schools and Laser Hair Removal segments. These increases were partially offset by a decrease in salary and payroll taxes due to the reversal of accruals related to performance-based compensation that is not probable of being earned.

INCOME (LOSS) FROM OPERATIONS

Income (loss) from operations of our reportable segments for the three months ended September 30, 2014 and 2013, respectively, was as follows (in thousands):

	For the Three Months Ended September 30,						% Change
	2014			2013
Income (loss) from Operations:
Spa Operations	$	10,158		$	11,428			(11.1%)
Products		7,692			6,254			23.0%
Schools		(44	)		763			(105.8%)
Laser Hair Removal		(2,476	)		(4,274	)		158.0
Other		(557	)		86		N/A
Total	$	14,773		$	14,257			3.6%

More than 50% of the decrease in operating income (loss) in the Spa Operations segment was attributable to the non-renewal of the Celebrity agreement. In addition, increased discounting at our land-based spas led to lower revenues at those spas. The income from operations for the Products segment increased due to the increase in product sales in the United Kingdom and North America driven by demand related to the upcoming holiday season.

The decrease in operating income from the Schools segment was primarily attributable to lower student population, which results in lower revenues and, commensurately, lower operating income. Our Schools have a fixed cost of operations and, accordingly, decreases in student population will result in a decrease in operating income. In addition, as a result of fewer students qualifying for government loans for their education at our schools as a result of regulatory changes that went into effect several years ago, we now offer significantly more in-house loans to students than we did when there were more government loans available. As a result, in the third quarter of 2014 we incurred greater bad debt expense than in the third quarter of 2013 associated with the increased amount of in-house loans.

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The reduction in the operating loss in the Laser Hair Removal segment during the third quarter of 2014 compared to the third quarter of 2013 was primarily attributable to only opening two new Centers in 2014 compared to opening 20 new Centers in the first nine months of 2013 since new Center openings result in operating losses during the first few months of operations of those Centers. The increase in revenues in that segment also contributed to the reduction in operating loss.

Other Income (Expense)

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

Provision for Income Taxes

Provision for income taxes increased $0.2 million to $2.2 million in the third quarter of 2014 from $2.0 million in the third quarter of 2013. Provision for income taxes reflected an overall effective rate of 15.1% in both the third quarter of 2014 and the third quarter of 2013.

NET INCOME

Net income was $12.1 million in the third quarter of 2014 compared to $11.5 million in the third quarter of 2013. This increase was primarily attributed to increased operating income in the Products segment and a decrease in the operating losses in the Laser Hair Removal segment.

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Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

REVENUES

Revenues of our reportable segments for the nine months ended September 30, 2014 and 2013, respectively, were as follows (in thousands):

	Nine Months Ended September 30,						% Change
	2014			2013
Revenue:
Spa Operations	$	342,377		$	378,157			(9.5%)
Products		158,433			133,938			18.3%
Schools		58,620			59,384			(1.3%)
Laser Hair Removal		114,874			96,323			19.3%
Other		(28,628	)		(33,304	)	N/A
Total	$	645,676		$	634,498			1.8%

Total revenues increased approximately 1.8%, or $11.2 million, to $645.7 million in the nine months ended September 30, 2014 from $634.5 million in the nine months ended September 30, 2013. Of this increase, $6.5 million was attributable to an increase in services revenues and $4.7 million was attributable to a increase in products revenues.

Spa Operations Revenues. Spa Operations segment revenues decreased approximately 9.5%, or $35.8 million, to $342.4 million in the nine months ended September 30, 2014 from $378.2 million in the nine months ended September 30, 2013. Average weekly revenues for our land-based spas decreased 5.4% to $27,386 in the nine months ended September 30, 2014 from $28,934 in the nine months ended September 30, 2013. We had an average of 2,633 shipboard staff members in service in the nine months ended September 30, 2014, compared to an average of 2,690 shipboard staff members in service in the nine months ended September 30, 2013. Revenues per shipboard staff per day was $409 in the nine months ended September 30, 2014 and $414 in the nine months ended September 30, 2013. Average weekly revenues for our shipboard spas increased by 1.0% to $50,679 in the nine months ended September 30, 2014 from $50,263 in the nine months ended September 30, 2013. More than 50% of the decrease in revenues was attributable to the loss of the Celebrity agreement. In addition, revenues also decreased due to increased discounting at our land-based spas to offset promotions from our competitors.

Products Revenues.Products segment revenues increased approximately 18.3%, or $24.5 million to $158.4 million in the nine months ended September 30, 2014 from $133.9 million in the nine months ended September 30, 2013. Excluding intercompany product sales, products revenues increased $9.5 million to $108.8 million for the nine months ended September 30, 2014 from $99.3 million in the nine months ended September 30, 2013. This increase was primarily attributable to an increase in sales of existing and new products through third party channels in the United Kingdom and North America.

Schools Revenues.Schools segment revenues decreased approximately 1.3% or $0.8 million to $58.6 million in the nine months ended September 30, 2014 from $59.4 million in the nine months ended September 30, 2013. Student population during a period is determined by the number of continuing students that are enrolled as of the beginning of the period combined with the number of new students that first become enrolled during that period, and as reduced by the number of students that graduate or otherwise cease to be enrolled at our schools as of the end of the period. As of December 31, 2013, which would be the starting point for 2014 enrollments, there were 3,719 students enrolled in our schools, a decrease of 188 students compared to the number of students at our schools as of December 31, 2012, the starting point for 2013 enrollments.

We believe that the decline in enrollments was attributable to the less effective performance results of our schools’ recruiting personnel in the fall of 2013 compared to the fall of 2012 which led to a lower population of students as of January 1, 2014. As of September 30, 2014, 4,645 students were enrolled in our Schools compared to 4,586 enrolled in as of September 30, 2013. This increase in student populations was attributable to higher enrollments in the first nine months of 2014 as compared to the first nine months of 2013. This slight increase in the number of students at the end of the third quarter did not affect the lower revenues for the nine months compared to 2013, since the key determinant of revenue during the year is the student population at the beginning of the year.

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Laser Hair Removal Revenues. The increase in services revenues was attributable to the opening of 29 new Centers in 2013 and the offering of new services at our Centers that were not offered during the first nine months of 2013.

Cost of Services 

Cost of services increased $10.6 million to $378.5 million in the nine months ended September 30, 2014 from $367.9 million in the nine months ended September 30, 2013. Cost of services as a percentage of services revenues increased to 83.9% in the nine months ended September 30, 2014 from 82.8% in the nine months ended September 30, 2013. This increase was primarily attributable to the increased costs relating to the Centers opened since the end of the third quarter of 2013, such as employee salaries, marketing costs and rent, and exacerbated by lower revenues during the first nine months of 2014 compared to the first nine months of 2013 at the schools which have fixed costs irrespective of revenue.

COST OF PRODUCTS

Cost of products increased $2.4 million to $128.9 million in the nine months ended September 30, 2014 from $126.5 million in the nine months ended September 30, 2013. Cost of products as a percentage of products revenues decreased very slightly to 66.2% in the nine months ended September 30, 2014 from 66.6% in the nine months ended September 30, 2013.

Operating Expenses 

Operating expenses increased $8.5 million to $103.6 million in the nine months ended September 30, 2014 from $95.1 million in the nine months ended September 30, 2013. Operating expenses as a percentage of revenues increased to 16.1% in the nine months ended September 30, 2014 from 15.0% in the nine months ended September 30, 2013. These increases were primarily attributable to increased marketing costs incurred to support 2014 sales initiatives and higher bad debt expense due to the expansion of in-house loan programs at our Schools and Laser Hair Removal segments.

INCOME (LOSS) FROM OPERATIONS

Income (loss) from operations of our reportable segments for the nine months ended September 30, 2014 and 2013, respectively, was as follows (in thousands):

	For the Nine Months Ended September 30,						% Change
	2014			2013
Income (loss) from Operations:
Spa Operations	$	28,433		$	32,507			(12.5%)
Products		13,887			14,094			(1.5%)
Schools		(395	)		2,541			(115.5%)
Laser Hair Removal		(5,129	)		233			(2,301.2%)
Other		(2,129	)		(4,405	)	N/A
Total	$	34,667		$	44,970			(22.9%)

More than 50% of the decrease in operating income (loss) in the Spa Operations segment was attributable to the non-renewal of the Celebrity agreement. In addition, increased discounting at our land-based spas led to lower revenues at those spas. The decrease in operating income in the Products segment was primarily attributable to increased discounts on our product sales in North America in order to compete with the large number of industry competitors, including those who offer coupon and other discount programs. In addition, adverse weather conditions in the Northeastern United States in the winter months resulted in fewer customer visits to retail outlets that sold our products.

The decrease in operating income from the Schools segment was primarily attributable to lower average student population, which results in lower revenues and, commensurately, lower operating income. Our schools have a fixed cost of operations and, accordingly, a decrease in student population will result in a decrease in operating income. In addition, as a result of there being fewer students who qualify for government loans for their education at our schools as a result of regulatory changes that went into effect several years ago, we now offer significantly more in-house loans to students than we did when there were more government loans available. As a result, in the first nine months of 2014 we incurred greater bad debt expense than in the nine months of 2013 associated with the increased amount of in-house loans.

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The decrease in operating income in the Laser Hair Removal segment during the first nine months of 2014 compared to the first nine months of 2013, notwithstanding the increase in revenues in that segment, was primarily attributable to the increased costs related to greater Ideal Image corporate overhead expense resulting from the need to manage a greater number of Centers, marketing expenses incurred in an effort to generate increased customer lead flow and depreciation expense due to the increased amount of property and equipment needed for new Centers and new services.

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 decreased $0.1 million to $5.4 million in the nine months ended September 30, 2014 from $5.5 million in the nine months ended September 30, 2013. Provision for income taxes reflected an overall effective rate of 16.3% in the nine months ended September 30, 2014 and 13.0% in the nine months ended September 30, 2013. 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, 2014 than such income represented in the nine months ended September 30, 2013.

NET INCOME

Net income was $27.8 million in the nine months ended September 30, 2014 compared to $36.5 million in the nine months ended September 30, 2013. This decrease was primarily attributable to a decline in operating income in all of our segments, as discussed in more detail above.

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Liquidity and Capital Resources

Sources and Uses of Cash

During the nine months ended September 30, 2014, net cash provided by operating activities was approximately $16.1 million compared with $57.9 million for the nine months ended September 30, 2013. This change was attributable to decreases in net income and in a number of working capital changes.

During the nine months ended September 30, 2014, cash used in investing activities was $12.2 million compared with $21.6 million for the nine months ended September 30, 2013. This decrease was attributable to a decline in capital expenditures.

During the nine months ended September 30, 2014, cash used in financing activities was $44.3 million compared with $44.5 million for the nine months ended September 30, 2013. This decrease in cash used in financing activities was primarily attributable to the purchase of more treasury shares during the nine months ended September 30, 2014 as compared to September 30, 2013, offset by a decrease in the payments of long-term debt during the nine months ended September 30, 2014 as compared to September 30, 2013.

Steiner Leisure had a working capital deficit of approximately $3.3 million at September 30, 2014, compared to working capital of approximately $4.7 million at December 31, 2013. This decrease is primarily attributable to the decline in deferred revenue due to lower cash sales in 2014.

In February 2013, our Board of Directors 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, 2014 and 2013, we purchased approximately 1,165,000 and 61,000 shares, with a value of approximately $47.3 million and $2.9 million, respectively. Of those shares purchased, 23,000 and 12,000 shares for the nine months ended September 30, 2014 and 2013, 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 2014, we do not plan on opening any new Centers.

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Financing Activities

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.

On June 3, 2014, our Credit Facility was amended to increase the annual limit of total dividends and share repurchases that may be made to $75 million for fiscal year 2014, and $35 million in subsequent years.

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. Our prior credit agreement contained similar covenants and, through the termination of that facility, we were in compliance with those covenants. Other limitations on capital expenditures, or on other operational matters, could apply in the future under the credit agreement.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 continuance. 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.

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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, 2013 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.

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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 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, 2014.

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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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, 2013.

Item 1A.  Risk Factors

There were no material changes during the third quarter of 2014 in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 except for the following:

The following is added at the end of“Government Regulation – Schools”,Texas Schools eligibility issue.

We have obtained accreditation and state approvals for our Arlington, Texas campus and have obtained approval from the U.S. Department of Education (the “DOE”) for the campus to participate in the student financial programs authorized by Title IV of the Higher Education Act of 1965 (the “Title IV Programs”), which are administered by the DOE. In order to be eligible to participate in the Title IV Programs, the campus must, among other things, meet DOE requirements for being considered “legally authorized” in the State of Texas, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 at “Regulation – Schools – State Authorization Agencies.” If the DOE determines that a state agency’s approval does not comply with DOE requirements, the DOE has established a process under which the effective date of the requirements will be extended through June 30, 2015 if the state provides an explanation of how an additional one-year extension will permit the state to finalize its procedures so that the approvals provided to institutions comply with state authorization requirements and requests such extension.

The DOE has approved the Arlington campus to participate in the Title IV programs. The DOE previously had notified us on August 4, 2014 that it had denied the application for DOE approval of the Arlington campus to participate in the Title IV programs based on the DOE’s conclusion that documentation of the authorization from the Texas Department of State Health Services (“DSHS”) was insufficient to demonstrate compliance with DOE requirements and based on the documentation from DSHS not containing the required explanation or extension request as referenced above. We subsequently requested the DOE to reconsider its determination based in part on additional documentation that we provided. The DOE responded by granting an extension of the effective date of the state authorization rule requirements until June 30, 2015 and approving the Arlington campus to participate in the Title IV programs. If Texas does not change its law to clarify the authority of DSHS in a manner that complies with the state authorization rule by June 30, 2015, we could lose our authority to disburse Title IV funds to students enrolled at the Arlington campus and this would have a material adverse effect on our business, results of operations and financial condition.

We also have two other campuses in Texas (Dallas and Houston) that the DOE previously approved for Title IV participation in 2011 and in 2012, respectively, that have approvals from DSHS, and that have applied, as required, to the DOE for recertification to continue to participate in the Title IV Programs. Those two campuses, together with the Arlington campus, represent 13% of the total student population of our schools. The DOE has not yet reviewed the recertification applications for these two campuses. If the DOE did not apply the extension to the two campuses, the DOE could refuse to recertify our Dallas and Houston campuses for continued Title IV participation, and could attempt to seek repayment of federal aid funds disbursed to students at these campuses notwithstanding its prior approval of these campuses, which would have a material adverse effect on our business, results of operations and financial condition. If the DOE approves our Dallas and Houston campuses, but Texas does not change its law to clarify the authority of DSHS in a manner that complies with the state authorization rule of DOE by June 30, 2015, we could lose our authority to disburse Title IV funds to students enrolled at these campuses, which would have a material adverse effect on our business, results of operations and financial condition.

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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, 2014:

	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, 2014 through July 30, 2014		175,715	$	41.39		175,715	$	57,423,395
August 1, 2014 through August 31, 2014		127,926		41.43		125,196		52,239,621
September 1, 2014 through September 30, 2014		131,453		39.79		131,453		47,009,288
Total		435,094	$	40.92		432,364	$	47,009,288

(1)   During the third quarter of 2014, 432,364 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 $100.0 million of our common shares in the open market or other transactions, of which $52,990,712 of our common shares have been purchased to date.

(2)   Includes commissions paid.

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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.

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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 7, 2014	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)

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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.

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