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Table Of Contents

 



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, 2015

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 2, 2015, the registrant had 12,838,636 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, 2015 and December 31, 2014

3

     
 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

5

     
 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2015 and 2014

6

     
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

7

     
 

Notes to Condensed Consolidated Financial Statements

9

     

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21

     

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

34

     

ITEM 4.

Controls and Procedures

34

     
PART II OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 35
     
ITEM 1A. Risk Factors 35
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
     
ITEM 6. Exhibits 37
     
SIGNATURES AND CERTIFICATIONS 38

  

 

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

STEINER LEISURE LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

   

September 30,

   

December 31,

 

ASSETS

 

2015

   

2014

 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 54,404     $ 59,736  

Accounts receivable, net

    56,687       59,359  

Accounts receivable - students, net

    19,646       20,531  

Inventories

    54,861       52,102  

Prepaid expenses and other current assets

    22,392       18,129  

Total current assets

    207,990       209,857  

PROPERTY AND EQUIPMENT, net

    103,635       96,509  

GOODWILL

    128,023       148,815  

OTHER ASSETS:

               

Intangible assets, net

    59,780       69,184  

Deferred financing costs, net

    1,902       2,481  

Deferred customer acquisition costs

    8,774       8,723  

Other

    19,978       17,274  

Total other assets

    90,434       97,662  

Total assets

  $ 530,082     $ 552,843  

LIABILITIES AND SHAREHOLDERS' EQUITY

               

CURRENT LIABILITIES:

               

Accounts payable

  $ 31,725     $ 26,162  

Accrued expenses

    48,309       43,302  

Current portion of long-term debt

    10,578       1,405  

Current portion of deferred rent

    2,392       2,392  

Current portion of deferred tuition revenue

    21,931       22,337  

Current portion of deferred revenue

    95,206       88,086  

Gift certificate liability

    14,206       16,364  

Income taxes payable

    1,733       1,972  

Total current liabilities

    226,080       202,020  

NON-CURRENT LIABILITIES:

               

Deferred income tax liabilities, net

    26,929       28,304  

Long-term debt

    88,003       127,177  

Long-term deferred rent

    14,107       14,674  

Long-term deferred tuition revenue

    341       113  

Long-term deferred revenue

    7,719       7,660  

Total non-current liabilities

    137,099       177,928  

 

(Continued)

 

 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED)

(in thousands)

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 

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, 24,224 shares issued in 2015 and 24,191 shares issued in 2014

    242       242  

Additional paid-in capital

    202,109       196,156  

Accumulated other comprehensive loss

    (3,293

)

    (2,571

)

Retained earnings

    373,473       373,898  
Treasury shares, at cost, 11,385 shares in 2015 and 11,153 shares in 2014     (405,628 )     (394,830 )
Total shareholders' equity     166,903       172,895  
Total liabilities and shareholders' equity   $ 530,082     $ 552,843  

 

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

 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(Unaudited)

(in thousands, except per share data)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

REVENUES:

                               

Services

  $ 160,787     $ 149,389     $ 467,033     $ 451,098  

Products

    66,618       70,288       193,837       194,578  

Total revenues

    227,405       219,677       660,870       645,676  

COST OF REVENUES:

                               

Cost of services

    135,392       126,452       390,705       378,546  

Cost of products

    43,985       44,561       127,857       128,851  

Total cost of revenues

    179,377       171,013       518,562       507,397  

Gross profit

    48,028       48,664       142,308       138,279  

OPERATING EXPENSES:

                               

Administrative

    20,321       17,472       53,809       46,850  

Salary and payroll taxes

    16,863       16,419       56,573       56,762  

Impairment of goodwill and other intangibles

    29,507       --       29,507       --  

Total operating expenses

    66,691       33,891       139,889       103,612  

(Loss) income from operations

    (18,663

)

    14,773       2,419       34,667  

OTHER INCOME (EXPENSE), NET:

                               

Interest expense

    (757

)

    (712

)

    (2,361

)

    (2,165

)

Other income

    246       202       741       671  

Total other income (expense), net

    (511

)

    (510

)

    (1,620

)

    (1,494

)

(Loss) income before provision for income taxes

    (19,174

)

    14,263       799       33,173  

(BENEFIT) PROVISION FOR INCOME TAXES

    (1,685

)

    2,157       1,224       5,423  

Net (loss) income

  $ (17,489

)

  $ 12,106     $ (425

)

  $ 27,750  

(LOSS) INCOME PER SHARE:

                               

Basic

  $ (1.36

)

  $ 0.88     $ (0.03

)

  $ 1.94  

Diluted

  $ (1.36

)

  $ 0.87     $ (0.03

)

  $ 1.93  

 

 

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

 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(Unaudited)
(in thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net (loss) income

  $ (17,489

)

  $ 12,106     $ (425 )   $ 27,750  

Other comprehensive (loss) income, net of taxes:

                               

Foreign currency translation adjustments

    (982

)

    (1,416 )     (722 )     (817 )

Total other comprehensive loss, net of taxes

    (982

)

    (1,416 )     (722 )     (817 )

Comprehensive (loss) income

  $ (18,471

)

  $ 10,690     $ (1,147 )   $ 26,933  

 

 

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

 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Unaudited, in thousands)

 

   

Nine Months Ended

 
   

September 30,

 
   

2015

   

2014

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net (loss) income

  $ (425

)

  $ 27,750  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

               

Depreciation and amortization

    17,137       18,259  

Loss on impairment of goodwill and other intangibles

    29,507       --  

Stock-based compensation

    5,850       6,955  

Provision for doubtful accounts

    6,905       6,391  

Deferred income tax (benefit) provision

    (1,375

)

    2,610  
                 

Changes in:

               

Accounts receivable and accounts receivable-students

    (4,067

)

    (19,816

)

Inventories

    (3,071

)

    1,717  

Prepaid expenses and other current assets

    (4,308

)

    (5,362

)

Other assets

    (2,754

)

    (5,106

)

Accounts payable

    5,716       (4,335

)

Accrued expenses

    4,982       (9,170

)

Deferred tuition revenue

    (178

)

    6,917  

Deferred revenue

    7,179       (8,885

)

Deferred rent

    (567

)

    (264

)

Gift certificate liability

    (2,135

)

    (1,578

)

Net cash provided by operating activities

    58,396       16,083  

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Capital expenditures

    (21,687

)

    (12,182

)

Net cash used in investing activities

    (21,687

)

    (12,182

)

 

(Continued)

 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Unaudited, in thousands)

 

   

Nine Months Ended

 
   

September 30,

 
   

2015

   

2014

 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Purchase of treasury shares

  $ (10,798

)

  $ (47,306

)

Proceeds from long-term debt

    4,000       6,000  

Payments of long-term debt

    (34,000

)

    (3,058

)

Proceeds from share option exercises

    103       63  

Net cash used in financing activities

    (40,695

)

    (44,301

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    (1,346

)

    (356

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (5,332

)

    (40,756

)

CASH AND CASH EQUIVALENTS, Beginning of period

    59,736       75,252  

CASH AND CASH EQUIVALENTS, End of period

  $ 54,404     $ 34,496  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               
                 

Interest

  $ 1,755     $ 1,486  
                 

Income taxes

  $ 2,831     $ 2,460  

 

 

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

 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015
(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 operations, comprehensive (loss) 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, 2015 and cash flows for the nine months ended September 30, 2015 are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2015. 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, 2014 (the "2014 Annual Report"). The December 31, 2014 Condensed Consolidated Balance Sheet included herein was extracted from the December 31, 2014 audited Consolidated Balance Sheet included in our 2014 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 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 cosmetic services 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 global 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 cosmetic services centers (the “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, cosmetic services, laser hair removal, facial rejuvenation and body contouring services. We also develop and market premium quality beauty products which are sold at our facilities, through e-commerce and through third party retail outlets and other channels, and we also operate post-secondary schools offering massage therapy and related courses.

 

On August 21, 2015, we entered into a definitive agreement with Catterton, a leading consumer-focused private equity firm, in which an affiliate of Catterton will acquire all of our outstanding shares for $65 per share in cash. The transaction is expected to close in the fourth quarter of 2015 or early in 2016 and is subject to regulatory approvals and the approval of our shareholders.

 

 

 

(3)       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Our significant accounting policies were described in Note 2 to our consolidated financial statements included in our 2014 Annual Report. There have been no significant changes in our significant accounting policies for the nine months ended September 30, 2015, unless otherwise described below.

 

(a)     Principles of Consolidation and Basis of Presentation

 

We hold variable interests in physician-owned entities that provide cosmetic services to the Ideal Image 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 consolidated financial statements include the operating results of those 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. Inventories consist of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 
                 

Finished goods

  $ 51,990     $ 48,736  

Raw materials

    2,871       3,366  
    $ 54,861     $ 52,102  

 

(c)     Intangible Assets

 

A detail of intangibles is as follows (in thousands):

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 

Intangible assets (various, principally trade names, leases, licenses and logos) with definite lives:

               

Gross carrying amount

  $ 13,509     $ 13,509  

Less accumulated amortization

    (11,746

)

    (11,057

)

Amortized intangible assets, net

    1,763       2,452  
                 

Unamortized intangible assets with indefinite lives:

               

Trade names

    57,817       60,428  

Title IV rights

    200       6,304  

Intangible assets with indefinite lives

    58,017       66,732  

Total intangible assets, net

  $ 59,780     $ 69,184  

 

See Note 3 (d) for discussion regarding impairment charges during the third quarter of 2015.

 

 

(d)     Goodwill

 

During the quarter ended September 30, 2015, the Company voluntarily changed the date of its annual goodwill and indefinite - lived intangible assets impairment testing from the first day of the fiscal year to the first day of the fourth quarter. This voluntary change is preferable under the circumstances as it provides the Company with additional time to complete its annual goodwill and indefinite - lived intangible asset impairment testing in advance of its year-end reporting and results in better alignment with the Company’s strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. This change will not be applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.

 

During the third quarter of 2015, we concluded that as a result of current conditions, circumstances, and as required by Accounting Standards Codification No. 350, Intangibles – Goodwill and Other, that our Schools reporting unit was at risk of its respective carrying values exceeding fair values as of September 30, 2015. A significant amount of judgment is involved in determining if an indicator of impairment has occurred.

 

During 2015, our Schools reporting unit continued to operate in an environment with increased regulatory compliance obligations that continued to adversely affect our enrollments and its overall financial performance. During the third quarter of 2015, our actual enrollments and overall financial performance at the Schools reporting unit was significantly below what we had planned, which also adversely affected our projections of future results for this business.

 

Consequently, we performed an interim impairment analysis as of September 30, 2015. We calculated the fair value for this unit and performed extensive valuation analyses, utilizing the income approach, in our goodwill assessment process.

 

To determine the estimated fair value of our Schools reporting unit, utilizing the income approach, we discounted our estimated cash flows which were developed by management. We estimate our future cash flows after considering current economic conditions and trends, estimated future operating results, our views of growth rates and anticipated future economic and regulatory conditions. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our future expected cash flows and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our models, we use a terminal value approach and incorporate the present value of the resulting terminal value into our estimate of fair value.

 

The determination of estimated fair value of our Schools reporting unit requires significant estimates and assumptions, and as such, the fair value measurement is categorized as Level 3 per ASC Topic 820. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating cash flow projections and capital expenditure forecasts. Due to the inherent uncertainty involved in deriving those estimates, actual results could differ from those estimates. We evaluate the merits of each significant assumption used, both individually and in the aggregate, to determine the fair value of the reporting unit for reasonableness.

 

As a result of the second step of the interim impairment test completed as of September 30, 2015, we recorded a goodwill impairment charge of $20.8 million for our Schools reporting unit.

 

In addition, in conjunction with the second step of the goodwill impairment test, fair values are assigned to all assets and liabilities for each reporting unit, including all other intangible assets, as if the reporting unit had been acquired in a business combination.  As a result, there was an impairment charge to the Schools trade names of $2.6 million and a $6.1 million impairment charge to the rights under the Title IV student loan programs of the U.S. Department of Education (“DOE”) for the Schools. We calculate the fair value of each of those intangible assets in accordance with FASB ASC Topic 820—Fair Value Measurement, by utilizing the relief from royalty method under the income approach. The assumptions utilized in determining these fair values included utilizing projected revenue growth rates, discount rates of approximately 17%, royalty rates ranging from 1% to 3% and terminal growth rates of approximately 3%. These fair value measurements are categorized as Level 3 per ASC Topic 820. Due to the inherent uncertainty involved in deriving those estimates, actual results could differ from those estimates. We evaluate the merits of each significant assumption used, both individually and in the aggregate, to determine the fair value of these intangible assets for reasonableness.

 

 

A tax benefit of $3.5 million was recorded in connection with these charges and related primarily to the reversal of related deferred tax liabilities.

 

The following table presents the balance of goodwill by reporting unit, including the changes in the carrying amount of goodwill (in thousands):

 

   


Maritime

   

Land-Based
Spas

   

Product
Distribution

   


Schools

   

Ideal
Image

   


Total

 

Balance at December 31, 2014

  $ 10,704     $ 40,297     $ 23,695     $ 30,752     $ 43,367     $ 148,815  

Impairment charges

    --       --       --       (20,792

)

    --       (20,792

)

Balance at September 30, 2015

  $ 10,704     $ 40,297     $ 23,695     $ 9,960     $ 43,367     $ 128,023  

 

(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 Operations were approximately ($0.8 million) and ($1.7 million) for the three months ended September 30, 2015 and 2014, respectively, and approximately ($1.2 million) and ($0.9 million) for the nine months ended September 30, 2015 and 2014, respectively. The transaction gains (losses) in the Cost of Products caption of our Condensed Consolidated Statements of Operations were approximately $0.7 million and $0.9 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $0.3 million and $0.5 million for the nine months ended September 30, 2015 and 2014, 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,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net (loss) income

  $ (17,489 )   $ 12,106     $ (425 )   $ 27,750  
                                 

Weighted average shares outstanding used in calculating basic earnings per share

    12,833       13,771       12,888       14,299  

Dilutive common share equivalents

    --       112       --       94  

Weighted average common and common share equivalents used in calculating diluted earnings per share

    12,833       13,883       12,888       14,393  
                                 

(Loss) income per common share:

                               

Basic

  $ (1.36 )   $ 0.88     $ (0.03 )   $ 1.94  
                                 

Diluted

  $ (1.36 )   $ 0.87     $ (0.03 )   $ 1.93  
                                 

Options and restricted share units outstanding which are not included in the calculation of diluted earnings per share because their impact is anti-dilutive

    460       123       460       78  

 

No share options were issued during the three months ended September 30, 2015 or September 30, 2014.

 

The Company issued 3,000 of its common shares upon the exercise of share options during both the nine months ended September 30, 2015 and 2014, respectively.

 

(g)     Stock-Based Compensation

 

The Company granted approximately 10,000 and 12,000 restricted share units during the nine months ended September 30, 2015 and 2014, respectively. No stock-based compensation was granted during the three months ended September 30, 2015 and 2014, respectively.

 

(h)     Recent Accounting Pronouncements

 

In January 2015, amended GAAP guidance was issued changing the requirements for reporting extraordinary and unusual items in the income statement. The update eliminates the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. A reporting entity may apply the amendments prospectively or retrospectively to all periods presented in the financial statements. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this newly issued guidance is not expected to have an impact on our consolidated financial statements.

 

 

In February 2015, amended GAAP guidance was issued affecting current consolidation guidance. The guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance must be applied using one of two retrospective application methods and will be effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in any interim period. The adoption of this newly issued guidance is not expected to have an impact on our consolidated financial statements.

 

In April 2015, amended GAAP guidance was issued simplifying the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. This guidance will be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this newly issued guidance is not expected to be material to our consolidated financial statements.

 

In April 2015, amended GAAP guidance was issued to clarify a customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license or if the arrangement should be accounted for as a service contract. This guidance will impact the accounting of software licenses but will not change a customer’s accounting for service contracts. The guidance will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either prospectively or retrospectively. We are currently evaluating the impact, if any, that the adoption of this newly issued guidance would have on our consolidated financial statements.

 

In July 2015, amended GAAP guidance was issued that simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last in first out (“LIFO”) and the retail inventory method (“RIM”). Entities that use LIFO or RIM will continue to use existing impairment models. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. We are currently evaluating the impact, if any, that the adoption of this newly issued guidance would have on our consolidated financial statements.

  

In September 2015, amended GAAP guidance was issued to simplify the accounting for measurement-period adjustments related to business combinations. The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined and eliminates the requirement to retroactively adjust the provisional amounts recognized at the acquisition date. The guidance will be effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments are required to be applied prospectively to measurement period adjustments that occur after the effective date. Early adoption is permitted for financial statements that have not been issued. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.

 

 

(i)     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.

 

The fair value of items measured on a nonrecurring basis, estimated using Level 3 input as of September 30, 2015 is as follows (in thousands):

 

Schools goodwill

$

9,940

 

Certain Schools indefinite-lived intangibles

$

3,031

 

 

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 values of our term and revolving loans were estimated using Level 2 inputs based on quoted prices for those or similar instruments. The fair values of the term and revolving loans were determined using applicable interest rates as of September 30, 2015 and December 31, 2014 and approximate 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.

 

(j)     Concentrations of Credit Risk

 

Student notes receivable represent extensions of credit to students that generally mature 60 months subsequent to the students’ graduation dates. We extend credit after an evaluation of credit scores and credit information. Revenues related to the issuance of such notes are recognized over the students' applicable course or program period at the net amount expected to be collected on such notes. Any future adjustments to our estimate of collectability of the notes are recorded as an adjustment to bad debt expense. Generally, no interest is charged while the student attends courses and the interest rate generally increases to 9.5% once the student graduates. Interest income is recorded as amounts are received. Loan origination fees are deferred and recognized over the life of the notes as an adjustment of interest income. Any other lending costs, such as servicing fees, are charged to expense as incurred.

 

 

These notes receivable are included in other current assets and other assets for the short-term and long-term balances, respectively. Student notes receivable are stated net of an allowance for doubtful accounts. We establish and monitor an allowance for doubtful accounts based on historical bad debt experience for these loans and other qualitative information. Generally, a student's notes receivable balance is written off once it is determined to be uncollectible (if the note is more than 90 days past due, based on collection efforts, and/or if a student has filed for bankruptcy). Payments received on past due student notes receivable are recorded against bad debt expense. A roll-forward of the allowance for doubtful accounts for student notes receivables at September 30, 2015 is as follows (in thousands):

 

Balance at beginning of period

  $ 3,494  

Provision

    3,329  

Write-offs

    (2,932

)

Balance at end of period

  $ 3,891  

 

As of September 30, 2015, the delinquency status of gross notes receivable was as follows (in thousands):

 

Current   $ 5,967  
1-30     762  
31-60     454  
61-90     877  
91+     457  
    $ 8,517  

 

(k)     Seasonality

 

A significant portion 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.

 

(l)     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. During the third quarter of 2015, we recorded a $3.5 million tax benefit related to our impairment charges.

  

(4)       COMMITMENTS AND CONTINGENCIES:

 

Legal Proceedings

 

From time to time, in the ordinary course of business, we are a party to various claims and legal proceedings. Currently, there are no such claims or proceedings which, in the opinion of management, could have a material adverse effect on our results of operations, financial condition and cash flows, except as follows:

 

On April 7, 2014, a former student at our Schools Division’s Denver School of Massage Therapy brought a putative class action against our Schools Division, Nesbitt v. FCNH, Inc. et al., in the U.S. District Court for the District of Colorado, alleging violations of the Fair Labor Standards Act (“FLSA”) and various state wage and hour laws. The plaintiff alleges that, in performing certain therapies on individuals from the public as part of the requirements that students perform clinical services (required for a massage therapy license), she was acting as an employee for purposes of the FLSA and applicable state law and was entitled to wages for those services. The complaint seeks unspecified damages. The plaintiff brought the action on behalf of herself and all others similarly situated at the schools operated by our Schools Division. At this time, we are unable to provide an evaluation of the likelihood of an unfavorable outcome, or provide an estimate of the amount or range of potential loss in this matter. Should we be found liable in this matter, the amount that we may be required to pay in connection with such liability could have a material adverse effect on our financial condition and results of operations.

 

 

On November 17, 2014, a former sales consultant brought a putative collective action against Ideal Image Development Corporation, Marlow v. Ideal Image Development Corp., in the U.S. District Court for the Eastern District of Tennessee, alleging violations of the FLSA. The plaintiff alleged that she and others working as sales consultants were not paid the applicable minimum wage for certain training and travel work and were not paid overtime for hours worked over 40 in a workweek. The complaint sought unspecified damages. The plaintiff brought the action on behalf of herself and others similarly situated across the country. Other individuals joined the lawsuit.  The matter went to mediation and the parties reached a settlement in compromise of the claims pursuant to which Ideal Image agreed to pay $780,000, the loss of which was included in Administrative expenses in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2015. The settlement is subject to approval of the court and, accordingly is not yet final. Should such settlement not be so approved, the litigation resume and we be found liable in this matter, the amount that we may be required to pay in connection with such liability could have a material adverse effect on our financial condition and results of operations. 

 

Regulatory Matters

 

In October 2015, the DOE issued a letter approving the renewal application for the eligibility of one of our schools to continue participating in the Title IV Programs, but that letter also prohibited the school from providing Title IV Program funds to any new or re-admitted student in three of the school’s educational programs.  The DOE stated that the school may continue to disburse Title IV funds to qualifying students who are currently enrolled in any of the three educational programs and did not prohibit the school from continuing to disburse Title IV funds to eligible students in any of the school’s other eligible educational programs.

 

The DOE regulations require that certain educational programs must, among other things, demonstrate a reasonable relationship between the length of the program and entry level requirements for the recognized occupation for which the program prepares the student.  By regulation, the DOE considers the relationship to be reasonable if the number of clock hours provided in the program does not exceed by more than 50 percent the minimum number of clock hours required for training in the recognized occupation for which the program prepares the student, as established by the state in which the program is offered, if the state has established such a requirement, or as established by any federal agency. Our school in question has three programs that the DOE cited in this regard.  The DOE has the authority to approve educational programs of greater length and has approved these programs, and similar programs at other institutions, in the past, including at some of our other schools.  However, the DOE has declined to consider approving these three programs at the school in question on a going forward basis.  We are in the process of requesting the DOE to reconsider its conclusion and permit continued funding of these programs as they are currently designed.

 

We also have seven other schools that offer one or more educational programs at one or more campuses that exceed the “more than 50 percent” threshold.  The DOE has previously approved each of these educational programs to participate in the Title IV Programs at its current length.  When these schools and their programs are reviewed by the DOE, if the DOE declines to consider continuing to approve some or all of the educational programs that exceed the “more than 50 percent” threshold, then we may be required to stop providing Title IV funds to students in these programs, and would then be required to modify the programs’ current length. The modified programs would be subject to DOE review and approval for Title IV program funds.

 

There can be no assurance that the DOE will reverse its position on the three programs currently in question, or that programs offered at seven other of the Company’s schools will not be barred from receiving Title IV funds, or, if necessary, that the Company will be able to successfully modify the length of, and receive approval of Title IV funds for, other programs that currently exceed the “more than 50 percent threshold. The loss of authority to provide these Title IV Program funds to students at our schools would have an adverse effect on the results of operations and financial condition of our Schools division.

 

 

(5)       SHAREHOLDERS' EQUITY:

 

On February 18, 2015, the board of directors of Steiner Leisure (the “Board”) 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 2013 was terminated. During the nine months ended September 30, 2015 and 2014, respectively, we purchased approximately 232,000 and 1,165,000 shares, with a value of approximately $10.8 million and $47.3 million, respectively. Of those shares purchased, 5,000 and 23,000 shares for the nine months ended September 30, 2015 and 2014, 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, 2015 and 2014 (in thousands):

 

   

Foreign Currency
Translation Adjustments

 
   

2015

   

2014

 

Accumulated comprehensive loss at beginning of the year

  $ (2,571

)

  $ (258

)

Other comprehensive loss before reclassifications

    (722

)

    (817

)

Amounts reclassified from accumulated other comprehensive loss

    --       --  

Net current-period other comprehensive loss

    (722

)

    (817

)

Ending balance

  $ (3,293

)

  $ (1,075

)

 

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) Ideal Image, 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.

  

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues:

                               

Spa Operations

  $ 124,089     $ 120,473     $ 359,734     $ 361,786  

Products

    46,620       52,687       135,994       139,024  

Schools

    18,073       19,906       56,548       58,620  

Ideal Image

    47,953       36,986       135,521       114,874  

Other

    (9,330

)

    (10,375

)

    (26,927

)

    (28,628

)

Total

  $ 227,405     $ 219,677     $ 660,870     $ 645,676  

Income (loss) from Operations:

                               

Spa Operations

  $ 9,976     $ 10,158     $ 29,835     $ 28,433  

Products

    4,726       7,692       10,326       13,887  

Schools

    (30,427

)

    (44

)

    (31,016

)

    (395

)

Ideal Image

    (384

)

    (2,476

)

    (2,311

)

    (5,129

)

Other

    (2,554

)

    (557

)

    (4,415

)

    (2,129

)

Total

  $ (18,663

)

  $ 14,773     $ 2,419     $ 34,667  

 

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 

Identifiable Assets:

               

Spa Operations

  $ 197,759     $ 191,218  

Products

    216,791       199,803  

Schools

    49,923       99,981  

Ideal Image

    166,117       147,933  

Other

    (100,508

)

    (86,092

)

Total

  $ 530,082     $ 552,843  

 

Included in Spa Operations, Products, Schools and Ideal Image is goodwill of $51.0 million, $23.7 million, $9.9 million and $43.4 million, respectively, as of September 30, 2015 and $51.0 million, $23.7 million, $30.7 million and $43.4 million, respectively, as of December 31, 2014.

 

Products segment revenues excluding intercompany transactions was $36.9 million and $41.8 million the three months ended September 30, 2015 and 2014, respectively, and $108.0 million and $108.8 million for the nine months ended September 30, 2015 and 2014, respectively.

 

For the three and nine months ended September 30, 2014 Spa Operations and Products revenues have been adjusted to correct the allocation of certain revenues between those segments.

 

 

 

 

(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,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues:

                               

United States

  $ 95,098     $ 91,902     $ 287,244     $ 272,562  

United Kingdom

    22,124       21,704       57,315       57,690  

Not connected to a country

    103,913       99,317       296,364       293,955  

Other

    6,270       6,754       19,947       21,469  

Total

  $ 227,405     $ 219,677     $ 660,870     $ 645,676  

 

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 

Property and Equipment, net:

               

United States

  $ 80,440     $ 74,781  

United Kingdom

    8,858       6,088  

Not connected to a country

    2,392       2,231  

Other

    11,945       13,409  

Total

  $ 103,635     $ 96,509  

 

 

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


Overview

 

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

 

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 highly regarded and premier United States and 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 Ideal Image 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 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. 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. During the third quarter of 2015, as a result of current conditions, circumstances, and in connection with Accounting Standards Codification No. 350, Intangibles – Goodwill and Other, we recorded a non-cash impairment charge of $29.5 million and associated income tax benefit of $3.5 million, related to the impairment of goodwill and other indefinite lived intangible assets at our Schools reporting unit.  During 2015, our Schools reporting unit continued to operate in an environment with increased regulatory compliance obligations that continued to adversely affect our enrollments and our overall financial performance.  During the third quarter of 2015, our actual enrollments and overall financial performance at the Schools reporting unit were below our plan, which also adversely affected our projections of future results for this business.  As a result of the decline in recent and forecasted performance of this reporting unit, during the third quarter of 2015, we have reduced our carrying values in certain of our assets as described in the impairment charge discussed above.  These charges are not expected to have any impact on the Company’s cash position or liquidity under our Credit Facility.

 

Through our Ideal Image segment, we offer a non-invasive procedure for the removal of unwanted facial and body hair and other services in a relaxing setting. Ideal Image is a leader in the growing consumer cosmetic category of laser hair removal. We operate 110 cosmetic service centers and are party to agreements with franchisees, who operate 17 cosmetic service centers offering services under the Ideal Image brand, all in upscale retail settings. 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 evaluate whether to continue to expand our Ideal Image segment. If we decide to expand this segment, the Ideal Image centers will either be company-owned or physician-owned, depending on the applicable regulations in the jurisdiction in which the respective Ideal Image center will be opened. In connection with the opening of any new Ideal Image center, we incur expenses, among other things, for leasehold improvements, marketing and training of new personnel. Accordingly, even new Ideal Image centers that are successful do not become cash flow positive until several months after opening.

  

Even after a new Ideal Image center becomes cash flow positive, however, under applicable U.S. GAAP rules, it takes an additional period of time for the positive cash flow (assuming the Ideal Image center is successful) to be reflected in the operating income of the segment with respect to that Ideal Image center. This is primarily because the laser hair removal 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 Ideal Image segment trails behind the related cash flow of the segment. This applies to both new Ideal Image centers and existing Ideal Image centers. To the extent that more new Ideal Image centers are opened, and, therefore, each new Ideal Image 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 Ideal Image centers typically have a regular base of customers and receive new customers at a more regular rate than newly opened Ideal Image centers and, therefore, have a stronger revenue base than new Ideal Image centers.

 

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.

 

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.

 

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 created a challenging environment for the cruise and hospitality industries and our business, including our retail beauty products sales. In order for the cruise industry to maintain its market share in difficult economic environments, 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. 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 also adversely affected consumers and business entities. The recurrence of the more severe aspects of these challenging economic conditions could have a material adverse effect on the cruise and hospitality industries and also could have a material adverse effect on our results of operations and financial condition for 2015 and thereafter.

 

Despite the general historic trend of growth in the volume of cruise passengers, in 2015 and future years, the global economic environment 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 decrease in passenger volume could have a material adverse effect on our results of operations and financial condition.

 

Other factors also can adversely affect our financial results. Fluctuations in currency exchange rates compared to the U.S. Dollar can impact our results of operations, most significantly 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. Accordingly, while the relative strength of the U.S. Dollar has improved recently, renewed weakness of the U.S. Dollar against those currencies can adversely affect our results of operations, as has occurred from time to time in recent years.

 

On August 21, 2015, we entered into a definitive agreement with Catterton, the leading consumer-focused private equity firm, in which an affiliate of Catterton will acquire all of our outstanding shares for $65 per share in cash. The transaction is expected to close in the fourth quarter of 2015 or early in 2016 and is subject to regulatory approvals and the approval of our shareholders.

 

 

 

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 and enrollments.

 

Ideal Image. With respect to our Ideal Image centers, we measure performance primarily through revenues.

 

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. 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.

 

Our critical accounting policies are included in our 2014 Annual Report. We believe that there have been no significant changes during the nine months ended September 30, 2015 to the critical accounting policies disclosed in our 2014 Annual Report except as follows.

 

During the quarter ended September 30, 2015, the Company voluntarily changed the date of its annual goodwill and indefinite - lived intangible assets impairment testing from the first day of the fiscal year to the first day of the fourth quarter. This voluntary change is preferable under the circumstances as it provides the Company with additional time to complete its annual goodwill and indefinite  - lived intangible asset impairment testing in advance of its year-end reporting and results in better alignment with the Company’s strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. This change will not be applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.

 

 

Recent Accounting Pronouncements

 

Refer to Note 3(h) 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 statement of operations data expressed as a percentage of revenues:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues:

                               

Services

    70.7

%

    68.0

%

    70.7

%

    69.9

%

Products

    29.3       32.0       29.3       30.1  

Total revenues

    100.0       100.0       100.0       100.0  

Cost of revenues:

                               

Cost of services

    59.5       57.5       59.1       58.6  

Cost of products

 

19.4

   

20.3

   

19.3

   

20.0

 

Total cost of revenues

    78.9       77.8       78.4       78.6  

Gross profit

    21.1       22.2       21.6       21.4  

Operating expenses:

                               

Administrative

    8.9       8.0       8.1       7.3  

Salary and payroll taxes

    7.4       7.5       8.6       8.8  

Impairment of goodwill and other tangibles

    13.0       --       4.5       --  

Total operating expenses

    29.3       15.5       21.2       16.1  

(Loss) income from operations

    (8.2

)

    6.7       0.4       5.3  

Other income (expense), net:

                               

Interest expense

    (0.3

)

    (0.3

)

    (0.4

)

    (0.3

)

Other income

    0.1       0.1       0.1       0.1  

Total other income (expense), net

    (0.2

)

    (0.2

)

    (0.3

)

    (0.2

)

(Loss) income before (benefit) provision for income taxes

    (8.4

)

    6.5       0.1       5.1  

(Benefit) provision for income taxes

    (0.7

)

    1.0       0.2       0.8  

Net (loss) income

    (7.7

)%

    5.5

%

    0.1

%

    4.3

%

 

 

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

 

REVENUES

 

Revenues of our reportable segments for the three months ended September 30, 2015 and 2014, respectively, were as follows (in thousands):

 

   

Three Months Ended
September 30,

   


% Change

 

Revenue:

 

2015

   

2014

         

Spa Operations

  $ 124,089     $ 120,473       3.0 %

Products

    46,620       52,687       (11.5% )

Schools

    18,073       19,906       (9.2% )

Ideal Image

    47,953       36,986       29.7 %

Other

    (9,330

)

    (10,375

)

 

N/A

 

Total

  $ 227,405     $ 219,677       3.5 %

 

Total revenues increased approximately 3.5%, or $7.7 million, to $227.4 million in the third quarter of 2015 from $219.7 million in the third quarter of 2014. This increase was attributable to an $11.4 million increase in services revenues offset by a $3.7 million decrease in products revenues.

 

Spa Operations Revenues. Spa Operations segment revenues increased approximately 3.0%, or $3.6 million, to $124.1 million in the third quarter of 2015 from $120.5 million in the third quarter of 2014. Average weekly revenues for our land-based spas decreased 4.5% to $24,823 in the third quarter of 2015 from $25,998 in the third quarter of 2014. We had an average of 2,619 shipboard staff members in service in the third quarter of 2015, compared to an average of 2,582 shipboard staff members in service in the third quarter of 2014. Revenues per shipboard staff per day increased by 3.1% to $431 in the third quarter of 2015 from $418 in the third quarter of 2014. Average weekly revenues for our shipboard spas increased by 3.4% to $53,032 in the third quarter of 2015 from $51,285 in the third quarter of 2014. The increases in revenues and key performance indicators referenced above were primarily attributable to some strengthening of the economy worldwide, resulting in increased spending by consumers at our spas.

 

Products Revenues. Products segment revenues decreased approximately 11.5% or $6.1 million to $46.6 million in the third quarter of 2015 from $52.7 million and in the third quarter of 2014. Excluding intercompany products sales, products revenues was $36.9 million in the three months ended September 30, 2015 and $41.8 million for the three months ended September 30, 2014, respectively. This decrease was primarily attributable to week retail sales in North America.

 

Schools Revenues. Schools segment revenues decreased approximately 9.2%, or $1.8 million to $18.1 million in the third quarter of 2015 from $19.9 million in the third quarter of 2014. 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, 2014, which was the starting point for 2015 enrollments, there were 3,977 students enrolled in our schools, an increase of 258 students compared to the number of students as of December 31, 2013, the starting point for 2014 enrollments. As of September 30, 2015, 4,195 students were enrolled in our schools, compared to 4,645 students enrolled at our schools at September 30, 2014. The decrease in revenues was primarily attributable to the lower number of new enrollments during the nine months ended September 30, 2015.

 

Ideal Image Revenues. Ideal Image segment revenues increased approximately 29.7%, or $11.0 million to $48.0 million in the third quarter of 2015 from $37.0 million in the third quarter of 2014. The increase in revenues was primarily attributable to the offering of new services during the three months ended September 30, 2015, which services were not offered during the three months ended September 30, 2014.

 

 

Cost of Services 

 

Cost of services increased $8.9 million to $135.4 million in the third quarter of 2015 from $126.5 million in the third quarter of 2014. Cost of services as a percentage of services revenues decreased to 84.2% in the third quarter of 2015 from 84.6% in the third quarter of 2014. This decrease was primarily attributable to the improved performance at Ideal Image.

  

Cost of Products 

  

Cost of products decreased $0.6 million to $44.0 million in the third quarter of 2015 from $44.6 million in the third quarter of 2014. Cost of products as a percentage of products revenue increased to 66.0% in the third quarter of 2015 from 63.4% in the third quarter of 2014. This increase was attributable to the sale of lower margin products in North America.

 

OPERATING EXPENSES

  

Operating expenses increased $32.8 million to $66.7 million in the third quarter of 2015 from $33.9 million in the third quarter of 2014. Operating expenses as a percentage of revenues increased to 29.3% in the third quarter of 2015 from 15.5% in the third quarter of 2014. Excluding the impairment charge of $29.5 million, operating expenses would have been $37.2 million and 16.4% of revenues. This increase is primarily attributable to incurring $2.9 million of transaction costs relating to the proposed merger with Catterton.

 

(LOSS) INCOME FROM OPERATIONS

 

(Loss) income from operations of our reportable segments for the three months ended September 30, 2015 and 2014, respectively, was as follows (in thousands):

 

   

For the Three Months Ended
September 30,

   


% Change

 

(Loss) income from Operations:

 

2015

   

2014

         

Spa Operations

  $ 9,976     $ 10,158       (1.8% )

Products

    4,726       7,692       (38.6% )

Schools

    (30,427 )     (44 )     (69,052.3% )

Ideal Image

    (384 )     (2,476 )     84.5 %

Other

    (2,554 )     (557 )  

N/A

 

Total

  $ (18,663 )   $ 14,773       (26.3% )

 

The decrease in operating income in the Spa Operations segment was attributable to increased discounting at our land-based spas to offset promotions by our competitors. 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. During the three months ended September 30, 2015, we recorded impairment charges of $29.5 million in our Schools segment. Excluding these charges, operating loss in the Schools segment increased to $0.9 million. The increase in operating loss in the Schools segment was primarily attributable to a lower average student population, which resulted in lower revenues and, commensurately, higher operating loss. The lower average student population was primarily attributable to lower enrollments during the three months ended September 30, 2015. The decrease in operating loss in the Ideal Image segment was primarily attributable to the offering of new services during the three months ended September 30, 2015, which services were not offered during the three months ended September 30, 2014.

 

Other Income (Expense)

 

Other income (expense) was unchanged for the three months ended September 30, 2015 and 2014.

 

 

 (BENEFIT) Provision for Income Taxes

  

(Benefit) provision for income taxes decreased $3.9 million to a benefit of $1.7 million in the third quarter of 2015 as compared to a provision for income taxes of $2.2 million in the third quarter of 2014, respectively. During the third quarter of 2015, we recorded a $3.5 million tax benefit related to our impairment charges. Excluding this benefit and related impairment charge, the effective tax rate would have been 17.7% in the third quarter of 2015 compared to 15.1% in the third quarter of 2014. The increase was primarily due to the income earned in jurisdictions where we are required to pay tax representing a higher percentage of our total income earned in the third quarter of 2015 than such income represented in the third quarter of 2014.

 

NET (LOSS) INCOME

 

Net loss was $17.5 million in the third quarter of 2015 compared to net income of $12.1 million in the third quarter of 2014. This decrease was primarily attributable to $29.5 million of impairment charges and $2.9 million of transaction costs relating to the proposed merger with Catterton. This decrease was offset by the improved performance in our Ideal Image segment as discussed above and the tax benefit of $3.5 million associated with the impairment charges.

  

 

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

 

REVENUES

 

Revenues of our reportable segments for the nine months ended September 30, 2015 and 2014, respectively, were as follows (in thousands):

 

   

Nine Months Ended
September 30,

   


% Change

 

Revenue:

 

2015

   

2014

         

Spa Operations

  $ 359,734     $ 361,786       (0.6% )

Products

    135,994       139,024       (2.2% )

Schools

    56,548       58,620       (3.5% )

Ideal Image

    135,521       114,874       18.0 %

Other

    (26,927

)

    (28,628

)

 

N/A

 

Total

  $ 660,870     $ 645,676       2.4 %

 

Total revenues increased approximately 2.4%, or $15.2 million, to $660.9 million in the nine months ended September 30, 2015 from $645.7 million in the nine months ended September 30, 2014. This increase was attributable to a $15.9 million increase in services revenues, which was partially offset by a $0.7 million decrease in products revenues.

 

Spa Operations Revenues. Spa Operations segment revenues decreased approximately 0.6%, or $2.1 million, to $359.7 million in the nine months ended September 30, 2015 from $361.8 million in the nine months ended September 30, 2014. Average weekly revenues for our land-based spas decreased 2.3% to $26,756 in the nine months ended September 30, 2015 from $27,386 in the nine months ended September 30, 2014. We had an average of 2,596 shipboard staff members in service in the nine months ended September 30, 2015, compared to an average of 2,633 shipboard staff members in service in the nine months ended September 30, 2014. Revenues per shipboard staff per day increased by 2.2% to $418 in the nine months ended September 30, 2015 from $409 in the nine months ended September 30, 2014. Average weekly revenues for our shipboard spas increased by 2.2% to $51,802 in the nine months ended September 30, 2015 from $50,679 in the nine months ended September 30, 2014. More than 50% of the decrease in revenues was attributable to the non-renewal of the Celebrity agreement.

 

Products Revenues. Products segment revenues decreased approximately 2.2% or $3.0 million to $136.0 million in the nine months ended September 30, 2015 from $139.0 million in the nine months ended September 30, 2014. Excluding intercompany products sales, products revenues decreased $0.8 million to $108.0 million for the nine months ended September 30, 2015 from $108.8 million in the nine months ended September 30, 2014. This decrease was primarily attributable to weak retail sales in North America.

 

Schools Revenues. Schools segment revenues decreased approximately 3.5%, or $2.1 million to $56.5 million in the nine months ended September 30, 2015 from $58.6 million in the nine months ended September 30, 2014. 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, 2014, which was the starting point for 2015 enrollments, there were 3,977 students enrolled in our schools, an increase of 258 students compared to the number of students as of December 31, 2014, the starting point for 2014 enrollments. As of September 30, 2015, 4,195 students were enrolled in our schools, compared to 4,645 students enrolled at our schools at September 30, 2014. The decrease in revenues was primarily attributable to the lower number of new enrollments during the nine months ended September 30, 2015.

 

Ideal Image Revenues. Ideal Image segment revenues increased approximately 18.0% or $20.6 million to $135.5 million for the nine months ended September 30, 2015 from $114.9 million in the nine months ended September 30, 2014. The increase in revenues was primarily attributable to the offering of new services during the nine months ended September 30, 2015, which services were not offered during the nine months ended September 30, 2014.

   

 

Cost of Services 

  

Cost of services increased $12.2 million to $390.7 million in the nine months ended September 30, 2015 from $378.5 million in the nine months ended September 30, 2014, respectively. Cost of services as a percentage of services revenues was 83.7% in the nine months ended September 30, 2015 compared to 83.9% in the nine months ended September 30, 2014. This decrease was primarily attributable to the improved performance of Ideal Image.

 

Cost of Products 

 

Cost of products decreased $1.0 million to $127.9 million in the nine months ended September 30, 2015 from $128.9 million in the nine months ended September 30, 2014. Cost of products as a percentage of products revenue decreased to 66.0% in the nine months ended September 30, 2015 from 66.2% in the nine months ended September 30, 2014. These decreases were primarily attributable to higher margin products that were sold in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. A substantial amount of these products were sold for the first time to Kohl’s department stores during the nine months ended September 30, 2015.

 

OPERATING EXPENSES

  

Operating expenses increased $36.3 million to $139.9 million in the nine months ended September 30, 2015 from $103.6 million in the nine months ended September 30, 2014. Operating expenses as a percentage of revenues was 21.2% in the nine months ended September 30, 2015 and 16.1% in the nine months ended September 30, 2014. Excluding the impairment charge of $29.5 million, operating expenses would have been $110.4 million and 16.7% of revenues. This increase was primarily attributable to the incurrence of $3.1 million of transaction costs relating to the proposed merger with Catterton.

 

INCOME FROM OPERATIONS

 

Income from operations of our reportable segments for the nine months ended September 30, 2015 and 2014, respectively, was as follows (in thousands):

 

    For the Nine Months Ended
September 30,
    % Change  
Income (loss) from Operations:   2015     2014      

Spa Operations

  $ 29,835     $ 28,433       4.9 %

Products

    10,326       13,887       (25.6 %)

Schools

    (31,016

)

    (395 )     (7,752.2 %)

Ideal Image

    (2,311

)

    (5,129 )     54.9 %

Other

    (4,415

)

    (2,129 )  

N/A

 

Total

  $ 2,419     $ 34,667       (93.0 %)

 

The increase in operating income in the Spa Operations segment was attributable to cost efficiencies achieved at certain of our spas. The decrease in operating income in the Products segment was primarily attributable to higher costs incurred to sell our products and expand our brands. During 2015, we recorded impairment charges of $29.5 million in our Schools segment. Excluding these charges, operating loss in the Schools segment increased to $1.5 million. The increase in operating loss in the Schools segment was primarily attributable to lower average student population, which resulted in lower revenues and, commensurately, higher operating loss. The lower average student population was primarily attributable to lower enrollments during the nine months ended September 30, 2015. The decrease in operating loss in the Ideal Image segment was primarily attributable to the offering of new services during the nine months ended September 30, 2015, which services were not offered during the nine months ended September 30, 2014.

 

Other Income (Expense)

 

Other income (expense) increased due to increased interest expense due to additional draws on our revolving term loan for general corporate purposes.

 

 

PROVISION for Income Taxes

 

Provision for income taxes was $1.2 million in the nine months ended September 30, 2015 and $5.4 million for the nine months ended September 30, 2014, respectively. During 2015, we recorded a $3.5 million tax benefit related to our impairment charges. Excluding this benefit and related impairment charges, the overall effective tax rate would have been 15.7% in the nine months ended September 30, 2015 compared to 16.3% in the nine months ended September 30, 2014. The decrease was primarily due to the income earned in jurisdictions where we are required to pay tax representing a lower percentage of our total income earned in the nine months ended September 30, 2015 than such income represented in the nine months ended September 30, 2014 and due to lower deferred income taxes.

  

NET (LOSS) INCOME

 

Net loss was ($0.4 million) in the nine months ended September 30, 2015 compared to net income of $27.8 million in the nine months ended September 30, 2014. This decrease was primarily attributable to $29.5 million of impairment charges and $3.1 million of transaction costs relating to the proposed merger with Catterton. This decrease was offset by our improved performance at the Spa Operations and Ideal Image segments as discussed above and the $3.5 million tax benefit related to the impairment charges.

 

 

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

During the nine months ended September 30, 2015, net cash provided by operating activities was approximately $58.4 million compared with $16.1 million for the nine months ended September 30, 2014. This change was attributable to increases in a number of working capital changes.

 

During the nine months ended September 30, 2015, cash used in investing activities was $21.7 million compared with $12.2 million for the nine months ended September 30, 2014. This increase was primarily attributable to an increase in capital expenditures primarily related to equipment purchased for Ideal Image that is used for new services.

  

During the nine months ended September 30, 2015, cash used in financing activities was $40.7 million compared with $44.3 million for the nine months ended September 30, 2014. This decrease in cash used in financing activities was primarily attributable to fewer purchases of treasury shares partially offset by payments of long-term debt during the nine months ended September 30, 2015 as compared to September 30, 2014.

 

Steiner Leisure had a working capital deficit of approximately $18.1 million at September 30, 2015, compared to working capital of approximately $7.8 million at December 31, 2014. This change was primarily attributable to the increases in deferred revenues related to our Ideal Image segment and an increase in the current portion of our long-term debt.

 

In February 2015, 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, 2015 and 2014, respectively, we purchased approximately 232,000 and 1,165,000 shares, with a value of approximately $10.8 million and $47.3 million, respectively. Of those shares purchased, 5,000 and 23,000 shares for the nine months ended September 30, 2015 and 2014, 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.

 

 

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 limit the total of dividends and share repurchases to no greater than $75 million in fiscal year 2014, and no greater than $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 had 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 periods of 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. Recurrence of the 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.

 

 

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 other Company facilities;
     
  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, 2014 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.

 

 

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 2014 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, 2015.

 

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, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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 2014 Annual Report, except as follows:

 

On November 17, 2014, a former sales consultant brought a putative collective action against Ideal Image Development Corporation, Marlow v. Ideal Image Development Corp., in the U.S. District Court for the Eastern District of Tennessee, alleging violations of the Fair Labor Standards Act. The plaintiff alleged that she and others working as sales consultants were not paid the applicable minimum wage for certain training and travel work and were not paid overtime for hours worked over 40 in a workweek. The complaint sought unspecified damages. The plaintiff brought the action on behalf of herself and others similarly situated across the country. Other individuals joined the lawsuit. The matter went to mediation and the parties reached a settlement in compromise of the claims pursuant to which Ideal Image agreed to pay $780,000, the loss of which was included in Administrative expenses in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2015. The settlement is subject to approval of the court and, accordingly is not yet final. Should such settlement not be so approved, the litigation resume and we be found liable in this matter, the amount that we may be required to pay in connection with such liability could have a material adverse effect on our financial condition and results of operations.

  

Item 1A.

Risk Factors

 

There were no material changes during the third quarter of 2015 in the risk factors previously disclosed in our 2014 Annual Report, except as follows:

 

The portion of the risk factor entitled “Government Regulation-Schools,” which was previously disclosed in our 2014 Annual Report, is modified to add the following new disclosure at the end of that risk factor:

 

October 2015 DOE Letter

 

In October 2015, the DOE issued a letter approving the renewal application for the eligibility of one of our schools to continue participating in the Title IV Programs, but that letter also prohibited the school from providing Title IV Program funds to any new or re-admitted student in three of the school’s educational programs.  The DOE stated that the school may continue to disburse Title IV funds to qualifying students who are currently enrolled in any of the three educational programs and did not prohibit the school from continuing to disburse Title IV funds to eligible students in any of the school’s other eligible educational programs.

 

The DOE regulations require that certain educational programs must, among other things, demonstrate a reasonable relationship between the length of the program and entry level requirements for the recognized occupation for which the program prepares the student.  By regulation, the DOE considers the relationship to be reasonable if the number of clock hours provided in the program does not exceed by more than 50 percent the minimum number of clock hours required for training in the recognized occupation for which the program prepares the student, as established by the state in which the program is offered, if the state has established such a requirement, or as established by any federal agency. Our school in question has three programs that the DOE cited in this regard.  The DOE has the authority to approve educational programs of greater length and has approved these programs, and similar programs at other institutions, in the past, including at some of our other schools.  However, the DOE has declined to consider approving these three programs at the school in question on a going forward basis.  We are in the process of requesting the DOE to reconsider its conclusion and permit continued funding of these programs as they are currently designed.

 

We also have seven other schools that offer one or more educational programs at one or more campuses that exceed the “more than 50 percent” threshold.  The DOE has previously approved each of these educational programs to participate in the Title IV Programs at its current length.  When these schools and their programs are reviewed by the DOE, if the DOE declines to consider continuing to approve some or all of the educational programs that exceed the “more than 50 percent” threshold, then we may be required to stop providing Title IV funds to students in these programs, and would then be required to modify the programs’ current length. The modified programs would be subject to DOE review and approval for Title IV program funds.

 

 

There can be no assurance that the DOE will reverse its position on the three programs currently in question, or that programs offered at seven other of the Company’s schools will not be barred from receiving Title IV funds, or, if necessary, that the Company will be able to successfully modify the length of, and receive approval of Title IV funds for, other programs that currently exceed the “more than 50 percent threshold. The loss of authority to provide these Title IV Program funds to students at our schools would have an adverse effect on the results of operations and financial condition of our Schools division.

 

 

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, 2015:

 

   

Total Number of

Shares Purchased(1)

   

Average Price

Paid per Share

   

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, 2015 through July 30, 2015

    --     $ --       --     $ 89,405,121  

August 1, 2015 through August 31, 2015

    --       --       --       89,405,121  

September 1, 2015 through September 30, 2015

    --       --       --       89,405,121  

Total

    --     $ --       --     $ 89,405,121  

 

 

 

(1)   During the third quarter, no shares were purchased through the Company's only repurchase plan, which was approved on February 18, 2015 (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 $10,594,879 of our common shares have been purchased to date.

 

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.

 

 

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 9, 2015

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)
   

 

 

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.

 

 

 39