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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

       

FORM 10-Q

(Mark One)

     

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   

For the quarterly period ended March 31, 2012

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

       
 

For the transition period from

_____________

To ______________

 

Commission File Number: 0-28972

STEINER LEISURE LIMITED
(Exact name of Registrant as Specified in its Charter)

       
       

Commonwealth of The Bahamas

 

98-0164731

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

       

Suite 104A, Saffrey Square

   

P.O. Box N-9306

   

Nassau, The Bahamas

 

Not Applicable

(Address of principal executive offices)

 

(Zip Code)

 

(242) 356-0006
(Registrant's telephone number, including area code)

       

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           [X]  Yes    [   ]  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X]  Yes         [  ]  No         

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]    Accelerated filer [X]    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 April 27, 2012, the registrant had 15,275,467 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 March 31, 2012 and December 31, 2011

3

     
 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011

5

     
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011

6

     
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

7

     
 

Notes to Condensed Consolidated Financial Statements

9

     

ITEM 2.

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

19

       

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

31

       

ITEM 4.

Controls and Procedures

 

31

       

PART II OTHER INFORMATION

   
       

ITEM 1.

Legal Proceedings

 

32

       

ITEM 1A.

Risk Factors

 

32

       

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

       

ITEM 6.

Exhibits

 

33

   

SIGNATURES AND CERTIFICATIONS

34

   

2


 

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

STEINER LEISURE LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

March 31,

December 31,

2012

2011

ASSETS

(Unaudited)

CURRENT ASSETS:

Cash and cash equivalents

$

60,206

$

62,645

Accounts receivable, net

41,872

34,192

Accounts receivable - students, net

23,593

20,594

Inventories

51,935

52,648

Prepaid expenses and other current assets

19,025

22,364

    Total current assets

196,631

192,443

PROPERTY AND EQUIPMENT, NET

87,466

87,220

GOODWILL

326,942

326,942

OTHER ASSETS:

Intangible assets, net

90,572

90,919

Deferred financing costs, net

4,983

5,334

Deferred customer acquisitions costs

4,487

1,452

Other

7,915

8,119

    Total other assets

107,957

105,824

    Total assets

$

718,996

$

712,429

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable

$

16,364

$

14,876

Accrued expenses

37,743

47,277

Current portion of long-term debt

18,563

26,500

Current portion of deferred rent

1,054

1,059

Current portion of deferred tuition revenue

28,239

25,521

Current portion of deferred revenue

58,215

51,418

Gift certificate liability

15,124

15,822

Income taxes payable

1,724

2,640

    Total current liabilities

177,026

185,113

NON-CURRENT LIABILITIES:

Deferred income tax liabilities, net

33,751

32,881

Long-term debt, net of current portion

142,312

148,500

Long-term deferred rent

10,274

10,518

Long-term deferred tuition revenue

845

532

Long-term deferred revenue

14,554

12,855

    Total non-current liabilities

201,736

205,286

(Continued)

3


 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(in thousands)

March 31,

December 31,

2012

2011

(Unaudited)

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:

Preferred shares, $.0l par value; 10,000 shares authorized, none

  issued and outstanding

--

--

Common shares, $.0l par value; 100,000 shares authorized,

  23,198 issued in 2012 and 23,153 shares issued in 2011

232

232

Additional paid-in capital

172,635

169,339

Accumulated other comprehensive loss

(2,448

)

(3,594

)

Retained earnings

444,024

429,454

Treasury shares, at cost, 7,998 shares in 2012 and 7,982

  shares in 2011

(274,209

)

(273,401

)

    Total shareholders' equity

340,234

322,030

    Total liabilities and shareholders' equity

$

718,996

$

712,429

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

4


STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Unaudited)

(in thousands, except per share data)

 

Three Months Ended

March 31,

2012

2011

REVENUES:

Services

$

141,442

$

113,029

Products

57,091

54,970

    Total revenues

198,533

167,999

COST OF REVENUES:

Cost of services

112,278

91,247

Cost of products

40,613

38,478

    Total cost of revenues

152,891

129,725

    Gross profit

45,642

38,274

OPERATING EXPENSES:

Administrative

10,779

7,807

Salary and payroll taxes

17,135

14,086

    Total operating expenses

27,914

21,893

    Income from operations

17,728

16,381

OTHER INCOME (EXPENSE), NET:

Interest expense

(1,587

)

(1,076

)

Other income

246

27

    Total other income (expense), net

(1,341

)

(1,049

)

    Income before provision for income taxes

16,387

15,332

PROVISION FOR INCOME TAXES

1,817

1,703

Net income

$

14,570

$

13,629

INCOME PER SHARE:

    Basic

$

0.96

$

0.91

    Diluted

$

0.95

$

0.90

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

5


STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Unaudited)
(in thousands)

 

Three Months Ended

March 31,

2012

2011

Net income

$

14,570

$

13,629

Other comprehensive income, net of taxes:

  Foreign currency translation adjustments

1,146

618

Total other comprehensive income, net of taxes

1,146

618

Comprehensive income

$

15,716

$

14,247

 

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

6


 

 

 

 

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited, in thousands)

Three Months Ended

March 31,

2012

2011

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

14,570

$

13,629

Adjustments to reconcile net income
  to net cash provided by operating activities:

    Depreciation and amortization

4,788

4,082

    Stock-based compensation

2,940

2,337

    Provision for doubtful accounts

717

525

    Deferred income tax provision

870

498

Changes in:

    Accounts receivable

(10,304

)

(2,380

)

    Inventories

1,285

(2,316

)

    Prepaid expenses and other current assets

(111

)

(2,088

)

    Other assets

205

354

    Deferred customer acquisition costs

(3,035

)

--

    Accounts payable

1,340

1,629

    Accrued expenses

(9,731

)

(7,336

)

    Income taxes payable

(941

)

(481

)

    Deferred tuition revenue

3,031

4,380

    Deferred revenue

8,496

--

    Deferred rent

(249

)

19

    Gift certificate liability

(730

)

(540

)

Net cash provided by operating activities

13,141

12,312

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(4,271

)

(1,400

)

Acquisition, net of cash acquired

--

(2,357

)

Post-closing working capital adjustments related to acquisitions

3,614

--

Net cash used in investing activities

(657

)

(3,757

)

(Continued)

7


STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited, in thousands)

 

Three Months Ended

 

March 31,

 

2012

     

2011

 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Purchase of treasury shares

$

(808

)

   

$

(931

)

Payments for long-term debt

 

(14,125

)

     

(25,000

)

Proceeds from share option exercises

 

354

       

1,067

 

Net cash used in financing activities

 

(14,579

)

     

(24,864

)

EFFECT OF EXCHANGE RATE

               

  CHANGES ON CASH

 

(344

)

     

(703

)

NET DECREASE IN CASH

               

  AND CASH EQUIVALENTS

 

(2,439

)

     

(17,012

)

CASH AND CASH EQUIVALENTS,

               

  Beginning of period

 

62,645

       

61,731

 

CASH AND CASH EQUIVALENTS,

               

  End of period

$

60,206

     

$

44,719

 

SUPPLEMENTAL DISCLOSURES OF
   CASH FLOW INFORMATION:

               

Cash paid during the period for:

               
                 

    Interest

$

1,318

     

$

329

 
                 

    Income taxes

$

1,962

$

1,536

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

8


 

STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012
(Unaudited)

(1)

BASIS OF PRESENTATION OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

The accompanying unaudited condensed consolidated financial statements for each period include the condensed consolidated balance sheets, statements of income, comprehensive income and cash flows of Steiner Leisure Limited (including its subsidiaries, "Steiner Leisure," the "Company," "we" and "our"). All significant intercompany items and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. 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 months ended March 31, 2012 and cash flows for the three months then ended are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2012. 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, 2011 (the "2011 Annual Report"). The December 31, 2011 Condensed Consolidated Balance Sheet included herein was extracted from the December 31, 2011 audited Consolidated Balance Sheet included in our 2011 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, recovery of long-lived assets and goodwill and other intangible assets, determination of deferred income taxes, including valuation allowances, useful lives of definite-lived intangible assets and property and equipment, determination of fair value of assets and liabilities in purchase price allocations, the determination of gift certificate breakage revenue assumptions related to the determination of stock-based compensation and for Ideal Image Center sales and related deferred customer acquisition costs, the determination of the average number of treatments provided.

(2)

ORGANIZATION:

Steiner Leisure Limited, a worldwide provider and innovator in the fields of beauty, wellness and education, was incorporated in the Bahamas as a Bahamian international business company in 1995. In our facilities on cruise ships, at land-based spas, including at resorts and urban hotels, luxury Elemis® day spas, Bliss® premium urban day spas and at our Ideal Image laser hair removal centers, we strive to create a relaxing and therapeutic environment where guests can receive beauty and body treatments of the highest quality. Our services include traditional and alternative massage, body and skin treatment options, fitness, acupuncture, medi-spa treatments and laser hair removal. We also develop and market premium quality beauty products which are sold at our facilities, through e-commerce and third party retail outlets and other channels. We also operate 12 post-secondary schools (comprised of a total of 30 campuses) located in Arizona, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey, Pennsylvania, Texas, Utah, Virginia and Washington.

9


 

(3)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a)

Inventories

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

March 31,

December 31,

2012

2011

Finished goods

$

44,769

$

45,061

Raw materials

7,166

7,587

$

51,935

$

52,648

(b)

Property and Equipment

We review long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated future cash flows, that the carrying amount of these assets may not be fully recoverable. In certain cases, the determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to determine the fair value of the assets under evaluation. As of March 31, 2012, management was not aware of any impairment of long-lived assets. Unexpected changes in cash flows could result in impairment charges in the future.

(c)

Goodwill

Goodwill represents the excess of cost over the fair market value of identifiable net assets acquired. Goodwill and other indefinite-lived intangible assets are subject to at least an annual assessment for impairment by applying a fair value based test. The impairment loss is the amount, if any, by which the implied fair value of goodwill and other indefinite-lived intangible assets are less than the carrying or book value. As of each of January 1, 2012 and 2011, we performed the required annual impairment test for each reporting unit and for indefinite-lived intangible assets and determined there was no impairment. We have six operating segments: (1) Maritime, (2) Land-based spas, (3) Product Distribution, (4) Training, (5) Schools and (6) Laser Hair Removal. The Maritime, Land-Based spas, Product Distribution, Schools and Laser Hair Removal operating segments have associated goodwill and each of them has been determined to be a reporting unit.

(d)

Income Taxes

We file a consolidated tax return for our U.S. subsidiaries other than those domiciled in U.S. territories which file specific returns. In addition, our foreign subsidiaries file income tax returns in their respective countries of incorporation, where required. We utilize the liability method and deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on the changes to the asset or liability from period to period. 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.

10


 

(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 included in the Administrative expenses caption of our Condensed Consolidated Statements of Income were approximately $0.9 million and $1.3 million for the three months ended March 31, 2012 and 2011, respectively. The transaction losses in the Cost of Products caption of our Condensed Consolidated Statements of Income were approximately ($0.9 million) and ($0.6 million) for the three months ended March 31, 2012 and 2011, 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

 
   

March 31,

 
   

2012

     

2011

 
               

Net income

$

14,570

   

$

13,629

 
               

Weighted average shares outstanding used in
   calculating basic earnings per share

 


15,189

     


14,977

 

Dilutive common share equivalents

 

189

     

204

 

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

 


15,378

     


15,181

 

Income per common share:

   Basic

$

0.96

$

0.91

   Diluted

$

0.95

$

0.90

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




--




--

The Company issued 12,000 and 41,000 of its common shares upon the exercise of share options during the three months ended March 31, 2012 and 2011, respectively.

(g)

Stock-Based Compensation

No stock-based compensation was granted during the three months ended March 31, 2012 or 2011.

11


 

(h)

Advertising Costs

Substantially all of our advertising costs are charged to expense as incurred, except costs which result in tangible assets, such as brochures, which are recorded as prepaid expenses and charged to expense as consumed. Advertising costs were approximately $10.0 million and $4.6 million for the three months ended March 31, 2012 and 2011, respectively. Of these amounts, $7.7 million and $2.8 million are included in cost of revenues in the accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, respectively. At March 31, 2012 and December 31, 2011, the amounts of advertising costs included in prepaid expenses were not material.

(i)

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08, "Testing Goodwill for Impairment" ("ASU 2011-08").  This new guidance allows, but does not require, an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for the purpose of determining if detailed quantitative goodwill impairment testing is necessary. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2011.  If an entity determines, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is below the carrying amount, the two-step impairment test would be required. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.

In June 2011, FASB issued ASU 2011-05, "Presentation of Comprehensive Income" ("ASU 2011-05").  This new guidance requires entities to report components of comprehensive income in either a continuous statement of other comprehensive income ("OCI") or two separate but consecutive statements. The ASU does not change the items that must be reported in OCI and does not require any incremental disclosures. We adopted ASU 2011-05 as of January 1, 2012. See our condensed consolidated statements of comprehensive income.

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS)." ASU 2011-04 provides a definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS and provides clarification about the application of existing fair value measurement and disclosure requirements. The ASU also expands certain other disclosure requirements, particularly pertaining to Level 3 fair value measurements.  The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2011 and must be applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations cash flows or related disclosures.

(j)

Fair Value Measurements

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

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

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

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

12


In accordance with US GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis and nonrecurring basis. We have no assets or liabilities that are adjusted to fair value on a recurring basis.  We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2012, or 2011.

Cash and cash equivalents, accounts receivable, accounts receivable - students and accounts payable are reflected in the accompanying Condensed Consolidated Financial Statements at cost, which approximated fair value due to the short maturity of these instruments. 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 March 31, 2012 and December 31, 2011 and approximate the carrying value of such debt because the underlying instruments were at variable rates that are repriced frequently.

(k)

Deferred Financing Costs

Deferred financing costs primarily relate to the costs of obtaining our former and current credit facilities and consist primarily of loan origination and other direct financing costs. These costs are amortized using the effective interest method over the term of the related debt balances. Such amortization is reflected as interest expense in our Consolidated Statements of Income and amounted to $0.4 million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively.

(l)

Shipping and Handling

Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories are sold. Shipping and handling costs associated with the delivery of products is included in selling, general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses amounted to $1.7 million and $1.9 million for the three months ended March 31, 2012 and 2011, respectively.

(m)

Seasonality

Our revenues are generated principally from our cruise ship spa operations. Certain cruise lines, and, as a result, Steiner Leisure, have experienced varying degrees of seasonality as the demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays. Accordingly, generally the third quarter and holiday periods result in the highest revenue yields for us. 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. Operating costs do not fluctuate as significantly on a quarterly basis, except for school admissions and advertising expenses, which are typically higher during the second quarter and third quarter in support of seasonally high enrollment.

(4)

ACQUISITIONS:

Ideal Image

On November 1, 2011, we acquired all the stock of Ideal Image, Development, Inc. ("Ideal Image"). We acquired Ideal Image to expand our services, add an incremental revenue stream and assist in the growth of our products distribution. The purchase price of the acquisition, which was funded from existing cash and common shares and through borrowings under our new credit facility, was $175 million in cash, less cash acquired.

At December 31, 2011, the Company had a receivable from the sellers of $2.3 million related to post-closing working capital adjustments, all of which was collected by March 31, 2012.

13


The following is a summary of the unaudited pro forma historical results, as if Ideal Image had been acquired at January 1, 2011 (in thousands).

Three Months Ended March 31, 2011

Total revenues

$

184,476

Income from operations

$

18,696

Basic income per share

$

0.95

Diluted income per share

$

0.93

These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had this acquisition occurred at January 1, 2011, nor are they necessarily indicative of future operating results.

Cortiva

On November 7, 2011, we acquired all of the assets of Cortiva Group, Inc. ("Cortiva"). We acquired Cortiva to expand our school operations and to assist the future growth of our Schools segment. The purchase price of the acquisition, which was funded from existing cash, was $33 million in cash, less cash acquired.

At December 31, 2011, the Company had a receivable from the sellers of Cortiva of $2.6 million related to a post-closing working capital adjustment, which is included in other current assets. During the three months ended March 31, 2012, we received $1.3 million related to this adjustment. Additional information is necessary to complete the purchase price allocation with respect to the working capital adjustment

(5)

COMMITMENTS AND CONTINGENCIES:

(a)

Legal Proceedings

 

From time to time, in the ordinary course of business, we are a party to various claims and legal proceedings. Currently, other than as described below, 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.

As previously reported, in December 2004, a personal injury action was filed against us in the Circuit Court in Miami-Dade County, Florida by Vennila Amaran as guardian of Preetha Amaran (the "Plaintiff") alleging that the Plaintiff suffered serious injuries in connection with her use of an exercise machine in a spa operated by us.  The Plaintiff is alleging an unspecified amount of damages. In October, 2011, summary judgment in our favor was granted by the court. The Plaintiff has appealed that ruling and the appeal is pending. We are unable to provide an evaluation of the likelihood of an unfavorable outcome on that appeal, or provide an estimate of the amount or range of possible loss in this matter.  Should we ultimately be found liable in this matter, and the amount of any such liability exceeds the limits of our applicable insurance coverage, the amount that we may be required to pay in connection with such liability could have a material adverse effect on our financial condition, results of operations and cash flows.

As previously reported, in April 2011, a Complaint was filed in California Superior Court, Los Angeles Central Division, against Bliss World LLC and related entities (Yvette Ferrari v. Bliss World LLC, et al) on behalf of an employee of Bliss claiming violations of various California requirements relating to the payment of wages. The action was presented as a class action, although the plaintiff has not yet filed a motion for class certification. This matter seeks unspecified damages. Likelihood of an unfavorable outcome resulting in a loss is reasonably possible. Management currently believes that the amount of such liability would not be material to the Company's financial condition, results of operations and cash flows.

14


 

 

(6)

ACCRUED EXPENSES:

Accrued expenses consists of the following (in thousands):

   

March 31,

   

December 31,

   

2012

   

2011

           

Operative commissions

$

4,414

 

$

4,240

Minimum cruise line commissions

 

2,558

   

6,023

Payroll and bonuses

 

7,631

   

11,516

Rent

 

3,359

   

2,954

Other

 

19,781

   

22,544

   Total

$

37,743

$

47,277

Under most of our concession agreements with cruise lines and certain of our leases with land-based spas, we are required to make minimum annual payments, irrespective of the amounts of revenues received from those operations. These minimum annual payments are expensed/accrued over the applicable 12-month period.

(7)

LONG-TERM DEBT:

Long-term debt consists of the following (in thousands):

March 31,

December 31,

2012

2011

Term loan

$

160,875

$

165,000

Revolving loan

--

10,000

Total long-term debt

160,875

175,000

Less: Current portion

18,563

26,500

Long-term debt, net of current portion

$

142,312

$

148,500

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

15


Interest on borrowings under the Credit Facility accrues at either a Base Rate, an Adjusted LIBO Rate or an Index Rate, at Borrower's election, plus, in each case, an applicable margin.  In the case of Adjusted LIBO Rate Loans, the applicable margin ranges from 1.75% - 2.75% per annum, based upon the Company's and its subsidiaries' financial performance.  Unpaid principal, together with accrued and unpaid interest, is due on the maturity date, November 1, 2016. Interest on all outstanding Adjusted LIBO Rate Loans is payable on the last day of each interest period applicable thereto, and, in the case of any Adjusted LIBO Rate Loans having an interest period in excess of three (3) months or ninety (90) days, respectively, on each day which occurs every three (3) months or ninety (90) days, as the case may be, after the initial date of such interest period, and on the Revolving Commitment Termination Date (November 1, 2016, or earlier, pursuant to certain events, as described in the Credit Agreement) or the maturity date, as the case may be.  Interest on each Base Rate Loan and LIBOR Index Rate Loan is payable monthly in arrears on the last day of each calendar month and on the maturity date of such Loan, and on the Revolving Commitment Termination Date.  Interest on any loan which is converted from one interest rate to another interest rate or which is repaid or prepaid is payable on the date of the conversion or on the date of any such repayment or prepayment (on the amount repaid or prepaid) of such loan. Principal under the Term Facility is payable in quarterly installments beginning March 31, 2012. At March 31, 2012, our borrowing rate was 3.74%.

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

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

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

(8)

SHAREHOLDERS' EQUITY:

In February 2008, 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 plan. During the three months ended March 31, 2012 and 2011, respectively, we purchased approximately 16,000 and 20,000 shares, with a value of approximately $0.8 million and $0.9 million, respectively. Those shares purchased 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.

(9)

SEGMENT INFORMATION:

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

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

16


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

   

Three Months Ended

 
   

March 31,

 
   

2012

   

2011

 

Revenues:

           

   Spa Operations

$

127,700

 

$

122,027

 

   Products

 

35,536

   

35,031

 

   Schools

 

21,130

   

17,411

 

   Laser Hair Removal

 

19,973

   

--

 

   Other

 

(5,806

)

 

(6,470

)

      Total

$

198,533

 

$

167,999

 

Income from Operations:

           

   Spa Operations

$

10,876

 

$

10,636

 

   Products

 

1,821

   

1,402

 

   Schools

 

2,259

   

4,085

 

   Laser Hair Removal

 

2,613

   

--

 

   Other

 

159

   

258

 

      Total

$

17,728

$

16,381

   

March 31,

 

December 31,

 
   

2012

     

2011

 

Identifiable Assets:

             

   Spa Operations

$

218,758

   

$

221,524

 

   Products

 

178,920

     

176,703

 

   Schools

119,620

131,179

   Laser Hair Removal

270,922

263,429

   Other

(69,224

)

(80,406

)

      Total

$

718,996

$

712,429

Included in Spa Operations, Products, Schools and Laser Hair Removal is goodwill of $51.0 million, $23.7 million, $57.2 million and $195.1 million, respectively, as of each of March 31, 2012 and December 31, 2011.

17


 

(10)

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

 
   

March 31,

 
   

2012

   

2011

 

Revenues:

           

  United States

$

73,338

 

$

49,433

 

  United Kingdom

 

14,980

   

14,147

 

  Not connected to a country

 

100,719

   

95,051

 

  Other

 

9,496

   

9,368

 

    Total

$

198,533

$

167,999

   

March 31,

   

December 31,

 
   

2012

   

2011

 

Property and Equipment, net:

           

   United States

$

60,244

 

$

60,194

 

   United Kingdom

6,708

5,951

   Not connected to a country

1,417

1,264

   Other

19,097

19,811

      Total

$

87,466

$

87,220

(11)

SUBSEQUENT EVENT:

In April 2012, we purchased land and building where we have administrative offices. The purchase price was $7.5 million and was paid from our existing cash. We anticipate utilizing most of the space in the building for our operations.

18


 

Item 2.

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


Overview

Steiner Leisure Limited is a leading worldwide provider of spa services.  We operate our businesses through four reportable segments: Spa Operations, Products, Schools and Laser Hair Removal.

On November 1, 2011, we acquired all of the issued and outstanding stock of Ideal Image. Ideal Image is a leader in the growing consumer healthcare category of laser hair removal. Ideal Image is subject to regulation in the states in which its facilities are located, related to, among other things, corporate entities such as Ideal Image "practicing medicine" and to the provision of the laser hair removal services. The purchase price for this transaction was $175 million payable in cash at closing, less cash acquired, and was paid from existing cash and common shares and through borrowings under our new credit facility.

On November 7, 2011, we acquired the assets of Cortiva. Cortiva operates seven post-secondary massage therapy schools from 12 campuses located in Arizona, Florida, Illinois, Massachusetts, New Jersey, Pennsylvania and Washington. The purchase price for this transaction was $33 million payable in cash at closing, less cash acquired. The purchase price was paid from existing cash.

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

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

Through our Schools operating segment, we own and operate 12 post-secondary schools (comprised of a total of 30 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 and La Thérapie products. We offer full-time programs as well as part-time programs for students who work or who otherwise desire to take classes outside traditional education hours. Revenues from our massage and beauty schools, which consist almost entirely of student tuition payments, are derived to a significant extent from the proceeds of loans issued under the Title IV Programs, authorized by Title IV of the Higher Education Act of 1965 (the "HEA") and administered by the U.S. Department of Education (the "DOE"). We must comply with a number of regulatory requirements in order to maintain the eligibility of our students and prospective students for loans under these programs. New Rules of the DOE, effective July 1, 2011, increased our regulatory compliance obligations, and have adversely affected our Schools operating segment's enrollments and are anticipated to continue to adversely affect our enrollment and our results of operations, although the full extent of the effect on the future business of our Schools segment cannot yet be determined.

Our revenues are generated principally from our cruise ship operations. Accordingly, our success and our growth are dependent to a significant extent on the success and growth of the travel and leisure industry in general, and on the cruise industry in particular. Our hotel land-based spas are dependent on the hospitality industry for their success. These industries are subject to significant risks that could affect our results of operations.

19


The success of the cruise and hospitality industries, as well as our business, is impacted by economic conditions. The economic slowdown experienced in recent years in the United States and other world economies have created a challenging environment for the cruise and hospitality industries and our business, including our retail beauty products sales. While economic conditions showed some improvement in 2011, beginning in 2011 and continuing into 2012, a number of European countries have experienced adverse economic conditions related to unpaid debt obligations of certain of those countries. The impact on consumers of periodic high fuel costs which appeared again in 2011 and which has continued into 2012 has added to this turmoil.

A recurrence or worsening of the more severe aspects of the recently experienced economic slowdown or the continuation of the increase in fuel prices experienced during 2011 and early 2012 could have a material adverse effect on our services and product sales for the balance of 2012 and thereafter during any such recurrence, continuation or worsening.

The cruise industry also is subject to risks specific to that industry. Among other things, the highly publicized January 2012 accident involving the Costa Concordia adversely affected cruise ship bookings in early 2012.

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

A significant factor in our financial results is the amounts we are required to pay under our agreements with the cruise lines and land-based venues we serve. In general, we have experienced increases in these payments as a percentage of revenues upon entering into new agreements with cruise lines.

Historically, a significant portion of our operations have been conducted on ships through entities that are not subject to income taxation in the United States or other jurisdictions. To the extent that our non-shipboard income continues to increase as a percentage of our overall income, the percentage of our overall income that will be subject to tax would continue to increase.

An increasing amount of revenues have come from our sales of products through third party retail outlets, our web sites, mail order and other channels. However, as our product sales grow, continued increases in the rate of such growth are more difficult to attain.

In addition, an increasing percentage of cruise passengers who use our services are repeat customers of ours. These repeat customers are less likely to purchase our products than new customers.

Key Performance Indicators

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

Schools. With respect to our massage and beauty schools, we measure performance primarily by the number of new student enrollments and the rate of retention of our students. A new student enrollment occurs each time a new student commences classes at one of our schools.

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

Laser Hair Removal. With respect to our laser hair removal centers, we measure performance primarily through average weekly revenue and new customer acquisitions.

20


Growth

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

Critical Accounting Policies

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

Our critical accounting policies are included in our 2011 Annual Report. We believe that there have been no significant changes during the quarter ended March 31, 2012 to the critical accounting policies disclosed in our 2011 Annual Report.

Recent Accounting Pronouncements

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

21


 

Results of Operations

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

   

Three Months Ended

 
   

March 31,

 
   

2012

   

2011

 

Revenues:

           

  Services

 

71.2

%

 

67.3

%

  Products

 

28.8

   

32.7

 

    Total revenues

 

100.0

   

100.0

 

Cost of revenues:

           

  Cost of services

 

56.6

   

54.3

 

  Cost of products

 

20.5

   

22.9

 

    Total cost of revenues

 

77.1

   

77.2

 

    Gross profit

 

22.9

   

22.8

 

Operating expenses:

           

  Administrative

 

5.4

   

4.6

 

  Salary and payroll taxes

 

8.6

   

8.4

 

    Total operating expenses

 

14.0

   

13.0

 

    Income from operations

8.9

9.8

Other income (expense), net:

           

  Interest expense

 

(0.8

)

 

(0.7

)

  Other income

 

0.1

   

--

 

    Total other income (expense), net

 

(0.7

)

 

(0.7

)

    Income before provision for
    income taxes

 


8.2

   


9.1

 

Provision for income taxes

 

0.9

   

1.0

 

Net income

7.3

%

8.1

%

 

 

22


Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

REVENUES

Revenues of our reportable segments for the three months ended March 31, 2012 and 2011, respectively, were as follows (in thousands):

   

Three Months Ended
March 31,

 


% Change

Revenue:

 

2012

   

2011

   

Spa Operations

$

127,700

 

$

122,027

 

4.6%

Products

 

35,536

   

35,031

 

1.4%

Schools

 

21,130

   

17,411

 

21.4%

Laser Hair Removal

 

19,973

   

--

 

N/A

Other

 

(5,806

)

 

(6,470

)

N/A

   Total

$

198,533

$

167,999

18.2%

Total revenues increased approximately 18.2%, or $30.5 million, to $198.5 million in the first quarter of 2012 from $168.0 million in the first quarter of 2011. Of this increase, $28.4 million was attributable to an increase in services revenues and $2.1 million was attributable to a increase in products revenues.

Spa Operations Revenues. Spa Operations segment revenues increased approximately 4.6%, or $5.7 million, to $127.7 million in the first quarter of 2012 from $122.0 million in the first quarter of 2011. Average weekly revenues for our land-based spas increased 0.6% to $30,801 in the first quarter of 2012 from $30,615 in the first quarter of 2011. We had an average of 2,646 shipboard staff members in service in the first quarter of 2012, compared to an average of 2,539 shipboard staff members in service in the first quarter of 2011. Revenues per shipboard staff per day increased by 0.5% to $418 in the first quarter of 2012 from $416 in the first quarter of 2011. Average weekly revenues for our shipboard spas increased by 4.9% to $52,267 in the first quarter of 2012 from $49,806 in the first quarter of 2011. The increases in revenues and the key performance indicators referenced above were primarily attributable to strengthening of the economy worldwide, resulting in increased spending by consumers at our spas.

Products Revenues. Product segment revenues increased approximately 1.4% or $0.5 million to $35.5 million in the first quarter of 2012 from $35.0 million in the first quarter of 2011. This increase is primarily attributable to a strengthening of the economy worldwide, resulting in increased spending by consumers on our products.

Schools Revenues. Schools segment revenues increased approximately 21.4%, or $3.7 million to $21.1 million in the first quarter of 2012 from $17.4 million in the first quarter of 2011. This increase in revenues was primarily attributable to the acquisition of Cortiva. Excluding Cortiva, Schools segment revenues decreased due to decreased enrollments.

Laser Hair Removal Revenues. The increase in services revenues was attributable to the acquisition of Ideal Image on November 1, 2011.

COST OF SERVICES

Cost of services increased $21.0 million to $112.3 million in the first quarter of 2012 from $91.2 million in the first quarter of 2011. Cost of services as a percentage of services revenues decreased to 79.4% in the first quarter of 2012 from 80.7% in the first quarter of 2011. This decrease was primarily due to the positive impact of Laser Hair Removal activities, which was partially offset by the weak performance of our Schools segment.

COST OF PRODUCTS

Cost of products increased $2.1 million to $40.6 million in the first quarter of 2012 from $38.5 million in the first quarter of 2011. Cost of products as a percentage of products revenue increased to 71.1% in the first quarter of 2012 from 70.0% in the first quarter of 2011. These increases were primarily attributed to a difference in the mix of products that were sold onboard the ships in the first quarter of 2012 compared to the first quarter of 2011.

23


OPERATING EXPENSES

Operating expenses increased $6.0 million to $27.9 million in the first quarter of 2012 from $21.9 million in the first quarter of 2011. Operating expenses as a percentage of revenues increased to 14.0% in the first quarter of 2012 from 13.0% in the first quarter of 2011. This increase is primarily attributed to the inclusion of Ideal Image and Cortiva this quarter and a foreign exchange gain of approximately $700,000 in the prior quarter.

INCOME FROM OPERATIONS

Income from operations of our reportable segments for the three months ended March 31, 2012 and 2011, respectively, was as follows (in thousands):

   

For the Three Months Ended
March 31,

 


% Change

Income from Operations:

 

2012

 

2011

   

Spa Operations

$

10,876

$

10,636

 

2.3%

Products

1,821

1,402

29.9%

Schools

 

2,259

 

4,085

 

(44.7%)

Laser Hair Removal

 

2,613

 

--

 

N/A

Other

 

159

 

258

 

N/A

   Total

$

17,728

$

16,381

8.2%

The increase in operating income in the Spa Operations and Products segments was primarily attributable to a strengthening of the economy worldwide, resulting in increased consumer spending on our products and services. The decrease in the operating income in the Schools segment was primarily attributed to higher operating costs attributable to that segment.

OTHER INCOME (EXPENSE)

Other income (expense) decreased due to increased interest expense as a result of the debt incurred in connection with the acquisition of Ideal Image during the fourth quarter of 2011.

PROVISION FOR INCOME TAXES

Provision for income taxes increased $0.1 million to $1.8 million in the first quarter of 2012 from $1.7 million in the first quarter of 2011. Provision for income taxes reflected an overall effective rate of 11.1% in both the first quarter of 2012 and in the first quarter of 2011.

24


Liquidity and Capital Resources

Sources and Uses of Cash

During the three months ended March 31, 2012, net cash provided by operating activities was approximately $13.1 million, compared with $12.3 million for the three months ended March 31, 2011. This increase was attributable to an increase in net income and changes in working capital.

During the three months ended March 31, 2012, cash used in investing activities was $0.7 million compared with $3.8 million for the three months ended March 31, 2011. This decrease was primarily attributable to the receipt of $3.6 million related to the post-closing working capital adjustments related to acquisitions.

During the three months ended March 31, 2012, cash used in financing activities was $14.6 million compared with $24.9 million for the three months ended March 31, 2011. This decrease in cash used in financing activities was primarily attributable to the pay-off of our term loan during the three months ended March 31, 2011.

Steiner Leisure had working capital of approximately $19.6 million at March 31, 2012, compared to working capital of approximately $7.3 million at December 31, 2011.

In February 2008, 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 plan. During the three months ended March 31, 2012 and 2011, respectively, we purchased approximately 16,000 and 20,000 shares, with a value of approximately $0.8 million and $0.9 million, respectively. Those shares purchased 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.

In April 2012, we purchased the land and building where we have administrative offices. The purchase price was $7.5 million and was paid from our existing cash. We anticipate utilizing most of the space in the building for our operations.

25


Financing Activities

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

Interest on borrowings under the Credit Facility accrues at either a base rate, an Adjusted LIBO Rate or an Index Rate, at Borrower's election, plus, in each case, an applicable margin.  In the case of Adjusted LIBO Rate Loans, the applicable margin ranges from 1.75% - 2.75% per annum, based upon the Company's and its subsidiaries' financial performance.  Unpaid principal, together with accrued and unpaid interest, is due on the maturity date, November 1, 2016. Interest on all outstanding Adjusted LIBO Rate loans is payable on the last day of each interest period applicable thereto, and, in the case of any Adjusted LIBO Rate loans having an interest period in excess of three (3) months or ninety (90) days, respectively, on each day which occurs every three (3) months or ninety (90) days, as the case may be, after the initial date of such interest period, and on the Revolving Commitment Termination Date (November 1, 2016, or earlier, pursuant to certain events, as described in the credit agreement) or the maturity date, as the case may be.  Interest on each base rate loan and LIBOR Index Rate Loan is payable monthly in arrears on the last day of each calendar month and on the maturity date of such Loan, and on the Revolving Commitment Termination Date.  Interest on any loan which is converted from one interest rate to another interest rate or which is repaid or prepaid is payable on the date of the conversion or on the date of any such repayment or prepayment (on the amount repaid or prepaid) of such loan. Principal under the Term Facility is payable in quarterly installments which began March 31, 2012. At March 31, 2012, our borrowing rate was 3.74%.

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

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

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Inflation and Economic Conditions

We do not believe that inflation has had a material adverse effect on our revenues or results of operations. However, public demand for activities, including cruises, is influenced by general economic conditions, including inflation. Periods of economic softness, such as has been experienced in recent years, particularly in North America where a substantial number of cruise passengers reside, could have a material adverse effect on the cruise industry and hospitality industry upon which we are dependent, and has had such an effect in recent years. Such a slowdown has adversely affected our results of operations and financial condition in recent years, though less so in 2011 and the first quarter of 2012. Continuance of the more severe aspects of the recent adverse economic conditions, as well as continued fuel price increases, in North America and elsewhere could have a material adverse effect on our business, results of operations and financial condition during the period of such recurrence. Continued weakness in the U.S. Dollar compared to the U.K. Pound Sterling and the Euro also could have a material adverse effect on our business, results of operations and financial condition.

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Cautionary Statement Regarding Forward-Looking Statements

From time to time, including in this report, 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 have tried, 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; and
    • the anticipated opening dates of new spas, schools and Ideal Image laser hair removal centers.

Factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements include the following:

    • our dependence on cruise line concession agreements of specified terms that are, in some cases, terminable by cruise lines with limited or no advance notice under certain circumstances;
    • our dependence on the cruise industry and the hospitality industry and our being subject to the risks of those industries, including operation of facilities in regions with histories of economic and/or political instability, or which are susceptible to significant adverse weather conditions, and the risk and adverse effect of maritime accidents or disasters (such as the Costa Concordia incident in early 2012), passenger disappearances and piracy or terrorist attacks at sea or elsewhere and the adverse publicity associated with the foregoing;
    • increases in our payment obligations in connection with renewals of expiring cruise line agreements and land-based spa agreements, or the securing of new agreements;
    • the economic slowdown experienced in recent years, including a significant reduction in consumer spending, which improved in 2010 and the first quarter of 2011, and related disruptions to capital and credit markets in North America and elsewhere that have reduced the number of customers on cruise ships and at land-based venues and have reduced consumer demand for our services and our products;
    • increasing numbers of cruise line passengers being sourced from outside of North America;
    • the continuing growth of the cruise lines' capacity in recent years and resulting potential need by the cruise lines to offer discounted fares to guests, resulting in potentially adverse effects on us due to reduced spending on our services and our products;
    • our dependence, with respect to our land-based spas, on airline service to our venue locations, which is beyond our control and subject to change;

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    • increasing numbers of days during cruises when ships are in port, which results in lower revenues to us;
    • reductions in revenues during periods of cruise ship dry-dockings and major renovations or closures of land-based venues where we operate spas;
    • our dependence on a limited number of companies in the cruise industry and further consolidation of companies in the cruise industry;
    • our dependence on the land-based hospitality industry and the risks to which that industry is subject;
    • the effects of outbreaks of illnesses or the perceived risk of such outbreaks on our land-based spa operations in Asia and in other locations, on our cruise ship operations and on travel generally;
    • major renovations or changes in room rates, guest demographics or guest occupancy at the land-based venues we serve that could adversely affect the volume of our business at land-based spas;
    • changes in or disruptions to airline service to cruise embarkation and disembarkation locations, resulting in adverse effects on the ability of cruise passengers to reach their ports or cancellation of cruises;
    • our dependence, with respect to our land-based spas, on airline service to our venue locations, which is beyond our control and subject to change;
    • the risk that we will be unable to successfully integrate or profitably operate Bliss Inc., Onboard, Ideal Image, Cortiva or other operations that we may acquire in the future, with our then existing businesses;
    • our dependence on a limited number of product manufacturers;
    • our dependence on our distribution facilities and on the continued viability of our third party product distribution channels;
    • the continuing effect on the travel and leisure segment of the international political climate, terrorist attacks and armed hostilities in various regions in recent years and the threat of future terrorist attacks and armed hostilities;
    • our obligation to make minimum payments to certain cruise lines and owners of the locations of our land-based spas, irrespective of the revenues received by us from customers;
    • our dependence on the continued viability of the cruise lines we serve and the land-based venues where we operate our spas;
    • delays in new ship introductions, a reduction in new, large spa ship introductions and unscheduled withdrawals from service of ships we serve;
    • increased fuel costs contributing to the economic weakness and increasing our costs of product delivery and employee travel expenses;
    • our dependence for success on our ability to recruit and retain qualified personnel;
    • possible labor unrest or changes in economics based on collective bargaining activities;
    • the licensing requirements of the various jurisdictions where we have operations, which could affect our ability to open or adequately staff new venues on our timely basis;
    • changes in the taxation of our Bahamas subsidiaries and increased amounts of our income being subject to taxation;
    • competitive conditions in each of our business segments, including competition from cruise lines and land-based venues that may desire to provide spa services themselves and competition from third party providers of shipboard and land-based spa services;
    • risks relating to our non-United States operations;
    • the risk of severe weather conditions, including, but not limited to, hurricanes, earthquakes and tsunamis, disrupting our spa operations;

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    • the ability of the land-based venue operators under certain of our land-based spa agreements to terminate those agreements under certain circumstances;
    • insufficiency of resources precluding our taking advantage of new business opportunities;
    • our potential need to seek additional financing and the risk that such financing may not be available on satisfactory terms or at all;
    • uncertainties beyond our control that could affect our ability to timely and cost-effectively construct and open new land-based spas, schools and Ideal Image laser hair removal centers;
    • risks relating to the performance of our massage and beauty schools which are, among other things, subject to significant government regulation, the need for their programs to keep pace with industry demands and the possibility that government-backed student loans will not be available to our students;
    • risks relating to the operation of our schools, including student enrollment and retention and faculty retention;
    • the risk that increases in interest rates could result in corresponding increases in cost to certain of our students and to students' ability to timely repay loans, resulting in a negative impact on our schools' ability to participate in Title IV programs and a reduction in the number of students attending our schools;
    • the risk, with respect to certain of our schools' campuses that experience severe weather conditions from time to time, that such weather conditions could result in closings of certain of those campuses for days at a time;
    • the risk of a protracted economic slowdown on our schools;
    • obligations under, and possible changes in, laws and government regulations applicable to us and the industries we serve, including the New DOE Regulations that could significantly affect our schools' operations, the risks related to the regulated nature of our Ideal Image laser hair removal operations, government regulation of our products and the claims we make about the efficacy of our products, proposed new rules with respect to shipboard employees, increased security requirements for ships we serve that call on United States ports, as well as possible challenges to our ability to obtain work permits for employees at our land-based spas;
    • the adverse effect on our Schools segment of the DOE regulations that went into effect on July 1, 2011;
    • the risks related to the regulated nature of our Ideal Image laser hair removal operations;
    • the special regulatory and operational risks related to the franchised Ideal Image operations;
    • product liability or other claims against us by customers of our products or services;
    • the risk that our insurance coverage may become unavailable to us on commercially reasonable terms or may be insufficient to cover us in the event of a certain loss, or that high visibility claims could result in adverse publicity and thus adversely affect our business;
    • the risk that Ideal Image's customers will be unable to secure financing from a third party financial institution to pay for treatments and/or fail to fulfill some or all of their payment obligations to Ideal Image under applicable deferred payment plans;
    • the risks to our cash investments resulting from the current financial environment;
    • restrictions imposed on us as a result of our credit facility;
    • our need to find additional sources of revenues;
    • the risk that announced retail rollouts of our product sales at specified venues will not occur;
    • our need to expand our services to keep up with consumer demands and to grow our business and the risk of increased expenses and liabilities potentially associated with such expansion;
    • our ability to successfully protect our trademarks or obtain new trademarks;
    • foreign currency exchange rate risk;

29


    • risks relating to interruptions in service of, and unauthorized access to, our computer networks;
    • the risk that changes in privacy law could adversely affect our ability to market our services and products effectively; and
    • the risk of fluctuations in our share price, including as a result of matters outside of our control.

These risks and other risks are detailed in our Annual Report on Form 10-K for the year ended December 31, 2011 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.

30


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.  Controls and Procedures

We carried out an evaluation, under the supervision, and with the participation, of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.

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 March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

31


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. Other than as described below, there have been no material changes with respect to legal proceedings previously reported in our annual report on Form 10-K for the year ended December 31, 2011.

Item 1A.

Risk Factors

There were no material changes during the first quarter of 2012 in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

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 March 31, 2012:

 






Total Number of Shares Purchased
(1)

 







Average Price Paid per Share
(2)

 


Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)

January 1, 2011 through January 31, 2012

--

$

--

--

$

39,385,365

February 1, 2011 through February 29, 2012

16,145

50.04

--

39,385,365

March 1, 2011 through March 31, 2012

--

--

--

39,385,365

Total

16,145

$

50.04

--

$

39,385,365

 

 

 

 

 

 

 

 

(1)  The shares indicated as purchased in March 2012 represent shares surrendered by our employees in connection with the vesting of restricted share units ("Vesting Repurchases"). We used these surrendered shares to satisfy payment of employee federal income tax withholding obligations arising upon the vesting of such restricted share units. During the first quarter, no shares were purchased through the Company's only repurchase plan, which was approved on February 27, 2008 (the "Repurchase Plan") and replaced the then-existing plan. The Repurchase Plan authorizes the purchase of up to $100 million of our common shares in the open market or other transactions, of which $60,614,635 of our common shares have been purchased to date.

(2)  Includes commissions paid.

32


 

Item 6.

Exhibits

   

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

   

101.INS**

XBRL Instance Document.

101.SCH**

XBRL Taxonomy Extension Schema Document.

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document.

   

*

Filed herewith.

**

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

33


SIGNATURES

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

Dated: May 7, 2012

STEINER LEISURE LIMITED

 

(Registrant)

   
   
 
/s/ Clive E. Warshaw
 

Clive E. Warshaw
Chairman of the Board

   
   
 
/s/ Leonard I. Fluxman
 

Leonard I. Fluxman
President and Chief Executive Officer
(principal executive officer)

   
   

/s/ Robert H. Lazar
 

Robert H. Lazar
Chief Accounting Officer
(principal accounting officer)

   
   
   
   
   
   

34


 

Exhibit Index

Exhibit Number

Description

   

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

   

101.INS**

XBRL Instance Document.

101.SCH**

XBRL Taxonomy Extension Schema Document.

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document.

   

*

Filed herewith.

**

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

 

35