Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

 
| **x** | **QUARTERLY REPORT PURSUANT  TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------------------------|

 

**For the quarter ended December 31, 2008**

** **

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT  TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom               to               **

** **

**Commission File Number:  000-51468**

 

----

 

**MWIVETERINARY SUPPLY, INC.**

(Exact name of Registrantas specified in its Charter)

 

----

 
| **Delaware**                                               | ** ** | **02-0620757**                           |
|------------------------------------------------------------|------------|------------------------------------------|
| (State of  Incorporation)                                  |       | (I.R.S. Employer  Identification Number) |
|                                                       |       |                                     |
| **651 S.  Stratford Drive, Suite 100**                | ** ** | ** **                               |
| **Meridian,  ID**                                          | ** ** | **83642**                                |
| (Address of  principal executive offices)                  |       | (Zip Code)                               |
|                                                       |       |                                     |
| **(800)  824-3703**                                        |
| (Registrant’s  telephone number, including area code) |

 

----

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes x No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o

 

Non-accelerated filer    o (Do not check if a smaller reporting  company) |   | Accelerated filer  x

 

Smaller reporting company   o |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes o No x

 

The number of shares ofthe Registrant’s common stock, $0.01 par value, outstanding as of January 30,2009 was 12,115,375.

 

 

 

----

Table of Contents

 

**MWIVETERINARY SUPPLY, INC.**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                   | ** ** | ** ** |
|-------------------|--------------------------------------------------------------------------------------------------------------|------------|------------|
|              |                                                                                                         |       |       |
| **Item 1.**       | **Financial Statements (Unaudited)**                                                                         | ** ** | ** ** |
|              | Condensed Consolidated  Statements of Income for the three months ended December 31, 2008 and  2007     |       | 3          |
|              |                                                                                                         |       |       |
|              | Condensed Consolidated  Balance Sheets as of December 31, 2008 and September 30, 2008              |       | 4          |
|              |                                                                                                         |       |       |
|              | Condensed Consolidated  Statements of Cash Flows for the three months ended December 31, 2008  and 2007 |       | 5          |
|              |                                                                                                         |       |       |
|              | Notes to  Condensed Consolidated Financial Statements                                                        |       | 6          |
|              |                                                                                                         |       |       |
|              | Report of  Independent Registered Public Accounting Firm                                                     |       | 12         |
|              |                                                                                                         |       |       |
| **Item 2.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**              | ** ** | 13         |
|              |                                                                                                         |       |       |
| **Item 3.**       | **Quantitative  and Qualitative Disclosures About Market Risk**                                              |       | 18         |
|              |                                                                                                         |       |       |
| **Item 4.**       | **Controls and  Procedures**                                                                                 | ** ** | 18         |
|              |                                                                                                         |       |       |
| **PART II.** | **OTHER INFORMATION**                                                                                        | ** ** | ** ** |
|              |                                                                                                         |       |       |
| ** **        | **Cautionary Statement**                                                                                     | ** ** | 19         |
|              |                                                                                                         |       |       |
| **Item 1.**       | **Legal Proceedings**                                                                                        | ** ** | 20         |
| ** **        | ** **                                                                                                   | ** ** | ** ** |
| **Item 1A.**      | **Risk Factors**                                                                                             | ** ** | 20         |
| ** **        | ** **                                                                                                   | ** ** | ** ** |
| **Item 2.**       | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                             |       | 21         |
|              |                                                                                                         |       |       |
| **Item 3.**       | **Defaults  Upon Senior Securities**                                                                         |       | 21         |
|              |                                                                                                         |       |       |
| **Item 4.**       | **Submission  of Matters to a Vote of Security Holders**                                                     |       | 21         |
|              |                                                                                                         |       |       |
| **Item 5.**       | **Other Information**                                                                                        |       | 21         |
|              |                                                                                                         |       |       |
| **Item 6.**       | **Exhibits**                                                                                                 |       | 22         |

 

2

----

Table of Contents

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOMEDollars and shares in thousands, except per share data(unaudited)**

 
| ** **                                    | ** ** | **Three months ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                 | ** ** | **2007** | ** ** |
| Revenues:                                     |       |                                     |       |   |   |
| Product sales                                 |       | $                                        | 216,616    |   | $ | 189,303 |   |
| Product sales to  related party               |       | 12,330                                   |       | 11,117 |   |
| Commissions                                   |       | 2,873                                    |       | 2,941 |   |
| Total revenues                                |       | 231,819                                  |       | 203,361 |   |
|                                          |       |                                     |       |   |   |
| Cost of product  sales                        |       | 198,164                                  |       | 173,576 |   |
| Gross profit                                  |       | 33,655                                   |       | 29,785 |   |
|                                          |       |                                     |       |   |   |
| Selling, general  and administrative expenses |       | 23,133                                   |       | 21,303 |   |
| Depreciation and  amortization                |       | 835                                      |       | 747 |   |
| Operating income                              |       | 9,687                                    |       | 7,735 |   |
|                                          |       |                                     |       |   |   |
| Other income  (expense):                      |       |                                     |       |   |   |
| Interest expense                              |       | (64                                      | )          | (51 | ) |
| Earnings of  equity method investees          |       | 66                                       |       | 51 |   |
| Other                                         |       | 149                                      |       | 235 |   |
| Total other  income (expense), net            |       | 151                                      |       | 235 |   |
|                                          |       |                                     |       |   |   |
| Income before  taxes                          |       | 9,838                                    |       | 7,970 |   |
| Income tax  expense                           |       | (3,889                                   | )          | (3,270 | ) |
|                                          |       |                                     |       |   |   |
| Net income                                    |       | $                                        | 5,949      |   | $ | 4,700 |   |
|                                          |       |                                     |       |   |   |
| Earnings per  common share:                   |       |                                     |       |   |   |
| Basic                                         |       | $                                        | 0.49       |   | $ | 0.39 |   |
| Diluted                                       |       | $                                        | 0.48       |   | $ | 0.38 |   |
|                                          |       |                                     |       |   |   |
| Weighted average  common shares outstanding:  |       |                                     |       |   |   |
| Basic                                         |       | 12,071                                   |       | 12,046 |   |
| Diluted                                       |       | 12,295                                   |       | 12,296 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

3

----

Table of Contents

 

**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED BALANCE SHEETSDollars and shares in thousands, except per share data  (unaudited)**

 
| ** **                                                                                                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| **Assets**                                                                                                       | ** ** | ** **            | ** ** | ** **             | ** ** |
| ** **                                                                                                       | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current Assets:                                                                                                  |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                       |       | $                     | 786        |                   | $          | 3,419 |   |
| Receivables, net                                                                                                 |       | 138,443               |       | 128,564                |       |
| Inventories                                                                                                      |       | 134,193               |       | 118,403                |       |
| Prepaid expenses  and other current assets                                                                       |       | 2,828                 |       | 3,168                  |       |
| Deferred income  taxes                                                                                           |       | 1,165                 |       | 809                    |       |
| Total current  assets                                                                                            |       | 277,415               |       | 254,363                |       |
|                                                                                                             |       |                  |       |                   |       |
| Property and  equipment, net                                                                                     |       | 9,743                 |       | 9,687                  |       |
| Goodwill                                                                                                         |       | 37,610                |       | 37,727                 |       |
| Intangibles, net                                                                                                 |       | 10,816                |       | 10,945                 |       |
| Other assets,  net                                                                                               |       | 2,113                 |       | 2,083                  |       |
| Total assets                                                                                                     |       | $                     | 337,697    |                   | $          | 314,805 |   |
|                                                                                                             |       |                  |       |                   |       |
| **Liabilities  And Stockholders’ Equity**                                                                   | ** ** | ** **            | ** ** | ** **             | ** ** |
| ** **                                                                                                       | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current  Liabilities:                                                                                            |       |                  |       |                   |       |
| Line-of-credit                                                                                                   |       | $                     | —     |                   | $          | — |   |
| Accounts payable                                                                                                 |       | 137,669               |       | 123,003                |       |
| Accrued expenses                                                                                                 |       | 11,487                |       | 9,854                  |       |
| Current  maturities of long-term debt                                                                            |       | 97                    |       | 97                     |       |
| Total current  liabilities                                                                                       |       | 149,253               |       | 132,954                |       |
|                                                                                                             |       |                  |       |                   |       |
| Deferred income  taxes                                                                                           |       | 1,082                 |       | 751                    |       |
|                                                                                                             |       |                  |       |                   |       |
| Long-term debt                                                                                                   |       | 97                    |       | 97                     |       |
|                                                                                                             |       |                  |       |                   |       |
| Commitments and  contingencies                                                                                   |       |                  |       |                   |       |
|                                                                                                             |       |                  |       |                   |       |
| **Stockholders’  Equity**                                                                                   | ** ** | ** **            | ** ** | ** **             | ** ** |
| Common stock  $0.01 par value, 40,000 authorized; 12,116 and 12,098 shares issued and  outstanding, respectively |       | 121                   |       | 121                    |       |
| Additional paid  in capital                                                                                      |       | 122,632               |       | 122,319                |       |
| Retained  earnings                                                                                               |       | 64,512                |       | 58,563                 |       |
| Total  stockholders’ equity                                                                                 |       | 187,265               |       | 181,003                |       |
| Total  liabilities and stockholders’ equity                                                                 |       | $                     | 337,697    |                   | $          | 314,805 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

4

----

Table of Contents

 

**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSDollars in thousands (unaudited)**

 
| ** **                                                                         | ** ** | **Three months ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                 | ** ** | **2007** | ** ** |
| **Cash  Flows From Operating Activities:**                                         | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                        | 5,949      |   | $ | 4,700 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                     |       |   |   |
| Depreciation and  amortization                                                     |       | 838                                      |       | 750 |   |
| Amortization of  debt issuance costs                                               |       | 11                                       |       | 11 |   |
| Stock-based  compensation                                                          |       | 54                                       |       | 17 |   |
| Deferred income  taxes                                                             |       | (25                                      | )          | (259 | ) |
| Earnings of  equity method investees                                               |       | (66                                      | )          | (51 | ) |
| Loss on disposal  of property and equipment                                        |       | 29                                       |       | — |   |
| Tax benefit of  common stock options                                               |       | (223                                     | )          | (112 | ) |
| Changes in  operating assets and liabilities (net of effects of acquisitions):     |       |                                     |       |   |   |
| Receivables                                                                        |       | (9,910                                   | )          | (5,177 | ) |
| Inventories                                                                        |       | (15,790                                  | )          | (19,915 | ) |
| Prepaid expenses  and other current assets                                         |       | 340                                      |       | 542 |   |
| Accounts payable                                                                   |       | 15,124                                   |       | 14,140 |   |
| Accrued expenses                                                                   |       | 1,856                                    |       | 1,503 |   |
| Net cash used in  operating activities                                             |       | (1,813                                   | )          | (3,851 | ) |
|                                                                               |       |                                     |       |   |   |
| **Cash  Flows From Investing Activities:**                                         | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Business  acquisitions                                                             |       | 117                                      |       | (4,556 | ) |
| Purchases of  property and equipment                                               |       | (1,173                                   | )          | (597 | ) |
| Other                                                                              |       | (63                                      | )          | 61 |   |
| Net cash used in  investing activities                                             |       | (1,119                                   | )          | (5,092 | ) |
|                                                                               |       |                                     |       |   |   |
| **Cash  Flows From Financing Activities:**                                         | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Issuance of  common stock, net of issuance costs                                   |       | 72                                       |       | — |   |
| Proceeds from  stock options                                                       |       | 4                                        |       | 50 |   |
| Tax benefit of  common stock options                                               |       | 223                                      |       | 112 |   |
| Net payments on  line-of-credit                                                    |       | —                                   |       | 244 |   |
| Net cash  provided by financing activities                                         |       | 299                                      |       | 406 |   |
|                                                                               |       |                                     |       |   |   |
| **Decrease  in Cash and Cash Equivalents**                                         |       | (2,633                                   | )          | (8,537 | ) |
| ** **                                                                         | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Cash and Cash  Equivalents at Beginning of Period                                  |       | 3,419                                    |       | 8,599 |   |
|                                                                               |       |                                     |       |   |   |
| Cash and Cash  Equivalents at End of Period                                        |       | $                                        | 786        |   | $ | 62 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

5

----

Tableof Contents

 

**MWI VETERINARY SUPPLY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDollars in thousands, except per share data(unaudited)**

 

## **NOTE1 — GENERAL**

##  

**Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements include the results ofoperations, financial position and cash flows of MWI Veterinary Supply, Inc.and its wholly-owned subsidiaries (collectively referred to as “we,” “us,” and “our”throughout this Form 10-Q).  Allmaterial intercompany balances have been eliminated.

 

In the opinion of ourmanagement, the accompanying unaudited condensed consolidated financialstatements include all adjustments necessary to present fairly, in all materialrespects, our results for the periods presented. These condensed consolidatedfinancial statements have been prepared by us pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and accompanying notes included in our 2008 Annual Report on Form 10-Kfiled with the SEC on November 24, 2008. The results of operations for the three months ended December 31,2008 are not necessarily indicative of results to be expected for the entirefiscal year.

 

Our unaudited condensedconsolidated balance sheet as of September 30, 2008 has been derived fromthe audited consolidated balance sheet as of that date.

 

**Useof Estimates**

 

*The*accompanying unaudited condensedconsolidated financial statements have been prepared on the accrual basis ofaccounting using accounting principles generally accepted in the United States.In preparing financial information, we use certain estimates and assumptionsthat may affect the reported amounts and disclosures. Some of these estimatesrequire difficult, subjective and complex judgments about matters that areinherently uncertain. As a result, actual results could differ materially fromthese estimates. Estimates are used when accounting for sales returns,allowance for doubtful accounts, customer incentives, vendor rebates,inventories, goodwill and intangible assets, income taxes, impairment oflong-lived assets, depreciation and amortization, employee benefits, unearnedincome and contingencies. The estimates of fair value of assets and liabilitiesand the disclosure of contingent assets and liabilities as of the balance sheetdate and reported amounts of revenue and expenses for the periods are based onassumptions that we believe to be reasonable.

 

**RevenueRecognition**

 

*We sell products we source from vendors to our customersthrough either a “buy/sell” transaction or an agency relationship with ourvendors. In a “buy/sell” transaction, we purchase or take inventory of productsfrom the vendor. When a customer places an order with us, we pick, pack, shipand invoice the customer for the order. We recognize revenue from “buy/sell”transactions as product sales when the product is delivered to the customer. Weaccept product returns from our customers. We estimate returns based onhistorical experience and recognize these estimated returns as a reduction ofproduct sales. Product returns have historically not been significant to ourfinancial statements. We record revenues net of sales tax.  In an agency relationship, we generally donot purchase and take inventory of products from vendors. We receive an orderfrom a customer, then transmit the order to the vendor, who picks, packs andships the order to the customer. In some cases, the vendor invoices andcollects payment from the customer, while in other cases we invoice and collectpayment from the customer on behalf of the vendor. We receive a commissionpayment for soliciting the order from the customer and for providing othercustomer service activities. Commissions are recognized when the services uponwhich the commissions are based are complete.*Grossbillings from agency contracts were $47,666 and $40,817 for the three monthsended December 31, 2008 and 2007, respectively, and generated commissionrevenue of $2,873 and $2,941, respectively.

 

**Costof Product Sales and Vendor Rebates**

 

*Cost of product salesconsist of our inventory product cost, including shipping costs to and from ourdistribution centers. Vendor rebates are recorded based on the terms of thecontracts or programs with each vendor. We may receive quarterly, trimester,semi-annual and annual performance-based rebates from third-party vendors basedupon attainment of certain sales and/or purchase goals. Sales rebates areclassified in the accompanying consolidated statements of income as a reductionto cost of product sales at the time the sales performance measures areachieved. Purchase rebates are measured against*

 

6

----

Table of Contents

 

*inventory purchases fromthe vendors and are classified as a reduction of inventory until the product issold. When the inventory is sold and purchase measures are achieved, purchaserebates are recognized as a reduction to cost of product sales.*

 

*Historically, actualresults have not significantly deviated from those determined using theestimates described above. We expect that our estimates in the future willcontinue to be reasonable as our rebates are based on specific vendor programgoals and are principally recorded upon achievement of sales or purchaseperformance measures. Vendors may change rebate programs from year to year.*

 

**NOTE 2 —EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 157, *Fair ValueMeasurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue according to generally accepted accounting principles and expandsdisclosure requirements regarding fair value measurements.  This statement emphasizes that fair valueshould be determined based on assumptions market participants would use toprice the asset or liability.  SFAS 157was effective for financial assets for our fiscal year beginning October 1,2008.  The implementation of SFAS 157 didnot have a material effect on our consolidated financial statements.  FASB Staff Position 157-2 (“FSP 157-2”)delayed the implementation of SFAS 157 for nonfinancial assets and liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually). FSP 157-2 iseffective for nonfinancial assets and liabilities for our fiscal year beginningOctober 1, 2009.  The adoption ofthis statement is not expected to have a material impact on our consolidatedfinancial statements.

 

In December 2007, the FASB issued SFAS No. 141(Revised), *Business Combinations* (“SFAS 141-R”).  SFAS 141-R retains the purchase method ofaccounting for acquisitions, but requires a number of changes, includingchanges in the way assets and liabilities are recognized in the purchaseaccounting. It changes the recognition of assets acquired and liabilitiesassumed arising from contingencies, requires the capitalization of in-processresearch and development at fair value and requires the expensing ofacquisition-related costs as incurred, among other items. The statement willapply prospectively to any business combinations occurring in our fiscal yearbeginning October 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated Financial Statements,an amendment of ARB 51* (“SFAS 160”). This statement amends Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, to establish accountingand reporting standards for the noncontrolling interest in a subsidiary and forthe deconsolidation of a subsidiary. Noncontrolling interests shall bereclassified to equity, consolidated net income shall be adjusted to includenet income attributable to noncontrolling interests and consolidatedcomprehensive income shall be adjusted to include comprehensive incomeattributable to the noncontrolling interests. SFAS 160 is effective for our fiscal year beginning October 1,2009.  The adoption of this statement isnot expected to have a material impact on our consolidated financialstatements.

 

In April 2008, the FASB issued FASB StaffPosition FAS 142-3 (“FSP 142-3”), which amends the list of factors an entityshould consider in determining the useful life of recognized intangible assetsunder FASB Statement 142.  FSP 142-3 iseffective for our fiscal year beginning October 1, 2009.  We are currently evaluating the expectedimpact, if any, that FSP 142-3 will have on our consolidated financialstatements.

 

**NOTE 3**—**BUSINESS ACQUISITION**

 

InJuly 2008, we acquired substantially all of the assets of AAHA ServicesCorporation, operating as AAHA MARKETLink (“AAHA MARKETLink”) for approximately$8,676, net of cash acquired of $1,320 (including direct acquisition costs ofapproximately $212).  The purchase priceof $8,676 was reduced by $117 during the quarter as a result of a post closingworking capital adjustment.  Based nearDenver, Colorado, AAHA MARKETLink was a distributor of animal health productsto members of the American Animal Hospital Association.

 

7

----

Table of Contents

 

**NOTE 4**—**RECEIVABLES**

 
| ** **                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| Trade                            |       | $                     | 124,705    |                   | $          | 118,242 |   |
| Vendor rebates  and programs     |       | 15,268                |       | 11,200                 |       |
|                             |       | 139,973               |       | 129,442                |       |
| Allowance for  doubtful accounts |       | (1,530                | )          | (878                   | )          |
|                             |       | $                     | 138,443    |                   | $          | 128,564 |   |

 

Product sales resultingfrom transactions with a single customer were 9% and 8% of total product salesduring the three months ended December 31, 2008 and 2007, respectively.Approximately 9% and 10% of our trade receivables resulted from transactionswith this single customer as of December 31, 2008 and September 30,2008, respectively.

 

**NOTE 5**—**PROPERTY AND EQUIPMENT**

 
| ** **                          | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| Land                                |       | $                     | 20         |                   | $          | 20 |   |
| Leasehold  improvements             |       | 3,535                 |       | 3,094                  |       |
| Machinery,  furniture and equipment |       | 12,415                |       | 11,587                 |       |
| Computer  equipment                 |       | 2,731                 |       | 3,428                  |       |
| Construction in  progress           |       | 703                   |       | 1,626                  |       |
|                                |       | 19,404                |       | 19,755                 |       |
| Accumulated  depreciation           |       | (9,661                | )          | (10,068                | )          |
|                                |       | $                     | 9,743      |                   | $          | 9,687 |   |

 

Depreciation expense was$629 and $623 for the three months ended December 31, 2008 and 2007,respectively.

 

**NOTE 6**—**INTANGIBLES**

 
| ** **                | ** ** | ** **       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------|------------|------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                | ** ** | **Useful Lives** | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| Amortizing:               |       |             |       |                  |       |                   |       |
| Customer  relationships   |       | 9-20 years       |       | $                     | 9,076      |                   | $          | 9,076 |   |
| Covenants not to  compete |       | 1-5 years        |       | 686                   |       | 686                    |       |
| Other                     |       | 3-5 years        |       | 257                   |       | 257                    |       |
|                      |       |             |       | 10,019                |       | 10,019                 |       |
| Accumulated  amortization |       |             |       | (1,555                | )          | (1,346                 | )          |
|                      |       |             |       | 8,464                 |       | 8,673                  |       |
| Non-Amortizing:           |       |             |       |                  |       |                   |       |
| Trade names and  patents  |       |             |       | 2,352                 |       | 2,272                  |       |
|                      |       |             |       | $                     | 10,816     |                   | $          | 10,945 |   |

 

Amortization expense was$209 and $127 for the three months ended December 31, 2008 and 2007,respectively.  Estimated future annualamortization expense related to intangible assets as of December 31, 2008follows:

 
| ** **         | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| Remainder of  2009 |       | $          | 620        |   |
| 2010               |       | 803        |       |
| 2011               |       | 786        |       |
| 2012               |       | 760        |       |
| 2013               |       | 675        |       |
| Thereafter         |       | 4,820      |       |
|               |       | $          | 8,464      |   |

 

8

----

Table of Contents

 

Theabove projection of amortization expense includes preliminary estimates ofintangible assets and lives associated with the acquisition of substantiallyall of the assets of AAHA MARKETLink. These amounts may be adjusted during the allocation period as defined inSFAS No. 141, *Business Combinations*.

 

**NOTE 7**—**CREDIT FACILITY AND LONG-TERM DEBT**

 

**Line-of-Credit**—OnDecember 13, 2006, MWI Veterinary Supply Co., our wholly-owned subsidiary(“MWI Co.”) as borrower, entered into an unsecured credit agreement with us andMemorial Pet Care, Inc. (our wholly-owned subsidiary), as guarantors, andBank of America, N.A. and Wells Fargo Bank, N.A., (collectively, the “lenders”)for the provision of a revolving credit facility (the “facility”).  The facility allows for borrowings in theaggregate of $70,000, with the right to request an increase in the commitmentof the lenders to $100,000.  The facilityhas a maturity date of December 1, 2011 and a variable interest rate equalto the Daily LIBOR Floating Rate or the LIBOR 1-month fixed rate plus a marginranging from 0.7% to 1.25% or the Prime Rate (at our option).  The lenders also receive an unused line feeand letter of credit fee equal to 0.125% of the unused amount of the facility.Our outstanding balance on the facility at each of December 31, 2008 and September 30,2008 was $0.

 

The facility containscertain financial covenants as well as other restrictive covenants. As of December 31,2008, we were in compliance with all covenants. The facility allows for the issuance of up to $10,000 in letters ofcredit. The letters of credit typically act as a guarantee of payment tocertain third-parties in accordance with specified terms and conditions. We hadtwo letters of credit totaling $200 at December 31, 2008 and four lettersof credit totaling $400 at September 30, 2008. There were no outstandingborrowings on these letters of credit at either December 31, 2008 or September 30,2008.

 

**Long-TermDebt**—In January 2005, we issued a promissory note in theaggregate principal amount of $487 in partial consideration for the purchase ofsubstantially all the assets of Vetpo Distributors, Inc. The note bearsinterest at the prime rate (3.25% at December 31, 2008), payablequarterly. The principal of the note is payable in five equal annualinstallments, the first of which was due on January 1, 2006.  The balance on this promissory note was $194at each of December 31, 2008 and September 30, 2008.

 

**NOTE 8**—**COMMON STOCK AND STOCK-BASED AWARDS**

 

We have two stock-basedaward plans, the 2002 Stock Option Plan and the Amended and Restated 2005Stock-Based Incentive Compensation Plan (the “2005 Plan”).  The 2005 Plan allows our Board of Directorsto grant common stock options, restricted stock, deferred units and otherstock-based awards to directors, executives and other key employees.  These plans have been developed to provideadditional incentives by allowing equity ownership in our Company and, as aresult, encouraging participants to contribute to our success.  At December 31, 2008, 405,271 options topurchase common stock were outstanding (348,863 options vested and exercisable)with a weighted average exercise price of $2.97 and expiring through September 2015.

 

We granted no commonstock options during each of the three months ended December 31, 2008 and2007.  During the three months ended December 31,2008 and 2007, we issued 0 and 4,000 shares of restricted stock under the 2005Plan, respectively, which vest ratably over 5 years.  During the three months ended December 31,2008 and 2007, we recognized $91 and $30 of compensation expense related torestricted stock grants, respectively. At December 31, 2008, 1,487,877 shares were available to be issuedunder our stock-based award plans.

 

We also have an employeestock purchase plan (“ESPP”) that allows substantially all employees topurchase shares of our common stock at 95% of the fair market value on the dateof purchase.  The purchase date is thelast trading date of the purchase period, which begins in March, June, September andDecember.  Employees accumulate amountsthrough payroll deductions during the purchase period of between 1% and 10% butno more than $20,000 annually.  Anemployee is allowed to purchase a maximum of 200 shares per purchaseperiod.  During the three months ended December 31,2008, we issued 3,057 shares of our common stock under the ESPP.  At December 31, 2008, there were 495,372shares available to be issued under the ESPP.

 

**NOTE 9**—**INCOME TAXES**

 

Oureffective tax rate for the three months ended December 31, 2008 and 2007was 39.5% and 41.0%, respectively.

 

Asof December 31, 2008, we had $423 of unrecognized tax benefits, of which$155 would impact our effective rate, if recognized. Our policy for classifyinginterest and penalties associated with unrecognized tax benefits is to includesuch 

 

9

----

Table ofContents

 

itemsin income tax expense.  The amount ofinterest and penalties recognized during the three months ended December 31,2008 was not material.

 

Wefile income tax returns in the U.S. federal jurisdiction and other variousstate and local jurisdictions.  A numberof years may elapse before an uncertain tax position is audited and finallyresolved.  While it is often difficult topredict the final outcome or the timing of resolution of any particularuncertain tax position, we believe that our liability for uncertain taxbenefits reflects the most probable outcome. We adjust the liability, as well as the related interest, in light ofchanging facts and circumstances. Settlement of any particular position would usually require the use ofcash.  The resolution of a matter wouldbe recognized as an adjustment to our income tax expense and our effective taxrate in the period of resolution.  Wehave begun the process to enter into voluntary disclosure agreements withcertain state jurisdictions and it is reasonably possible that these will besettled within the next twelve months, which would decrease the liability foruncertain tax benefits by approximately $238 as a result of the payment ofadditional tax expected to be due. Additionally, we filed Form 3115 Application of Change inAccounting Method with the Internal Revenue Service during the fiscal yearended September 30, 2008.  We filedan advance consent request for a non-automatic account method change for taxpurposes for which we had not received approval prior to our reporting periodend.  The method change will make revenuerecognition for tax purposes the same as revenue recognized for book purposes.We expect resolution within the next twelve months which would decrease theliability for uncertain tax benefits by approximately $185.  With few exceptions, we are no longer subjectto income tax examination for years before 2003 in the U.S. and significantstate and local jurisdictions.

 

## **NOTE10 — COMPUTATION OF EARNINGS PER SHARE***(In thousands, except per sharedata)*

## * *

| ** **                                                       | ** ** | **Three months ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                 | ** ** | **2007** | ** ** |
| ** **                                                       | ** ** | **Basic**                                | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                                       |       | $                                        | 5,949      |   | $ | 5,949 |   | $ | 4,700 |   | $ | 4,700 |   |
| Weighted average  common shares outstanding                      |       | 12,071                                   |       | 12,071 |   | 12,046 |   | 12,046 |   |
| Effect of  diluted securities Stock options and restricted stock |       |                                     |       | 224 |   |   |   | 250 |   |
| Weighted average  diluted shares outstanding                     |       |                                     |       | 12,295 |   |   |   | 12,296 |   |
| Earnings per  share                                              |       | $                                        | 0.49       |   | $ | 0.48 |   | $ | 0.39 |   | $ | 0.38 |   |
| Anti-dilutive  shares excluded from calculation                  |       |                                     |       | — |   |   |   | — |   |

 

**NOTE 11**—**RELATED PARTIES**

 

MWI Co. holds a 50.0%membership interest in Feeders’ Advantage. MWI Co. charged Feeders’ Advantage for certain operating andadministrative services in the amounts of $179 and $157 for the three monthsended December 31, 2008 and 2007, respectively.  Sales of products to Feeders’ Advantage were$12,330 and $11,117 for the three months ended December 31, 2008 and 2007,respectively, which represented 5% and 6% of total product sales during thethree months ended December 31, 2008 and 2007, respectively.

 

MWI Co. provides Feeders’Advantage with a line-of-credit to finance its day-to-day operations. Thisline-of-credit bears interest at the prime rate. The interest due on theline-of-credit is calculated and charged to Feeders’ Advantage on the last dayof each month. Conversely, to the extent MWI Co. has a payable balance due toFeeders’ Advantage, the payable balance accrues interest in favor of Feeders’Advantage at the average federal funds rates in effect for that month. As of December 31,2008 and September 30, 2008, MWI Co. had a payable balance to Feeders’Advantage of $508 and 429, respectively.

 

10

----

Table ofContents

 

**NOTE 12 — STATEMENTS OF CASH FLOWS — SUPPLEMENTAL ANDNON-CASH DISCLOSURES**

** **
| ** **                                             | ** ** | **Three months ended December 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                 | ** ** | **2007** | ** ** |
| *Supplemental  Disclosures*                            | * *   | * *                                 | * *   | * * | * * |
| Cash paid for  interest                                |       | $                                        | 45         |   | $ | 27 |   |
| Cash paid for  income taxes                            |       | 168                                      |       | 434 |   |
| *Non-cash  Activities*                                 | * *   | * *                                 | * *   | * * | * * |
| Equipment  acquisitions financed with accounts payable |       | 122                                      |       | 26 |   |
|                                                        |            |                                          |            |  |  |  |  |

 

**NOTE 13**—**COMMITMENTS AND CONTINGENCIES**

 

## From time totime, in the normal course of business, we may become a party to legalproceedings that may have an adverse effect on our financial position, resultsof operations and cash flows. At December 31, 2008, we were not a party toany material pending legal proceedings and were not aware of any claims thatcould have a material adverse effect on our financial position, results ofoperations or cash flows.

 

11

----

**Table ofContents**

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board of Directorsand Stockholders of

MWI Veterinary Supply, Inc.

Meridian, ID

 

We have reviewed theaccompanying condensed consolidated balance sheet of MWI Veterinary Supply, Inc.and subsidiaries as of December 31, 2008, and the related condensedconsolidated statements of income and of cash flows for the three-month periodsended December 31, 2008 and 2007.  These interim financial statements are theresponsibility of the Corporation’s management.

 

We conducted our reviewin accordance with the standards of the Public Company Accounting OversightBoard (United States).  A review ofinterim financial information consists principally of applying analyticalprocedures and making inquiries of persons responsible for financial andaccounting matters.  It is substantiallyless in scope than an audit conducted in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole.  Accordingly, we do notexpress such an opinion.

 

Based on our review, weare not aware of any material modifications that should be made to suchcondensed consolidated interim financial statements for them to be inconformity with accounting principles generally accepted in the United Statesof America.

 

We have previouslyaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheet of MWIVeterinary Supply, Inc. and subsidiaries as of September 30, 2008 andthe related consolidated statements of income, stockholders’ equity, and cashflows for the year then ended (not presented herein); and in our report dated November 21,2008, we expressed an unqualified opinion on those consolidated financialstatements. In our opinion, the information set forth in the accompanyingcondensed consolidated balance sheet as of September 30, 2008 is fairlystated, in all material respects, in relation to the consolidated balance sheetfrom which it has been derived.

 

/s/ DELOITTE &TOUCHE LLP

Boise, ID

February 4, 2009

 

12

----

Table of Contents

 

**Item 2.    Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*Alldollar amounts are presented in thousands, except for per share amounts.*

 

**Overview**

 

We are a leading distributor of animal healthproducts to veterinarians across the United States.  We distribute more than 30,000 productssourced from over 500 vendors to approximately 19,000 veterinary practices nationwide.  We currently operate out of twelvestrategically located distribution centers. Products we sell include pharmaceuticals, vaccines, parasiticides,diagnostics, capital equipment, supplies, veterinary pet food and nutritionalproducts.  We market these products to veterinariansin both the companion animal and production animal markets. We operate within asingle reporting segment and are primarily located within the United States.

 

Our Dallas, Texas distribution center moved froma 35,000 square foot facility to a 70,000 square foot facility in November 2008.  In January 2009, we consolidated ourdistribution center in San Antonio, Texas into our Dallas, Texas distributioncenter.

 

Historically, we estimate that approximatelytwo-thirds of our total revenues have been generated from sales to thecompanion animal market and one-third from sales to the production animalmarket. The state of the overall economy and consumer spending have impactedboth markets, while volatile commodity prices in grain, corn and feeder cattle,and changes in weather patterns have also affected demand in the productionanimal market.  Both markets have beenintegral to our financial results and we intend to continue supporting bothmarkets.

 

We believe that growth in the companion animalmarket has slowed recently as a result of a decrease in consumer spending.  Historically, this growth has been due to theincreasing number of households with companion animals, increased expenditureson animal health and preventative care, an aging pet population, advancementsin pharmaceuticals and diagnostic testing and extensive marketing programssponsored by companion animal nutrition and pharmaceutical companies. While theaverage order size for companion animal health products is often smaller than productionanimal health products, companion animal health products typically have highermargins. We intend to continue to penetrate this market through internal growthinitiatives and selective acquisitions.

 

Product sales in the production animal market havebeen negatively impacted by increasing volatility in commodity prices such ascorn, grain and feeder cattle, changes in weather patterns that allow cattle tograze for longer periods and changes in the general economy.  We believe that this is not a permanentcondition in the market and that demand will return as prices normalize. Weintend to continue to support production animal veterinarians with a broadrange of products and value added services. Historically, sales in this markethave been largely driven by spending on animal health products to improveproductivity, weight gain and disease prevention, as well as a growing focus onfood safety.

 

*Sales*

 

We sell products that we source from our vendorsto our customers through either a “buy/sell” transaction or an agencyrelationship with our vendors. In a “buy/sell” transaction, we purchase or takeinventory of products from our vendors. When a customer places an order, wepick, pack and ship products, and then invoice the customer for the order. Werecord sales from “buy/sell” transactions, which account for the majority ofour business, as revenue in conformity with accounting principles generallyaccepted in the United States. In an agency relationship, we generally do notpurchase and take inventory of products from vendors. When we receive an orderfrom a customer, we transmit the order to the vendor, who picks, packs andships the order to our customer. In some cases, the vendor invoices andcollects payment from the customer, while in other cases we invoice and collectpayment from the customer on behalf of the vendor. We receive a commissionpayment for soliciting the order from the customer and for providing othercustomer service activities. The aggregate revenue we receive in agencytransactions constitutes the “commissions” line item on our statement of incomeand is recorded in conformity with accounting principles generally accepted inthe United States. The vendor determines the method we use to sell theproducts. Historically, vendors have occasionally switched between the “buy/sell”and agency models for particular products in response to market conditionsrelated to that particular product. A switch between models can impact ourrevenues, gross margin, gross margin percentage and operating income.

 

Our top ten vendors supplied products thataccounted for approximately 73% of our revenues for each of the three monthsended December 31, 2008 and 2007, and 72%, 70% and 70% of our revenues forthe fiscal years ended September 30, 2008, 

 

13

----

Table of Contents

 

2007 and 2006, respectively.  Pfizer supplied products that accounted forapproximately 31% and 27% of our revenues during the three months ended December 31,2008 and 2007, respectively, and 23%, 21% and 19% of our revenues for ourfiscal years ended September 30, 2008, 2007 and 2006, respectively.  Fort Dodge supplied products that accountedfor approximately 9% and 11% of our revenues during the three months ended December 31,2008 and 2007, respectively, and 12%, 13% and 14% of our revenues for ourfiscal years ended September 30, 2008, 2007 and 2006, respectively.  Intervet-Schering supplied products thataccounted for approximately 8% and 9% of our revenues during the three monthsended December 31, 2008 and 2007, respectively, and 9%, 9% and 8% of ourrevenues for our fiscal years ended September 30, 2008, 2007 and 2006,respectively.  Of the Pfizer supplied products,production animal products under a livestock agreement accounted forapproximately 23% and 22% of our revenues during the three months ended December 31,2008 and 2007, respectively.  Of thePfizer supplied products, production animal products under a livestockagreement accounted for approximately 17%, 17% and 15% of our revenues for ourfiscal years ended September 30, 2008, 2007 and 2006, respectively.  Revenues from production animal products tendto be higher during the three months ended December 31 due to the timingof vendor marketing programs and price increases as well as an increase intreatment of cattle related to weather conditions during the wintermonths.   On January 26, 2009,Pfizer and Wyeth announced that they had entered into an agreement under whichPfizer will acquire all of the outstanding stock of Wyeth.  Pfizer and Fort Dodge, which is a division ofWyeth, are our two largest vendors as measured by our revenues.

 

*Vendor Rebates*

 

We typically renegotiate vendor contracts annually.  These vendor contracts may include termsdefining rebates, commissions and exclusivity requirements. Vendor rebatesbased on sales are classified in our accompanying consolidated statements ofincome as a reduction to cost of product sales at the time the salesperformance measures are achieved. Purchase rebates are measured against inventory purchases from thevendors and are a reduction of inventory until the product is sold.  When the inventory is sold, purchase rebatesare recognized as a reduction to cost of product sales. Many of our vendors’rebate programs are based on a calendar year.

 

On December 12, 2008, we entered into a 2009Livestock Products Distribution Agreement (the “Pfizer Livestock Agreement”)with Pfizer, Inc. which was effective January 1, 2009.  Under the Agreement, MWI is entitled todistribute Pfizer’s livestock products to customers in the livestockfield.  The Agreement allows for areduced fee for logistics and has eliminated incentive fees and rebatescompared to the 2008 Livestock Products Agreement (the “2008 Agreement”).  MWI is required to maintain sufficientinventory levels to meet customer demand and to store products in accordancewith their respective label instructions. The Agreement expires on December 31, 2009 and may be terminated byeither party with or without cause upon 30 days prior written notice.

 

*Acquisitions*

 

In July 2008, we acquired substantially allof the assets of AAHA MARKETLink.  Basednear Denver, Colorado, AAHA MARKETLink was a distributor of animal healthproducts to members of American Animal Health Association.

 

For more information onour business, see our Annual Report on Form 10-K filed with the SEC on November 24,2008.

 

14

----

Table of Contents

 

**Results of Operations**

 

The following table summarizes our results ofoperations for the three months ended December 31, 2008 and 2007, indollars and as a percentage of total revenues.

 
| ** **                                                  | ** ** | **Three Months Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                                | ** ** | **%** | ** ** | **2007** | ** ** | **%** | ** ** |
| Revenues:                                                   |       |                                                    |       |   |   |   |   |   |   |
| Product sales                                               |       | $                                                       | 216,616    |   | 93.5 | % | $ | 189,303 |   | 93.1 | % |
| Product sales to  related party                             |       | 12,330                                                  |       | 5.3 | % | 11,117 |   | 5.5 | % |
| Commissions                                                 |       | 2,873                                                   |       | 1.2 | % | 2,941 |   | 1.4 | % |
| Total revenues                                              |       | 231,819                                                 |       | 100.0 | % | 203,361 |   | 100.0 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Cost of product  sales                                      |       | 198,164                                                 |       | 85.5 | % | 173,576 |   | 85.4 | % |
| Gross profit                                                |       | 33,655                                                  |       | 14.5 | % | 29,785 |   | 14.6 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses               |       | 23,133                                                  |       | 10.0 | % | 21,303 |   | 10.5 | % |
| Depreciation and  amortization                              |       | 835                                                     |       | 0.3 | % | 747 |   | 0.3 | % |
| Operating income                                            |       | 9,687                                                   |       | 4.2 | % | 7,735 |   | 3.8 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Other income  (expense):                                    |       |                                                    |       |   |   |   |   |   |   |
| Interest expense                                            |       | (64                                                     | )          | 0.0 | % | (51 | ) | 0.0 | % |
| Earnings of  equity method investees                        |       | 66                                                      |       | 0.0 | % | 51 |   | 0.0 | % |
| Other                                                       |       | 149                                                     |       | 0.1 | % | 235 |   | 0.1 | % |
| Total other  income (expense), net                          |       | 151                                                     |       | 0.1 | % | 235 |   | 0.1 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Income before  taxes                                        |       | 9,838                                                   |       | 4.3 | % | 7,970 |   | 3.9 | % |
| Income tax  expense                                         |       | (3,889                                                  | )          | -1.7 | % | (3,270 | ) | -1.6 | % |
| Net income                                                  |       | $                                                       | 5,949      |   | 2.6 | % | $ | 4,700 |   | 2.3 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Earnings per  common share:                                 |       |                                                    |       |   |   |   |   |   |   |
| Basic                                                       |       | $                                                       | 0.49       |   |   |   | $ | 0.39 |   |   |   |
| Diluted                                                     |       | $                                                       | 0.48       |   |   |   | $ | 0.38 |   |   |   |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Weighted average  common shares outstanding (in thousands): |       |                                                    |       |   |   |   |   |   |   |
| Basic                                                       |       | 12,071                                                  |       |   |   | 12,046 |   |   |   |
| Diluted                                                     |       | 12,295                                                  |       |   |   | 12,296 |   |   |   |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Other Data:                                                 |       |                                                    |       |   |   |   |   |   |   |
| Product sales  from Internet as a percentage of sales       |       | 27                                                      | %          |   |   | 24 | % |   |   |
| Field sales  representatives (at end of period)             |       | 192                                                     |       |   |   | 170 |   |   |   |
| Telesales  representatives (at end of period)               |       | 138                                                     |       |   |   | 128 |   |   |   |
| Fill rate (1)                                               |       | 98                                                      | %          |   |   | 98 | % |   |   |

 

----

(1)               Defined as,for any period, the dollar value of orders shipped the same day they wereplaced from any distribution center expressed as a percentage of the totaldollar value of the orders placed by customers in the period.

 

15

----

Table of Contents

 

**Three Months Ended December 31,2008 Compared to Three Months Ended December 31, 2007**

 

*Total Revenues*.  Total revenues increased 14.0% to $231,819for the three months ended December 31, 2008, from $203,361 for the threemonths ended December 31, 2007. Revenues attributable to new and existing customers representedapproximately 71% and 29%, respectively, of the growth in total revenues duringthe three months ended December 31, 2008. For the purpose of calculating growth rates of new and existing customerrevenue, we have defined a new customer as a customer that did not purchaseproduct from us in the corresponding fiscal quarter of the prior year, with theremaining customer base being considered existing customers.  Included in the new customer growth wereapproximately $2,400 of revenues attributable to new customers acquired as aresult of the acquisition of AAHA MARKETLink on July 1, 2008.Additionally, we had approximately $5,500 of incremental revenues as a resultof the acquisition of AAHA MARKETLink from customers who had previously beenpurchasing from both MWI and AAHA MARKETLink. Commissions were $2,873 and $2,941 for the quarters ended December 31,2008 and 2007, respectively.  In the samequarter of the prior year, there were promotion programs and incentives offeredrelated to commissions that were not offered during the quarter ended December 31,2008.

 

*Gross Profit*.  Gross profit increased by 13.0% to $33,655for the three months ended December 31, 2008, from $29,785 for the threemonths ended December 31, 2007. Gross profit as a percentage of total revenues was 14.5% and 14.6% for thethree months ended December 31, 2008 and 2007, respectively. The decreasein gross profit as a percentage of total revenues was due to the decrease incommissions as a percentage of total revenues as previously explained. Vendorrebates increased approximately $1,200 for the three months ended December 31,2008 compared to the three months ended December 31, 2007.

 

*Selling, General andAdministrative (“SG&A”)*. SG&A expenses increased 8.6% to $23,133 for the three months ended December 31,2008, from $21,303 for the three months ended December 31, 2007.  SG&A expenses as a percentage of revenueswere 10.0% and 10.5% for the three months ended December 31, 2008 and2007, respectively, due to operating leverage and cost-control measures. Thedollar increase in SG&A expenses was primarily due to increasedcompensation costs as a result of additional headcount of 53 employees since December 31,2007, including 22 additional field sales representatives and 10 additionaltelesales representatives as well as an increase in our allowance for doubtfulaccounts.

 

*Depreciation andAmortization. *Depreciationand amortization expense increased 11.7% to $838 for the three months ended December 31,2008, from $750 for the three months ended December 31, 2007.  This increase was primarily the result ofamortization related to the AAHA MARKETLink acquisition.  Depreciation expense also increased as aresult of capital expenditures since December 31, 2007 related toimprovements in our distribution centers and information technology systems.

 

*Other Income (Expense)*.  Other income (expense) decreased 35.7% to$151 in income for the three months ended December 31, 2008 from $235 inincome for the three months ended December 31, 2007. This decrease inother income (expense) was due to a decline in interest revenue of $96 to $3for the three months ended December 31, 2008, compared to $99 for thethree months ended December 31, 2007. This decrease was a result of the lower average cash balance and lowerinterest rates during the quarter.

 

*Income Tax Expense*.  Our effective tax rate for the three monthsended December 31, 2008 and 2007 was 39.5% and 41.0%, respectively.

 

**Critical Accounting Policies**

 

The preparation of financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses and related disclosure of contingentassets and liabilities.  The accompanyingcondensed consolidated financial statements are prepared using the samecritical accounting policies discussed in our Annual Report on Form 10-Kfiled with the SEC on November 24, 2008.

 

**Liquidity and Capital Resources**

 

Our principal sources of liquidity are cashflows generated from operations and borrowings on our revolving credit facilityunder our credit agreement. We use capital primarily to fund day-to-dayoperations and to maintain sufficient inventory 

 

16

----

Table of Contents

 

levels in order to promptly fulfill customerorders and to expand our operations and sales growth. We believe our capitalresources, including our ability to borrow funds from our revolving creditfacility, will be sufficient to meet our anticipated cash needs for at leastthe next twelve months.  Bank of America,N.A. and Wells Fargo, N.A. are the lenders for the revolving creditfacility.  The revolving credit facilityallows for borrowings in the aggregate of $70,000, with the right to request anincrease in the commitment to $100,000. The facility has a maturity date of December 1,2011 and a variable interest rate equal to the Daily LIBOR Floating Rate or theLIBOR 1-month fixed rate plus a margin ranging from 0.7% to 1.25% or the PrimeRate (at our option).  The lenders alsoreceive an unused line fee and letter of credit fee equal to 0.125% of theunused amount of the facility. Our outstanding balance on the facility at December 31,2008 was $0.

 

Thefacility allows for the issuance of up to $10,000 in letters of credit. Theletters of credit typically act as guarantees of payment to certain thirdparties in accordance with specified terms and conditions. We had two lettersof credit totaling $200 at December 31, 2008 and four letters of credittotaling $400 at September 30, 2008. There were no outstanding borrowingson these letters of credit at either December 31, 2008 or September 30,2008.

 

Our lenders may have suffered losses related totheir lending and other financial relationships, especially because of thegeneral weakening of the national economy and increased financial instabilityof many borrowers.  As a result, thelenders may become insolvent or tighten their lending standards, which could makeit more difficult for us to borrow under our revolving credit facility or toobtain other financing on favorable terms or at all.  Our financial condition and results ofoperations could be adversely affected if we were unable to draw funds underour revolving credit facility because of a lender default or to obtain othercost-effective financing.

 

*Operating Activities*.  For the three months ended December 31,2008, cash used in operations was $1,813 and was primarily attributable to netincome of $5,949, a increase of receivables of $9,910 due to revenue growth, anincrease in inventories of $15,790 due to inventory planning and strategicinventory purchases, and an increase in accounts payable of $15,124.  The increase in accounts payable was due tothe above mentioned inventory planning offset by the use of cash discounts oninventory purchases.

 

Forthe three months ended December 31, 2007, cash used in operations was$3,851 and was primarily attributable to net income of $4,700, an increase ofreceivables of $5,177 due to higher revenue growth, an increase in inventoriesof $19,915 due to inventory planning and the timing of manufacturer priceincreases and an increase in accounts payable of $14,140 as a result ofincreased inventory purchases.  Due tothe growth in revenues in the quarter as a result of price increases from twoof our largest vendors, cash was used to accommodate delayed billing on ourproduction animal sales and to fund inventory purchases to meet the demandduring the quarter.

 

*Investing Activities.*  For the three months ended December 31,2008, net cash used in investing activities was $1,119 and was primarily due tocapital expenditures of $1,173, related to distribution center infrastructureand technology.

 

Forthe three months ended December 31, 2007, net cash used in investingactivities was $5,092 and was primarily due to the acquisition of Tri V for$4,606 coupled with capital expenditures of $597, primarily related todistribution center infrastructure and technology.

 

*Financing Activities.*  Forthe three months ended December 31, 2008, net cash provided by financingactivities was $299, which was due to the proceeds and tax benefit of stockoption exercises of $223 and issuance of common stock under our employee stockpurchase plan of $72.

 

For the three months endedDecember 31, 2007, net cash provided by financing activities was $406,which was primarily due to the use of $244 on our revolving credit facility andtax benefit of stock option exercises of $112.

 

**Contractual Obligations andGuarantees**

 

For information on ourcontractual obligations and guarantees, see our Annual Report on Form 10-Kfiled on November 24, 2008 with the SEC. During the three months ended December 31,2008 there were no material changes to the contractual obligations reported inour Form 10-K on November 24, 2008.

 

17

----

Table ofContents

 

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

The Company is exposed to market risks primarilyfrom changes in interest rates in the United States. The Company does notengage in financial transactions for trading or speculative purposes.

 

The interest payable on our revolving creditfacility is based on variable interest rates and is therefore affected bychanges in market interest rates. The outstanding balance on the facility as ofDecember 31, 2008 was $0. Therefore, there was no exposure to interest rate risks as of thisdate.  If there had been a balance on thefacility of $70,000, which is the maximum available amount on the facility, achange of 10% from the interest rate as of December 31, 2008, which was0.835% (Daily LIBOR Floating Rate plus .70%), would have changed interest by$58.

 

**Item4.  Controls and Procedures**

 

Management of the Company, including the ChiefExecutive Officer and the Chief Financial Officer of the Company, has evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) of the Securities Exchange Act of 1934) asof December 31, 2008.  Based on thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures, including theaccumulation and communication of disclosures to the Company’s Chief ExecutiveOfficer and Chief Financial Officer as appropriate to allow timely decisionsregarding required disclosure, are effective to provide reasonable assurancethat information required to be disclosed by the Company in the reports that itfiles or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified by the SEC’srules and forms.

 

Therewere no changes in the Company’s internal control over financial reporting thatoccurred during the Company’s most recently completed fiscal quarter that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

18

----

Table of Contents

 

**PART II. OTHER INFORMATION**

 

**CautionaryStatement for Purposes of “SafeHarbor Provisions” of the Private Securities Litigation Reform Act of 1995**

* *

*Thisquarterly report on Form 10-Q contains forward-looking statements withinthe meaning of the federal securities laws. Statements that are not historicalfacts, including statements about our beliefs and expectations, areforward-looking statements. Forward-looking statements include statementspreceded by, followed by or that include the words “may,” “could,” “would,” “should,”“believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend”and similar expressions. These statements include, among others, statementsregarding our expected business outlook, anticipated financial and operatingresults, our business strategy and means to implement our strategy, ourobjectives, the amount and timing of capital expenditures, the amount andtiming of interest expense, the likelihood of our success in expanding ourbusiness, financing plans, budgets, working capital needs and sources ofliquidity.*

 

*Forward-looking statements areonly predictions and are not guarantees of our performance. These statements arebased on our management’s beliefs and assumptions, which in turn are based oncurrently available information. Important assumptions relating to theforward-looking statements include, among others, assumptions regarding demandfor our products, the expansion of product offerings geographically or throughnew applications, the timing and cost of planned capital expenditures,competitive conditions and general economic conditions. These assumptions couldprove inaccurate. Forward-looking statements also involve known and unknownrisks and uncertainties, which could cause actual results that differmaterially from those contained in any forward-looking statement. Many of thesefactors are beyond our ability to control or predict. Such factors include, butare not limited to, the following:*

 

·                  *vendor rebates based upon attaining certain growth goals;*

 

·                  *changes in or availability of vendor rebate programs;*

 

·                  *changes in the way vendors introduce products to market;*

 

·                  *exclusivity requirements with certain vendors that may prohibit us fromdistributing competing products manufactured by other vendors;*

 

·                  *the impact of general economic trends on our business;*

 

·                  *the recall of a significant product by one of our vendors;*

 

·                  *extended shortage or backlog of a significant product by one of ourvendors;*

 

·                  *seasonality;*

 

·                  *the timing and effectiveness of marketing programs offered by ourvendors;*

 

·                  *the timing of the introduction of new products and services by ourvendors;*

 

·                  *the ability to borrow on our credit line;*

 

·                  *unforeseen litigation;*

 

·                  *a disruption caused by adverse weather or other natural conditions;*

 

·                  *inability to ship products to the customer as a result of technologicalor shipping disruptions; and*

 

·                  *competition.*

 

*Except as required byapplicable law, including the securities laws of the United States and the rules andregulations of the SEC, we are under no obligation to publicly update or reviseany forward-looking statements, whether as a result of any new information,future events or otherwise. You should not place undue reliance on ourforward-looking statements. Although we believe that the expectations reflectedin the forward-looking statements are reasonable, we cannot guarantee futureresults or performance.*

 

19

----

Table of Contents

 

*Investors should also be aware that while we do,from time to time, communicate with securities analysts, it is against ourpolicy to disclose any material non-public information or other confidentialcommercial information. Accordingly, stockholders should not assume that weagree with any statement or report issued by any analyst irrespective of thecontent of the statement or report. Furthermore, we have a policy againstissuing or confirming financial forecasts or projections issued by others.Thus, to the extent that reports issued by securities analysts contain anyprojections, forecasts or opinions, such reports are not the responsibility ofMWI Veterinary Supply, Inc.*

 

## **Item 1. Legal Proceedings**

##  

## We are not currently a party to any materialpending legal proceedings and are not aware of any claims that could have amaterially adverse effect on our financial position, results of operations orcash flows.

##  

## **Item 1A. Risk Factors**

##  

## Other than with respect to the risk factorsset forth below, there have been no material changes from the risk factorsdisclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-Kfor the fiscal year ended September 30, 2008.

##  

***Ourbusiness, financial condition and results of operations depend upon maintainingour relationships with vendors.***

*** ***

During the year ended September 30,2008, we distributed more than 30,000 products, of which over 15,000 werestocked in our distribution centers, sourced from approximately 500 vendors toover 19,000 veterinary practices. We currently do not manufacture the vastmajority of our products and are dependent on these vendors for our supply ofproducts. Our top ten vendors supplied products that accounted forapproximately 73% of our revenues for each of the three months ended December 31,2008 and 2007, and 72%, 70% and 70% of our revenues for the fiscal years ended September 30,2008, 2007 and 2006, respectively. Pfizer supplied products that accounted for approximately 31% and 27% ofour revenues during the three months ended December 31, 2008 and 2007,respectively, and 23%,21% and 19% of our revenues for our fiscal years ended September 30, 2008,2007 and 2006, respectively.  FortDodge supplied products that accounted for approximately 9% and 11% of ourrevenues during the three months ended December 31, 2008 and 2007,respectively, and 12%, 13% and 14% of our revenues for our fiscal years ended September 30,2008, 2007 and 2006, respectively. Intervet-Schering supplied products that accounted for approximately 8%and 9% of our revenues during the three months ended December 31, 2008 and2007, respectively, and 9%, 9% and 8% of our revenues for our fiscal yearsended September 30, 2008, 2007 and 2006, respectively.  Of the Pfizer supplied products, productionanimal products under a livestock agreement accounted for approximately 23% and22% of our revenues during the three months ended December 31, 2008 and2007, respectively.  Of the Pfizersupplied products, production animalproducts under a livestock agreement accounted for approximately 17%, 17% and15% of our revenues for our fiscal years ended September 30, 2008, 2007and 2006, respectively.  Revenues fromproduction animal products tend to be higher during the three months ended December 31due to the timing of vendor marketing programs and price increases as well asan increase in treatment of cattle related to weather conditions during thewinter months.

 

On January 26, 2009,Pfizer and Wyeth announced that they had entered into an agreement under whichPfizer will acquire all of the outstanding stock of Wyeth.  Pfizer and Fort Dodge, which is a division ofWyeth, are our two largest vendors as measured by our revenues.  Ifthe merger of Pfizer and Wyeth is consummated, the combined company will have ahigh market share with respect to certain animal health products and could useits increased leverage in the channel to negotiate terms with distributors thatare materially worse to the distributor than the terms that we were able tonegotiate with Pfizer and Wyeth while they were competitors.

 

Our ability to sustainour gross profits has been, and will continue to be, dependent in part upon ourability to obtain favorable terms and access to new and existing products fromour vendors. These terms may be subject to changes from time to time byvendors, such as changing from a “buy/sell” to an agency relationship, or froman agency to a “buy/sell” relationship. In a “buy/sell” transaction, wepurchase or take inventory of products from our vendors. Under an agencyrelationship, when we receive orders for products from a customer, we transmitthe order to the vendor who then picks, packs and ships the products. Anychanges from “buy/sell” to agency or from agency to “buy/sell” could adverselyaffect our revenues and operating income. The loss of one or more of our largevendors, a material reduction in their supply of products to us or materialchanges in the terms we obtain from them could have a material adverse effecton our business, financial condition and results of operations.

 

20

----

Table of Contents

 

Vendors may also chooseto change the method in which products are taken to market.  For example, a vendor may change ourrelationship from a complete distribution provider, including logistics andsales support, to only a logistics provider or only a sales supportprovider.  Only doing one of theseservices would reduce our margin on any sale. A change in the method in which products are taken to market caused byany vendor could have a material adverse effect on our business.

 

Someof our current and future vendors may decide to compete with us in the futureby pursuing or increasing their efforts in direct marketing and sales of theirproducts. These vendors could sell their products at lower prices and maintaina higher gross margin on their product sales than we can. In this event,veterinarians or animal owners may elect to purchase animal health productsdirectly from these vendors. Increased competition from any vendor of animalhealth products could significantly reduce our market share and adverselyimpact our financial results.

 

## **Item 2. Unregistered Sales of Equity Securities and Use ofProceeds**

##  

## The table below provides informationconcerning our repurchase of shares of our common stock during the three monthsended December 31, 2008.

##  

**Issuer Purchases of Equity Securities**

 
| **Period**                                       | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May Yet  Be Purchased Under  the Plans or  Programs** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                   | ** ** | ** **                               | ** ** | ** **                                                                                                                   | ** ** | ** **                                                                                                                                                                    | ** ** |
| October 1,  2008 to October 31, 2008   |       | 857                                          | (1)   | $                                        | 40.22      |                                                                                                                         | —     |                                                                                                                                                                          | —     |   |
| November 1,  2008 to November 30, 2008 |       | —                                       |       | —                                   |       | —                                                                                                                       |       | —                                                                                                                                                                        |       |
| December 1,  2008 to December 31, 2008 |       | —                                       |       | —                                   |       | —                                                                                                                       |       | —                                                                                                                                                                        |       |
| Total                                            |       | 857                                          | (1)   | $                                        | 40.22      |                                                                                                                         | —     |                                                                                                                                                                          | —     |   |

 

----

(1)             Theseshares were withheld upon the vesting of employee restricted stock grants inconnection with payment of required withholding taxes.

 

## **Item 3. Defaults Upon Senior Securities**

##  

None.

 

## **Item 4. Submission of Matters to a Vote of Security Holders**

##  

## None.

##  

## **Item 5. Other Information**

##  

None.

 

21

----

Table ofContents

 

**Item 6.  Exhibits**

 
| 10.1   |   | 2009 Livestock Products  Distribution Agreement between MWI Veterinary Supply, Inc. and  Pfizer, Inc. effective as of January 1, 2009 † |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                        |
| 15     |   | Letter re: Unaudited  Interim Financial Information                                                                                                         |
|   |   |                                                                                                                                                        |
| 31.1   |   | Certification of CEO  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        |
|   |   |                                                                                                                                                        |
| 31.2   |   | Certification of CFO  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                        |
|   |   |                                                                                                                                                        |
| 32     |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                          |
|   |   |                                                                                                                                                        |
| 99.1   |   | Third Amendment To  Office Lease dated February 28, 2008 between MWI Veterinary  Supply, Inc. and Rafanelli and Nahas                             |

 

----

†              Certain portions of the exhibithave been omitted pursuant to a confidential treatment request submitted to theSEC.

 

SIGNATURE

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                              |     | MWI  Veterinary Supply, Inc.                                               |
|------------------------------|----------|---------------------------------------------------------------------------------|
|                         |     | (Registrant)                                                                    |
|                         |     |                                                                            |   |
| Date: February 4,  2009 |     | /s/ Mary Patricia B.  Thompson                                                  |
|                         |     | Mary Patricia B.  Thompson                                                      |   |
| * *                     | * * | *Senior Vice President of Finance and  Administration, Chief Financial Officer* |

 

22

----