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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended December 31, 2009**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from                     to                     **

** **

**Commission File Number:  000-51468**

 

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**MWIVETERINARY SUPPLY, INC.**

(Exact name of registrantas specified in its Charter)

 

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| **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)                               |
|                                                       |       |                                     |
| **(208)  955-8930**                                        |
| (Registrant’s telephone  number, including area code) |

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

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 February 1,2010 was 12,218,236.

 

 

 

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**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, 2009 and 2008     |       | 3          |
|              |       |                                                                                                         |       |       |
|              |       | Condensed  Consolidated Balance Sheets as of December 31, 2009 and September 30,  2009             |       | 4          |
|              |       |                                                                                                         |       |       |
|              |       | Condensed  Consolidated Statements of Cash Flows for the three months ended  December 31, 2009 and 2008 |       | 5          |
|              |       |                                                                                                         |       |       |
|              |       | Notes to Condensed Consolidated Financial Statements                                                         |       | 6          |
|              |       |                                                                                                         |       |       |
|              |       | Report of Independent Registered Public Accounting  Firm                                                     |       | 11         |
|              |       |                                                                                                         |       |       |
| **Item 2.**       | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**              |       | 12         |
|              |       |                                                                                                         |       |       |
| **Item 3.**       | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk**                                              |       | 17         |
|              |       |                                                                                                         |       |       |
| **Item 4.**       | ** ** | **Controls and Procedures**                                                                                  |       | 18         |
|              |       |                                                                                                         |       |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                        | ** ** | ** ** |
|              |       |                                                                                                         |       |       |
|              | ** ** | **Cautionary Statement**                                                                                     |       | 18         |
|              |       |                                                                                                         |       |       |
| **Item 1.**       | ** ** | **Legal Proceedings**                                                                                        |       | 19         |
| ** **        | ** ** | ** **                                                                                                   | ** ** | ** ** |
| **Item  1A.**     | ** ** | **Risk  Factors**                                                                                            |       | 19         |
| ** **        | ** ** | ** **                                                                                                   | ** ** | ** ** |
| **Item 2.**       | ** ** | **Unregistered Sales  of Equity Securities and Use of Proceeds**                                             |       | 20         |
| ** **        | ** ** |                                                                                                         |       |       |
| **Item 3.**       | ** ** | **Defaults Upon  Senior Securities**                                                                         |       | 20         |
| ** **        | ** ** |                                                                                                         |       |       |
| **Item 4.**       | ** ** | **Submission of  Matters to a Vote of Security Holders**                                                     |       | 20         |
| ** **        | ** ** |                                                                                                         |       |       |
| **Item 5.**       | ** ** | **Other Information**                                                                                        |       | 20         |
| ** **        | ** ** |                                                                                                         |       |       |
| **Item  6.**      | ** ** | **Exhibits**                                                                                                 |       | 20         |

 

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**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,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Revenues:                                     |       |                                     |       |   |   |
| Product sales                                 |       | $                                        | 221,479    |   | $ | 216,616 |   |
| Product sales to  related party               |       | 11,058                                   |       | 12,330 |   |
| Commissions                                   |       | 3,574                                    |       | 2,873 |   |
| Total revenues                                |       | 236,111                                  |       | 231,819 |   |
|                                          |       |                                     |       |   |   |
| Cost of product sales                         |       | 200,102                                  |       | 198,164 |   |
| Gross profit                                  |       | 36,009                                   |       | 33,655 |   |
|                                          |       |                                     |       |   |   |
| Selling, general and  administrative expenses |       | 22,421                                   |       | 23,133 |   |
| Depreciation and  amortization                |       | 855                                      |       | 835 |   |
| Operating income                              |       | 12,733                                   |       | 9,687 |   |
|                                          |       |                                     |       |   |   |
| Other income (expense):                       |       |                                     |       |   |   |
| Interest expense                              |       | (40                                      | )          | (64 | ) |
| Earnings of equity  method investees          |       | 57                                       |       | 66 |   |
| Other                                         |       | 107                                      |       | 149 |   |
| Total other income  (expense), net            |       | 124                                      |       | 151 |   |
|                                          |       |                                     |       |   |   |
| Income before taxes                           |       | 12,857                                   |       | 9,838 |   |
| Income tax expense                            |       | (5,023                                   | )          | (3,889 | ) |
|                                          |       |                                     |       |   |   |   |   |
| Net income                                    |       | $                                        | 7,834      |   | $ | 5,949 |   |
|                                          |       |                                     |       |   |   |
| Earnings per common  share:                   |       |                                     |       |   |   |
| Basic                                         |       | $                                        | 0.64       |   | $ | 0.49 |   |
| Diluted                                       |       | $                                        | 0.63       |   | $ | 0.48 |   |
|                                          |       |                                     |       |   |   |
| Weighted average common  shares outstanding:  |       |                                     |       |   |   |
| Basic                                         |       | 12,173                                   |       | 12,071 |   |
| Diluted                                       |       | 12,356                                   |       | 12,295 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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

 
| ** **                                                                                                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| **Assets**                                                                                                       |       |                  |       |                   |       |
|                                                                                                             |       |                  |       |                   |       |
| Current Assets:                                                                                                  |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                       |       | $                     | 10,841     |                   | $          | 14,302 |   |
| Receivables, net                                                                                                 |       | 133,501               |       | 142,485                |       |
| Inventories                                                                                                      |       | 131,689               |       | 116,119                |       |
| Prepaid expenses and  other current assets                                                                       |       | 3,440                 |       | 3,946                  |       |
| Deferred income taxes                                                                                            |       | 1,793                 |       | 1,517                  |       |
| Total current assets                                                                                             |       | 281,264               |       | 278,369                |       |
|                                                                                                             |       |                  |       |                   |       |
| Property and equipment,  net                                                                                     |       | 9,079                 |       | 9,313                  |       |
| Goodwill                                                                                                         |       | 37,610                |       | 37,610                 |       |
| Intangibles, net                                                                                                 |       | 9,987                 |       | 10,194                 |       |
| Other assets, net                                                                                                |       | 2,490                 |       | 2,433                  |       |
| Total assets                                                                                                     |       | $                     | 340,430    |                   | $          | 337,919 |   |
|                                                                                                             |       |                  |       |                   |       |
| **Liabilities  And Stockholders’ Equity**                                                                   |       |                  |       |                   |       |
|                                                                                                             |       |                  |       |                   |       |
| Current Liabilities:                                                                                             |       |                  |       |                   |       |
| Line-of-credit                                                                                                   |       | $                     | —     |                   | $          | — |   |
| Accounts payable                                                                                                 |       | 109,565               |       | 117,830                |       |
| Accrued expenses                                                                                                 |       | 13,054                |       | 10,767                 |       |
| Current maturities of  long-term debt                                                                            |       | 97                    |       | 97                     |       |
| Total current  liabilities                                                                                       |       | 122,716               |       | 128,694                |       |
|                                                                                                             |       |                  |       |                   |       |
| Deferred income taxes                                                                                            |       | 1,510                 |       | 1,298                  |       |
|                                                                                                             |       |                  |       |                   |       |
| Commitments and  contingencies                                                                                   |       |                  |       |                   |       |
|                                                                                                             |       |                  |       |                   |       |
| **Stockholders’  Equity**                                                                                   |       |                  |       |                   |       |
| Common stock $0.01 par  value, 40,000 authorized; 12,218 and 12,196 shares issued and outstanding,  respectively |       | 122                   |       | 122                    |       |
| Additional paid in  capital                                                                                      |       | 124,780               |       | 124,337                |       |
| Retained earnings                                                                                                |       | 91,302                |       | 83,468                 |       |
| Total stockholders’  equity                                                                                 |       | 216,204               |       | 207,927                |       |
| Total liabilities and  stockholders’ equity                                                                 |       | $                     | 340,430    |                   | $          | 337,919 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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

 
| ** **                                                                        | ** ** | **Three months ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                                         |       |                                     |       |   |   |
| Net  income                                                                       |       | $                                        | 7,834      |   | $ | 5,949 |   |
| Adjustments  to reconcile net income to net cash provided byoperating activities: |       |                                     |       |   |   |
| Depreciation  and amortization                                                    |       | 858                                      |       | 838 |   |
| Amortization  of debt issuance costs                                              |       | 11                                       |       | 11 |   |
| Stock-based  compensation                                                         |       | 70                                       |       | 54 |   |
| Deferred  income taxes                                                            |       | (64                                      | )          | (25 | ) |
| Earnings  of equity method investees                                              |       | (47                                      | )          | (66 | ) |
| Loss  on disposal of property and equipment                                       |       | —                                   |       | 29 |   |
| Tax  benefit of common stock options                                              |       | (305                                     | )          | (223 | ) |
| Changes  in operating assets and liabilities (net of effects of acquisitions):    |       |                                     |       |   |   |
| Receivables                                                                       |       | 8,973                                    |       | (9,910 | ) |
| Inventories                                                                       |       | (15,570                                  | )          | (15,790 | ) |
| Prepaid  expenses and other current assets                                        |       | 524                                      |       | 340 |   |
| Accounts  payable                                                                 |       | (8,165                                   | )          | 15,124 |   |
| Accrued  expenses                                                                 |       | 2,592                                    |       | 1,856 |   |
| Net  cash used in operating activities                                            |       | (3,289                                   | )          | (1,813 | ) |
|                                                                              |       |                                     |       |   |   |
| **Cash Flows From Investing Activities:**                                         |       |                                     |       |   |   |
| Business  acquisitions                                                            |       | —                                   |       | 117 |   |
| Purchases  of property and equipment                                              |       | (517                                     | )          | (1,173 | ) |
| Other                                                                             |       | (36                                      | )          | (63 | ) |
| Net  cash used in investing activities                                            |       | (553                                     | )          | (1,119 | ) |
|                                                                              |       |                                     |       |   |   |
| **Cash Flows From Financing Activities:**                                         |       |                                     |       |   |   |
| Issuance  of common stock, net of issuance costs                                  |       | 62                                       |       | 72 |   |
| Proceeds  from stock options                                                      |       | 14                                       |       | 4 |   |
| Tax  benefit of common stock options                                              |       | 305                                      |       | 223 |   |
| Net  cash provided by financing activities                                        |       | 381                                      |       | 299 |   |
|                                                                              |       |                                     |       |   |   |
| **Decrease in Cash and Cash Equivalents**                                         |       | (3,461                                   | )          | (2,633 | ) |
|                                                                              |       |                                     |       |   |   |
| Cash  and Cash Equivalents at Beginning of Period                                 |       | 14,302                                   |       | 3,419 |   |
|                                                                              |       |                                     |       |   |   |
| Cash  and Cash Equivalents at End of Period                                       |       | $                                        | 10,841     |   | $ | 786 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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

 

## **NOTE 1 —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.  We have evaluated all subsequent eventsthrough February 4, 2010, the date the financial statements were issued.

 

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 2009 Annual Report on Form 10-Kfiled with the SEC on November 20, 2009. The results of operations for the three months ended December 31,2009 are not necessarily indicative of results to be expected for the entirefiscal year.

 

Our unaudited condensedconsolidated balance sheet as of September 30, 2009 has been derived fromthe audited consolidated balance sheet as of that date.

 

**Useof Estimates**

 

*The*accompanyingunaudited condensed consolidated financial statements have been prepared on theaccrual basis of accounting using accounting principles generally accepted inthe United States. In preparing financial information, we use certain estimatesand assumptions that may affect the reported amounts and disclosures. Some ofthese estimates require difficult, subjective and complex judgments aboutmatters that are inherently uncertain. As a result, actual results could differmaterially from these estimates. Estimates are used when accounting for salesreturns, 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.*Gross billings from agency contracts were$54,427 and $47,666 for the three months ended December 31, 2009 and 2008,respectively, and generated commission revenue of $3,574 and $2,873,respectively.

 

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**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. *Many of our vendors’ rebate programs arebased on a calendar year.  *We may receive quarterly, semi-annual or annualperformance-based rebates from third-party vendors based upon attainment ofcertain sales and/or purchase goals. Sales rebates are classified in theaccompanying consolidated statements of income as a reduction to cost ofproduct sales at the time the sales performance measures are achieved. Purchaserebates are measured against inventory purchases from the vendors and areclassified as a reduction of inventory until the product is sold. When theinventory is sold and purchase measures are achieved, purchase rebates arerecognized 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 or eliminate rebate programs from yearto year.*

 

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

 

In June 2009, theFinancial Accounting Standards Board issued SFAS No. 167, Amendments toFASB Interpretation No. 46(R), which has now been codified underAccounting Standards Codification 810. This accounting standard amends the consolidation guidance applicable tovariable interest entities and requires additional disclosures concerning anenterprise’s continuing involvement with variable interest entities. Thestatement is effective for our fiscal year beginning October 1, 2010. We arecurrently evaluating the expected impact, if any, that this standard will haveon our consolidated financial statements.

 

**NOTE 3**—**RECEIVABLES**

 
| ** **                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| Trade                            |       | $                     | 120,961    |                   | $          | 132,369 |   |
| Vendor rebates and  programs     |       | 15,762                |       | 13,122                 |       |
|                             |       | 136,723               |       | 145,491                |       |
| Allowance for doubtful  accounts |       | (3,222                | )          | (3,006                 | )          |
|                             |       | $                     | 133,501    |                   | $          | 142,485 |   |

 

Product sales resultingfrom transactions with Banfield, The Pet Hospital (“Banfield”) wereapproximately 11% and 9% of total product sales during the three months ended December 31,2009 and 2008, respectively. Approximately 13% of our trade receivablesresulted from transactions with Banfield as of December 31, 2009 and September 30,2009.

 

**NOTE 4**—**PROPERTY AND EQUIPMENT**

 
| ** **                          | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| Land                                |       | $                     | 20         |                   | $          | 20 |   |
| Leasehold improvements              |       | 3,736                 |       | 3,566                  |       |
| Machinery, furniture  and equipment |       | 13,532                |       | 12,792                 |       |
| Computer equipment                  |       | 3,599                 |       | 3,325                  |       |
| Construction in  progress           |       | 370                   |       | 1,140                  |       |
|                                |       | 21,257                |       | 20,843                 |       |
| Accumulated  depreciation           |       | (12,178               | )          | (11,530                | )          |
|                                |       | $                     | 9,079      |                   | $          | 9,313 |   |

 

Depreciation expense was$651 and $629 for the three months ended December 31, 2009 and 2008,respectively.

 

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**NOTE 5**—**INTANGIBLES**

 
| ** **                | ** ** | ** **       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------|------------|------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                | ** ** | **Useful Lives** | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| 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 |       |             |       | (2,384                | )          | (2,177                 | )          |
|                      |       |             |       | 7,635                 |       | 7,842                  |       |
| Non-Amortizing:           |       |             |       |                  |       |                   |       |
| Trade names and patents   |       |             |       | 2,352                 |       | 2,352                  |       |
|                      |       |             |       | $                     | 9,987      |                   | $          | 10,194 |   |

 

Amortization expense was$207 and $209 for the three months ended December 31, 2009 and 2008,respectively.  Estimated future annualamortization expense related to intangible assets as of December 31, 2009follows:

 
| ** **         | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| Remainder of  2010 |       | $          | 597        |   |
| 2011               |       | 786        |       |
| 2012               |       | 758        |       |
| 2013               |       | 674        |       |
| 2014               |       | 668        |       |
| Thereafter         |       | 4,152      |       |
|               |       | $          | 7,635      |   |

 

**NOTE 6**—**CREDIT FACILITY AND LONG-TERM DEBT**

 

**Line-of-Credit**—On December 13, 2006, MWIVeterinary Supply Co., our wholly-owned subsidiary (“MWI Co.”) as borrower,entered into an unsecured credit agreement with us and Memorial Pet Care, Inc.(our wholly-owned subsidiary), as guarantors, and Bank of America, N.A. andWells Fargo Bank, N.A., (collectively, the “lenders”) for the provision of arevolving credit facility (the “facility”). The facility allows for borrowings in the aggregate of $70,000, with theright to request an increase in the commitment of the lenders 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. We had no outstanding balance on the facility atboth December 31, 2009 and September 30, 2009, and the interest ratefor the facility was 0.87% as of December 31, 2009.

 

The facility containscertain financial covenants as well as other restrictive covenants. As of December 31,2009, we were in compliance with all covenants in the facility.  The facility allows for the issuance of up to$10,000 in letters of credit. The letters of credit would typically act as aguarantee of payment to certain third-parties in accordance with specifiedterms and conditions. We had no letters of credit outstanding at either December 31,2009 or September 30, 2009.

 

**NOTE 7**—**COMMON STOCK AND STOCK-BASED AWARDS**

 

*2002 Stock Plan*

* *

We have a 2002Stock Plan (the “2002 Plan”) to provide our directors, executives and other keyemployees with additional incentives by allowing them to acquire an ownershipinterest in us and, as a result, encouraging them to contribute to our success.As of December 31, 2009 and 2008, we had 323,804 and 402,220 shares,respectively, of our common stock available for issuance under the 2002 Plan.The options granted under the 2002 Plan are nonqualified stock options thathave an exercise price per share equal to fair market value of the common stockat the time of grant. The term of each option is determined by our board ofdirectors or by a designated committee of the board.  The term of any option may not exceed tenyears from the date of grant.  As of December 31,2009, 263,364 options to purchase common stock were outstanding with a weightedaverage exercise price of $0.18 per share and expiring through June 2012.

 

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*2005 Stock Plan*

* *

In July 2005, we adopted the 2005 Stock-Based Award andIncentive Compensation Plan (the “2005 Plan”). Under the 2005 Plan as amended,we may offer restricted shares of our common stock and grant options topurchase shares of our common stock to selected employees and non-employeedirectors. The purpose of the 2005 Plan is to promote our long-term financialsuccess by attracting, retaining and rewarding eligible participants. As of December 31,2009 and 2008 we had 1,064,771 and 1,081,199 shares, respectively, of ourcommon stock available for issuance under the 2005 Plan. As of December 31,2009, 54,967 options to purchase common stock were outstanding with a weightedaverage exercise price of $18.06 per share and expiring through September 2015.

 

The 2005 Plan permits us to grant stock options (both incentivestock options and non-qualified stock options), restricted stock and deferredstock. The compensation committee will determine the number and type ofstock-based awards to each participant, the exercise price of each award, theduration of the award (not to exceed ten years), vesting provisions and allother terms and conditions of such award in individual award agreements. The2005 Plan provides that upon termination of employment with us, unlessdetermined otherwise by the compensation committee at the time options aregranted, the exercise period for vested awards will generally be limited,provided that vested awards will be canceled immediately upon a termination forcause or voluntary termination. The 2005 Plan provides for the cancellation ofall unvested awards upon termination of employment with us, unless determinedotherwise by the compensation committee at the time awards are granted.

 

We granted no commonstock options during each of the three months ended December 31, 2009 and2008.  During the three months ended December 31,2009 and 2008, we did not issue any shares of restricted stock under the 2005Plan.  During the three months ended December 31,2009 and 2008, we recognized $95 and $91 of compensation expense related to restrictedstock grants, respectively.

 

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 31,2009 and 2008, we issued 1,770 and 3,057 shares, respectively, of our commonstock under the ESPP.  As of December 31,2009, there were 487,661 shares available to be issued under the ESPP.

 

**NOTE 8**—**INCOME TAXES**

 

Oureffective tax rate for the three months ended December 31, 2009 and 2008was 39.1% and 39.5%, respectively.  Thechange in our effective tax rate is due to a change in our estimates related tostate taxes.

 

Asof December 31, 2009, we had $205 of unrecognized tax benefits, of which$15 would impact our effective rate if recognized. Our policy for classifyinginterest and penalties associated with unrecognized tax benefits is to includesuch items in income tax expense.  Theamount of interest and penalties recognized during the three months ended December 31,2009 and 2008 was not material.

 

Wefiled Form 3115 Application of Change in Accounting Method with theInternal Revenue Service during the fiscal year ended September 30,2008.  We filed an advance consentrequest for a non-automatic account method change for tax purposes for which wehad not received approval prior to our reporting period end.  The method change will make revenue recognitionfor tax purposes the same as revenue recognized for book purposes. We expectresolution within the next twelve months which would decrease the liability forunrecognized tax benefits by approximately $182.

 

Additionally,we are in the process of entering into voluntary disclosure agreements withcertain state jurisdictions and it is possible that these matters may besettled within the next twelve months, which would decrease the liability forunrecognized tax benefits by approximately $23 as a result of the payment ofadditional tax expected to be due. Settlement of any particular position wouldusually require the use of cash.  Theresolution of a matter would be recognized as an adjustment to our income taxexpense and our effective tax rate in the period of resolution.  With few exceptions, we are no longer subjectto income tax examination for years before 2004 in the U.S. and significantstate and local jurisdictions.

 

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## **NOTE 9 —COMPUTATION OF EARNINGS PER SHARE***(Inthousands, except per share data)*

 
| ** **                                                       | ** ** | **Three months ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                                       | ** ** | **Basic**                                | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                                       |       | $                                        | 7,834      |   | $ | 7,834 |   | $ | 5,949 |   | $ | 5,949 |   |
| Weighted average common  shares outstanding                      |       | 12,173                                   |       | 12,173 |   | 12,071 |   | 12,071 |   |
| Effect of diluted  securities Stock options and restricted stock |       |                                     |       | 183 |   |   |   | 224 |   |
| Weighted average  diluted shares outstanding                     |       |                                     |       | 12,356 |   |   |   | 12,295 |   |
| Earnings per share                                               |       | $                                        | 0.64       |   | $ | 0.63 |   | $ | 0.49 |   | $ | 0.48 |   |
| Anti-dilutive shares excluded  from calculation                  |       |                                     |       | — |   |   |   | — |   |

 

**NOTE 10**—**RELATED PARTIES**

 

MWI Co. holds a 50.0%membership interest in Feeders’ Advantage LLC (“Feeders’ Advantage”).  MWI Co. charged Feeders’ Advantage forcertain operating and administrative services in the amounts of $207 and $179for the three months ended December 31, 2009 and 2008, respectively.  Sales of products to Feeders’ Advantage were$11,058 and $12,330 for the three months ended December 31, 2009 and 2008,respectively, which represented 5% of total product sales for both of the threemonths ended December 31, 2009 and 2008.

 

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 31,2009, MWI Co. had a payable balance from Feeders’ Advantage of $794, and as of September 30,2009, MWI Co. had a payable balance to Feeders’ Advantage of $210.

 

**NOTE 11 — STATEMENTS OF CASH FLOWS — SUPPLEMENTAL ANDNON-CASH DISCLOSURES**

 
| ** **                                             | ** ** | **Three months ended December 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| *Supplemental  Disclosures*                            |       |                                     |       |   |   |
| Cash paid for interest                                 |       | $                                        | 23         |   | $ | 45 |   |
| Cash paid for income  taxes                            |       | 340                                      |       | 168 |   |
| *Non-cash  Activities*                                 |       |                                     |       |   |   |
| Equipment acquisitions  financed with accounts payable |       | 19                                       |       | 122 |   |
|                                                        |            |                                          |            |  |  |  |  |

 

**NOTE 12**—**COMMITMENTS AND CONTINGENCIES**

 

## Fromtime to time, 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, 2009, 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.

 

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**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 (the “Corporation”) as of December 31, 2009, and the relatedcondensed consolidated statements of income and of cash flows for thethree-month periods ended December 31, 2009 and 2008.  These interim financial statements are theresponsibility of the Corporation’s management.

 

We conducted our reviewsin 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 and accountingmatters.  It is substantially less inscope than an audit conducted in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the objective of which isthe expression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not expresssuch an opinion.

 

Based on our reviews, 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, 2009 andthe related consolidated statements of income, stockholders’ equity, and cashflows for the year then ended (not presented herein); and in our report dated November 20,2009, 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, 2009 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 4,2010

 

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

 

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

 

**Overview**

 

We are a leading distributor of animal health productsto veterinarians across the United States. We market our products toveterinarians in both the companion and production animal markets. Our growthhas primarily been from internal growth initiatives and, to a lesser extent,selective acquisitions.  We operatewithin a single reporting segment and are primarily located within the UnitedStates.

 

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 animal market.The state of the overall economy and consumer spending have impacted bothmarkets, with tightening credit markets, volatile commodity prices in milk,grain, corn and feeder cattle, and changes in weather patterns also affectingdemand in the production animal market. Both markets have been integral to our financial results and we intendto continue supporting both markets.

 

We believe that the companion animal market has slowedas a result of a decrease in consumer spending. Historically, growth in the companion animal market 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 thanproduction animal health products, companion animal health products typicallyhave higher margins. We intend to continue to penetrate this market throughinternal growth initiatives and selective acquisitions.  We believe that some of our customers in thismarket have experienced liquidity issues as a result of the tightening creditmarkets.

 

Product sales in the production animal market havebeen negatively impacted by volatility in commodity prices such as milk, corn,grain and feeder cattle, changes in weather patterns that allow cattle to grazefor longer periods and changes in the general economy.  Milk price declines in the dairy market overthe last two years have had a significant impact on dairy farmers.  This has created cash-flow challenges forthese farmers and in turn, has impacted the time it takes for us to collect ouroutstanding accounts receivable from these customers.  However, we still believe that it isimportant to our business to service this market and we intend to continue tosupport production animal veterinarians with a broad range of products andvalue-added services. Historically, sales in this market have been largelydriven by spending on animal health products to improve productivity, weightgain and disease prevention, as well as a growing focus on food safety.

 

We generally extend some level of credit to ourcustomers without requiring collateral, which exposes us to credit risk.  If customers’ cash flow or operating andfinancial performance deteriorates, or if they are unable to make scheduledpayments or obtain other sources of credit, they may not be able to pay or maydelay payment to us, or in some cases may return products to us.******We continually assess our customers’ability to pay us and adjust our allowance for doubtful accounts, as necessary.

 

Ourquarterly sales and operating results have varied significantly in the past,and will likely continue to do so in the future. Historically, our totalrevenues have typically been higher during the spring and fall months due toincreased sales of production animal products. Product use cycles for productionanimal products are directly related to medical procedures performed byveterinarians on production animals during the spring and fall months. Thesebuying patterns can also be affected by the marketing programs or priceincrease announcements of vendors and distributors, which can causeveterinarians to purchase production animal health products earlier than thoseproducts are needed. This kind of early purchasing may reduce our sales in themonths these purchases would have otherwise been made.

 

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*Sales*

 

We sell products that we source from our vendors toour customers through either a “buy/sell” transaction or an agency relationshipwith our vendors. In a “buy/sell” transaction, we purchase or take inventory ofproducts from our vendors. When a customer places an order with us, we pick,pack, ship and invoice the customer for the order. We record sales from “buy/sell”transactions, which account for the vast majority of our business, as revenuesin conformity with generally accepted accounting principles in the UnitedStates. In an agency relationship, we generally do not purchase and takeinventory of products from our vendors. When we receive an order from ourcustomer, we transmit the order to our vendor, who picks, packs and ships theorder to our customer. In some cases, our vendor invoices and collects paymentfrom our customer, while in other cases we invoice and collect payment from ourcustomer on behalf of our vendor. We receive a commission payment forsoliciting the order from our customer and for providing other customer serviceactivities. The aggregate revenues we receive in agency transactions constitutethe “commissions” line item on our consolidated statements of income and arerecorded in conformity with accounting principles generally accepted in theUnited States. Our vendors determine the method we use to sell our products.Historically, vendors have occasionally switched between the “buy/sell” andagency models for particular products in response to market conditions relatedto that particular product. A switch between models can impact our revenues andour operating income. We cannot know in advance when a vendor will switchbetween the “buy/sell” and agency models or what impact, if any, such a changemay have. A switch can occur even with vendors with whom we have writtenagreements, because most of our agreements with vendors have relatively shortterms and are terminable with or without cause on short notice, normally 30 to90 days. The impact of any individual change from a “buy/sell” to anagency model depends on the costs and expenses associated with a particularproduct, and can have either a positive or a negative effect on ourprofitability.

 

Historically, our contract with Merial to sell theirflea, tick and heartworm products included an exclusivity requirement.  This requirement did not permit us to sell ordistribute other competing flea, tick and heartworm products.  During the course of our contractnegotiations with Merial for calendar year 2010, we agreed with Merial to begina non-exclusive arrangement for 2010 where we will be permitted to sell anddistribute other competing products. Some of these competing products will be sold under buy-sellarrangements, while others will be sold under agency arrangements.  Merial’s flea, tick and heartworm productsare sold under an agency arrangement. This switch to buy-sell arrangements for certain flea, tick andheartworm products will have an impact on how our revenues are reported, sinceunder agency sales, only commissions are reported as revenues, while forbuy-sell products the total sale price of the product is reported as revenue.

 

OnOctober 15, 2009, Pfizer completed its acquisition of Wyeth.  Prior to this acquisition, Pfizer and FortDodge, a division of Wyeth, were our two largest vendors as measured by ourrevenues.  In connection with thisacquisition, Pfizer divested certain animal health products to BoehringerIngelheim.  Fort Dodge supplied productsthat accounted for approximately 11% of our revenues for fiscal year 2009.  Of this amount, based on information receivedfrom the Federal Trade Commission, Pfizer and Boehringer Ingelheim, we estimatethat approximately 43% of such revenues were attributable to products now ownedby Pfizer and approximately 57% of such revenues were attributable to productsnow owned by Boehringer Ingelheim.  Weare currently negotiating new contracts with Pfizer and Boehringer Ingelheimfor calendar year 2010.

 

OnNovember 3, 2009, Merck and Schering-Plough completed their merger underwhich Merck acquired all of the outstanding stock of Schering-Plough.  Merial was a joint venture between Merck andSanofi-Aventis, and Sanofi-Aventis acquired Merck’s interest in Merial shortlybefore Merck and Schering-Plough completed their merger.  Merck has announced that Sanofi-Aventis hasan option to combine the Intervet/Schering-Plough Animal Health business withMerial to form an animal health joint venture that would be equally owned bythe new Merck and Sanofi-Aventis.  If theoption is exercised by Sanofi-Aventis, the formation of the new animal healthjoint venture would be subject to approval by the relevant regulatoryauthorities.  Merial andIntervet-Schering are also two of our larger vendors.  We are currently negotiating new contractswith each of these companies for calendar year 2010.

 

Thesurviving companies from these transactions will have high market shares withrespect to certain animal health products, and they could use their increasedleverage in the channel to negotiate terms with distributors that arematerially worse to the distributor than the terms that we have been able to negotiatewith Pfizer, Fort Dodge, Boehringer Ingelheim, Merial and Intervet-Scheringindividually while they were competing with each other. There also remainsuncertainty related to any changes to the terms that may be included in thevendor contracts we negotiate for the upcoming year as a result of thesetransactions.  There is also apossibility of product disruption as these companies integrate their operationswhich could adversely impact our financial results.  Further consolidation among animal health productsvendors could result in our vendors further increasing their market share,which could give vendors greater pricing power and make it easier for suchvendors to sell their products directly to animal health customers, both ofwhich could decrease our net sales and profitability.

 

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Ourtop ten vendors supplied products that accounted for approximately 68% and 73%of our revenues for the three months ended December 31, 2009 and 2008,respectively, and 74% of our revenues for the fiscal year ended September 30,2009.  Pfizer supplied products thataccounted for approximately 25% and 31% of our revenues during the three monthsended December 31, 2009 and 2008, respectively, and  24% of our revenues for our fiscal year endedSeptember 30, 2009.  Of the Pfizersupplied products, production animal products under a livestock agreementaccounted for approximately 13% and 23% of our revenues during the three monthsended December 31, 2009 and 2008, respectively and approximately 14% ofour revenues for our fiscal year ended September 30, 2009.  Fort Dodge supplied products that accountedfor approximately 1% and 9% of our revenues during the three months ended December 31,2009 and 2008, respectively, and 11% of our revenues for our fiscal year ended September 30,2009.  Intervet-Schering, a subsidiary ofSchering Plough, supplied products that accounted for approximately 10% and 8%of our revenues during the three months ended December 31, 2009 and 2008,respectively, and 11% of our revenues for our fiscal year ended September 30,2009.  Boehringer Ingelheim suppliedproducts that accounted for approximately 7% and 3% of our revenues during thethree months ended December 31, 2009 and 2008, respectively, and 4% of ourrevenues for our fiscal year ended September 30, 2009.  Merial, a subsidiary of Sanofi-Aventis,  supplies the majority of their products to usunder an agency relationship.  Commissionrevenue generated from Merial products accounted for approximately 53% and 36%of total commission revenues for the three months ended December 31, 2009and 2008, respectively, and 56% of total commission revenues for our fiscalyear ended September 30, 2009.

 

*Vendor Rebates*

 

We typically renegotiate vendor contractsannually.  These vendor contracts mayinclude terms defining rebates, commissions and exclusivity requirements.Vendor rebates based on sales are classified in our accompanying consolidatedstatements of income as a reduction to cost of product sales at the time thesales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendorsand 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.

 

*Acquisitions*

 

InJuly 2008, we acquired substantially all of the assets of AAHAMARKETLink.  Based near Denver, Colorado,AAHA MARKETLink was a distributor of animal health products to members ofAmerican Animal Hospital Association.

 

For more information onour business, see our Annual Report on Form 10-K filed with the SEC on November 20,2009.

 

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**Results of Operations**

 

Thefollowing table summarizes our results of operations for the three months endedDecember 31, 2009 and 2008, in dollars and as a percentage of totalrevenues.

 
| ** **                                                  | ** ** | **Three Months Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                 | ** ** | **%** | ** ** | **2008** | ** ** | **%** | ** ** |
| Revenues:                                                   |       |                                     |       |   |   |   |   |   |   |
| Product sales                                               |       | $                                        | 221,479    |   | 93.8 | % | $ | 216,616 |   | 93.5 | % |
| Product sales to related  party                             |       | 11,058                                   |       | 4.7 | % | 12,330 |   | 5.3 | % |
| Commissions                                                 |       | 3,574                                    |       | 1.5 | % | 2,873 |   | 1.2 | % |
| Total revenues                                              |       | 236,111                                  |       | 100.0 | % | 231,819 |   | 100.0 | % |
|                                                        |       |                                     |       |   |   |   |   |   |   |
| Cost of product sales                                       |       | 200,102                                  |       | 84.7 | % | 198,164 |   | 85.5 | % |
| Gross profit                                                |       | 36,009                                   |       | 15.3 | % | 33,655 |   | 14.5 | % |
|                                                        |       |                                     |       |   |   |   |   |   |   |
| Selling, general and administrative  expenses               |       | 22,421                                   |       | 9.5 | % | 23,133 |   | 10.0 | % |
| Depreciation and  amortization                              |       | 855                                      |       | 0.4 | % | 835 |   | 0.3 | % |
| Operating income                                            |       | 12,733                                   |       | 5.4 | % | 9,687 |   | 4.2 | % |
|                                                        |       |                                     |       |   |   |   |   |   |   |
| Other income (expense):                                     |       |                                     |       |   |   |   |   |   |   |
| Interest expense                                            |       | (40                                      | )          | 0.0 | % | (64 | ) | 0.0 | % |
| Earnings of equity  method investees                        |       | 57                                       |       | 0.0 | % | 66 |   | 0.0 | % |
| Other                                                       |       | 107                                      |       | 0.0 | % | 149 |   | 0.1 | % |
| Total other income  (expense), net                          |       | 124                                      |       | 0.0 | % | 151 |   | 0.1 | % |
|                                                        |       |                                     |       |   |   |   |   |   |   |
| Income before taxes                                         |       | 12,857                                   |       | 5.4 | % | 9,838 |   | 4.3 | % |
| Income tax expense                                          |       | (5,023                                   | )          | -2.1 | % | (3,889 | ) | -1.7 | % |
| Net income                                                  |       | $                                        | 7,834      |   | 3.3 | % | $ | 5,949 |   | 2.6 | % |
|                                                        |       |                                     |       |   |   |   |   |   |   |
| Earnings per common  share:                                 |       |                                     |       |   |   |   |   |   |   |
| Basic                                                       |       | $                                        | 0.64       |   |   |   | $ | 0.49 |   |   |   |
| Diluted                                                     |       | $                                        | 0.63       |   |   |   | $ | 0.48 |   |   |   |
|                                                        |       |                                     |       |   |   |   |   |   |   |
| Weighted average common  shares outstanding (in thousands): |       |                                     |       |   |   |   |   |   |   |
| Basic                                                       |       | 12,173                                   |       |   |   | 12,071 |   |   |   |
| Diluted                                                     |       | 12,356                                   |       |   |   | 12,295 |   |   |   |
|                                                        |       |                                     |       |   |   |   |   |   |   |
| Other Data:                                                 |       |                                     |       |   |   |   |   |   |   |
| Product sales from  Internet as a percentage of sales       |       | 32                                       | %          |   |   | 27 | % |   |   |
| Field sales  representatives (at end of period)             |       | 204                                      |       |   |   | 192 |   |   |   |
| Telesales  representatives (at end of period)               |       | 143                                      |       |   |   | 138 |   |   |   |
| Fill rate (1)                                               |       | 98                                       | %          |   |   | 98 | % |   |   |

 

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(1)          Definedas, 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.

 

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**Three Months Ended December 31, 2009 Compared to ThreeMonths Ended December 31, 2008**

 

*Total Revenues*.  Total revenues increased 1.9% to $236,111 forthe three months ended December 31, 2009, from $231,819 for the threemonths ended December 31, 2008. Revenue growth from companion animal product sales continued to increasein line with historical double-digit growth rates.  Revenue from production animal product saleswas negatively impacted by a change in a livestock contract with one of ourlargest vendors from the contract that was in place during the quarter ended December 31,2008, as well as unfavorable economic conditions for livestock producers andthe timing of price increases.  Thelivestock contract with one of our largest vendors in place during the quarterended December 31, 2008 provided opportunities for incentives and rebateswhich the new contract that commenced on January 1, 2009 did notinclude.  Additionally, there wereseveral price increases announced in the prior year that were effective on January 1,2009 which caused increased buying to occur during the quarter ended December 31,2008.  There was not the same level ofprice increases announced during the quarter ended December 31, 2009.  Revenues from existing customers decreased byapproximately 4% as a result of the items described above.  Revenues from new customers accounted forgrowth of approximately 6%.  For thepurpose of calculating growth rates of new and existing customer revenue, wehave defined a new customer as a customer that did not purchase product from usin the corresponding fiscal quarter of the prior year, with the remainingcustomer base being considered existing customers.  Commissions on agency sales increased 24.4%to $3,574 for the three months ended December 31, 2009, from $2,873 forthe three months ended December 31, 2008. The increase in commissions was partially due to incentives that wereachieved during the quarter ended December 31, 2009 that were not achievedin the same period of the prior fiscal year.

 

*Gross Profit*.  Gross profit increased by 7.0% to $36,009 forthe three months ended December 31, 2009, from $33,655 for the threemonths ended December 31, 2008. Gross profit as a percentage of total revenues was 15.3% and 14.5% forthe three months ended December 31, 2009 and 2008, respectively.  Our product margin improved due to a shift inthe mix of product revenues for the quarter ended December 31, 2009, comparedto the same period in the prior fiscal year. Vendor rebates for the three months ended December 31, 2009decreased by approximately $850 compared to the three months ended December 31,2008.  This decrease was primarily aresult of the elimination of the livestock rebate opportunity from one of ourlargest vendors, partially offset by improvements in rebates from othervendors.  Our gross profit also benefitedfrom an improvement in freight costs as a percentage of total revenues comparedto the same period in the prior fiscal year.

 

*Selling, General and Administrative (“SG&A”)*.  SG&A expenses decreased 3.1% to $22,421for the three months ended December 31, 2009, from $23,133 for the threemonths ended December 31, 2008. SG&A expenses as a percentage of total revenues improved to 9.5% forthe three months ended December 31, 2009 compared to 10.0% for the threemonths ended December 31, 2008. The dollar decrease was primarily due to alower bad debt expense, location expenses and travel expenses.  Our allowance for doubtful accounts increasedapproximately $215 during the quarter ended December 31, 2009, compared toapproximately $650 during the quarter ended December 31, 2008.

 

*Income Tax Expense*.  Our effective tax rate for the three monthsended December 31, 2009 and 2008 was 39.1% and 39.5%, respectively.  The change in our effective tax rate is dueto a change in our estimates related to state taxes.

 

**Critical Accounting Policies**

 

Thepreparation of financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses and related disclosure of contingent assets and liabilities.  The accompanying condensed consolidatedfinancial statements are prepared using the same critical accounting policiesdiscussed in our Annual Report on Form 10-K filed with the SEC on November 20,2009.

 

**Liquidity and Capital Resources**

 

Ourprincipal sources of liquidity are cash flows generated from operations andborrowings on our revolving credit facility under our credit agreement. We usecapital primarily to fund day-to-day operations and to maintain sufficientinventory levels in order to promptly fulfill customer orders and to expand ouroperations and sales growth. We believe our capital resources, including ourability to borrow funds from our revolving credit facility, will be sufficientto meet our anticipated cash needs for at least the next twelve months.  Bank of America, N.A. and Wells Fargo, N.A.are the lenders under our revolving credit facility.  The revolving credit facility allows forborrowings in the aggregate of $70,000, with the right to request an increasein 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 31,2009 was $0, and the interest rate for the facility was .87% as of December 31,2009.

 

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The facility allows forthe issuance of up to $10,000 in letters of credit. The letters of credittypically act as guarantees of payment to certain third parties in accordancewith specified terms and conditions. We had no letters of credit outstanding ateither December 31, 2009 or September 30, 2009.

 

Ourlenders may have suffered losses related to their lending and other financialrelationships, especially because of the general weakening of the national economyand increased financial instability of many borrowers.  As a result, the lenders may become insolventor tighten their lending standards, which could make it more difficult for usto borrow under our revolving credit facility, extend the terms of ourrevolving credit facility or obtain alternative financing on favorable terms orat all.  Our financial condition andresults of operations could be adversely affected if we were unable to drawfunds under our revolving credit facility because of a lender default or if wefail to obtain other cost-effective financing.

 

Wegenerally extend some level of credit to our customers. If customers’ cash flowor operating and financial performance deteriorates, or if they are unable tomake scheduled payments or obtain other sources of credit, they may not be ableto pay or may delay payment to us, or in some cases may return products to us.Any inability of current and/or potential customers to pay us for our productsand/or services due to their deteriorating financial condition or otherwise mayadversely affect our results of operations and financial condition.

 

*OperatingActivities*.  For the three months ended December 31,2009, cash used in operations was $3,289 and was primarily attributable to netincome of $7,834, coupled with a decrease of receivables of $8,973 due tocollection of receivables with extended payment terms that related to salesfrom prior periods.  This improvement incash was offset by an increase in inventory of $15,570 due to the strategic purchaseof inventory from certain vendors as incentives were offered for thosepurchases and a decrease in accounts payable of $8,165 due primarily to thetiming of payment to vendors for our payment of inventory purchases.

 

For the three monthsended December 31, 2008, cash used in operations was $1,813 and wasprimarily attributable to net income of $5,949, an increase of receivables of$9,910 due to revenue growth, an increase in inventories of $15,790 due toinventory planning and strategic inventory purchases, and an increase inaccounts payable of $15,124.  Theincrease in accounts payable was due to the above mentioned inventory planningoffset by the use of cash discounts on inventory purchases.

 

*InvestingActivities.*  For the three months ended December 31,2009, net cash used in investing activities was $553 and was primarily due tocapital expenditures of $517 related to technology investments.

 

For the three monthsended December 31, 2008, net cash used in investing activities was $1,119and was primarily due to capital expenditures of $1,173, related todistribution center infrastructure and technology investments.

 

*Financing Activities.*  For the three months ended December 31, 2009, netcash provided by financing activities was $381, which was primarily due to thetax benefit from stock option exercises of $305 and common stock issued underour employee stock purchase plan of $62.

 

For the three monthsended December 31, 2008, net cash provided by financing activities was$299, which was due to the proceeds and tax benefit of stock option exercisesof $223 and issuance of common stock under our employee stock purchase plan of$72.

 

**Contractual Obligations and Guarantees**

 

For information on our contractualobligations and guarantees, see our Annual Report on Form 10-K filed on November 20,2009 with the SEC. During the three months ended December 31, 2009, therewere no material changes to the contractual and other long-term obligationsreported in our Form 10-K on November 20, 2009.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

TheCompany is exposed to market risks primarily from changes in interest rates inthe United States. The Company does not engage in financial transactions fortrading or speculative purposes.

 

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Theinterest payable on our revolving credit facility is based on variable interestrates and is therefore affected by changes in market interest rates. Theoutstanding balance on the facility as of December 31, 2009 was $0.  Therefore, there was no exposure to marketrisks as of that date.  If there had beena balance on the facility of $70,000, which is the maximum available amount onthe facility, a change of 10% from the interest rate as of December 31,2009, which was .87% (Daily LIBOR Floating Rate plus .70%), would have changedinterest by $15 for the quarter ended December 31, 2009.

 

**Item4.  Controls and Procedures**

 

Managementof the Company, including the Chief Executive Officer and the Chief FinancialOfficer of the Company, has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934) as of December 31, 2009.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures, including the accumulation and communication ofdisclosures to the Company’s Chief Executive Officer and Chief FinancialOfficer as appropriate to allow timely decisions regarding required disclosure,are effective to provide reasonable assurance that information required to bedisclosed by the Company in the reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified by the SEC’s rules and forms.

 

There were no changes inthe Company’s internal control over financial reporting that occurred duringthe Company’s most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**CautionaryStatement for Purposes of “Safe Harbor Provisions” of the Private SecuritiesLitigation 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 historical facts,including statements about our beliefs and expectations, are forward-lookingstatements. Forward-looking statements include statements preceded by, followedby or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,”“anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similarexpressions. These statements include, among others, statements regarding ourexpected business outlook, anticipated financial and operating results, ourbusiness strategy and means to implement our strategy, our objectives, theamount and timing of capital expenditures, the amount and timing of interestexpense, the likelihood of our success in expanding our business, financingplans, budgets, working capital needs and sources of liquidity.*

 

*Forward-looking statements are only predictions and are notguarantees of our performance. These statements are based on our management’sbeliefs and assumptions, which in turn are based on currently availableinformation. Important assumptions relating to the forward-looking statementsinclude, among others, assumptions regarding demand for our products, theexpansion of product offerings geographically or through new applications, thetiming and cost of planned capital expenditures, competitive conditions andgeneral economic conditions. These assumptions could prove inaccurate.Forward-looking statements also involve known and unknown risks anduncertainties, which could cause actual results that differ materially fromthose contained in any forward-looking statement. Many of these factors arebeyond our ability to control or predict. Such factors include, but are notlimited to, the following:*

 

·                  *the impact of vendor consolidation on our business;*

 

·                  *changes in or availability of vendor contracts or rebateprograms;*

 

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

 

·                  *changes in the way vendors introduce/deliver products tomarket;*

 

·                  *exclusivity requirements with certain vendors that mayprohibit us from distributing 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 backorder of a significant product byone of our vendors;*

 

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·                  *seasonality;*

 

·                  *the timing and effectiveness of marketing programs or pricechanges offered by our vendors;*

 

·                  *the timing of the introduction of new products and servicesby our vendors;*

 

·                  *the ability to borrow on our revolving credit facility,extend the terms of our revolving credit facility or obtain alternativefinancing on favorable terms or at all;*

 

·                  *the impact of tightening credit standards and/or access tocredit on behalf of our customers and suppliers;*

 

·                  *unforeseen litigation;*

 

·                  *a disruption caused by adverse weather or other naturalconditions;*

 

·                  *inability to ship products to the customer as a result oftechnological or shipping disruptions; and*

 

·                  *competition.*

 

*Except as required by applicable law, including thesecurities laws of the United States and the rules and regulations of theSEC, we are under no obligation to publicly update or revise anyforward-looking statements, whether as a result of any new information, futureevents or otherwise. You should not place undue reliance on our forward-lookingstatements. Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future resultsor performance.*

 

## *Investorsshould also be aware that while we do, from time to time, communicate withsecurities analysts, it is against our policy to disclose any materialnon-public information or other confidential commercial information.Accordingly, stockholders should not assume that we agree with any statement orreport issued by any analyst irrespective of the content of the statement orreport. Furthermore, we have a policy against issuing or confirming financialforecasts or projections issued by others. Thus, to the extent that reportsissued by securities analysts contain any projections, forecasts or opinions, suchreports are not the responsibility of MWI Veterinary Supply, Inc.*

##  

## **Item1.  Legal Proceedings**

##  

## We are not currently aparty to any material pending legal proceedings and are not aware of any claimsthat could have a material adverse effect on our financial position, results ofoperations or cash flows.

##  

## **Item1A.  Risk Factors**

##  

## There have been nomaterial changes from the risk factors disclosed in the “Risk Factors” sectionof the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,2009.

 

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## **Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

## The table below providesinformation concerning our repurchase of shares of our common stock during thethree months ended December 31, 2009.

##  

**Issuer Purchases of EquitySecurities**

 
| **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,  2009 to October 31, 2009   |       | 626                                     | (1)        | $                                   | 38.39      |                                                                                           | —     |                                                                                                                         | —     |   |
| November 1,  2009 to November 30, 2009 |       | —                                  |       | —                              |       | —                                                                                         |       | —                                                                                                                       |       |
| December 1,  2009 to December 31, 2009 |       | —                                  |       | —                              |       | —                                                                                         |       | —                                                                                                                       |       |
| Total                                            |       | 626                                     | (1)        | $                                   | 38.39      |                                                                                           | —     |                                                                                                                         | —     |   |

 

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

 

## **Item3.  Defaults Upon Senior Securities**

 

None.

 

## **Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

None.

 

## **Item5.  Other Information**

 

None.

 

**Item 6. Exhibits**

 
| 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 |

 

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SIGNATURE

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                        | MWI Veterinary  Supply, Inc.                                                |
|-----------------------------|----------------------------------------------------------------------------------|
|                        | (Registrant)                                                                     |
|                        |                                                                             |
|                        |                                                                             |
| Date: February 4, 2010 | /s/ Mary Patricia B. Thompson                                                    |
|                        | Mary Patricia B. Thompson                                                        |
| * *                    | *Senior  Vice President of Finance and  Administration, Chief Financial Officer* |

 

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