Table of Contents
   UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.  20549
  
 FORM 10-Q
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  For the quarterly period ended December 31, 2010
  OR
  o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  For the transition period from                      to
  Commission File Number:  000-51468
 
 
 MWI VETERINARY SUPPLY, INC.
 (Exact name of registrant as specified in its Charter)
 
 
 Delaware

02-0620757(State of Incorporation)

(I.R.S. Employer Identification Number)651 S. Stratford Drive, Suite 100Meridian, ID

83642(Address of principal executive offices)

(Zip Code)(208) 955-8930(Registrant’s telephone number, including area code)
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No  o
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer
o

Accelerated filer
xNon-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
  The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 31, 2010 was 12,517,348.
  Table of Contents
  MWI VETERINARY SUPPLY, INC.
  INDEX
  
 PART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Condensed Consolidated Statements of Income for the three months ended  December 31, 2010 and 2009
3Condensed Consolidated Balance Sheets as of December 31, 2010 and September 30, 2010
4Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2010 and 2009
5Notes to Condensed Consolidated Financial Statements
6Report of Independent Registered Public Accounting Firm
15Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 3.

Quantitative and Qualitative Disclosures About Market Risk
22Item 4.

Controls and Procedures
22PART II.

OTHER INFORMATIONCautionary Statement
23Item 1.

Legal Proceedings
24Item 1A.

Risk Factors
24Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds
24Item 3.

Defaults Upon Senior Securities
24Item 4.

Removed and Reserved
24Item 5.

Other Information
24Item 6.

Exhibits
24
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  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsMWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOMEDollars and shares in thousands, except per share data(unaudited)Three months ended December 31,2010

2009Revenues:Product sales
$
347,737

$
221,479Product sales to related party

14,723


11,058Commissions

3,714


3,574Total revenues

366,174


236,111Cost of product sales

316,102


200,102Gross profit

50,072


36,009Selling, general and administrative expenses

31,047


22,421Depreciation and amortization

1,489


855Operating income

17,536


12,733Other income (expense):Interest expense

(182)


(40)Earnings of equity method investees

73


57Other

135


107Total other income (expense), net

26


124Income before taxes

17,562


12,857Income tax expense

(6,734)


(5,023)Net income
$
10,828

$
7,834Earnings per common share:Basic
$
0.87

$
0.64Diluted
$
0.87

$
0.63Weighted average common shares outstanding:Basic

12,415


12,173Diluted

12,483


12,356See Notes to Condensed Consolidated 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 30,2010

2010AssetsCurrent Assets:Cash and cash equivalents
$
853

$
911Receivables, net

185,370


189,428Inventories

178,247


175,292Prepaid expenses and other current assets

4,963


8,729Deferred income taxes

1,697


1,556Total current assets

371,130


375,916Property and equipment, net

21,119


15,238Goodwill

47,125


47,330Intangibles, net

25,938


26,710Other assets, net

2,718


2,738Total assets
$
468,030

$
467,932Liabilities And Stockholders’ EquityCurrent Liabilities:Credit facilities
$
22,225

$
10,140Accounts payable

159,201


183,604Accrued expenses

16,837


15,118Note payable

2,000


2,000Current maturities of long-term debt and capital lease obligations

935


1,631Total current liabilities

201,198


212,493Deferred income taxes

5,645


5,310Long-term debt and capital lease obligations

702


953Other long-term liabilities

2,337


2,389Commitments and contingencies (see Note 14)Stockholders’ EquityCommon stock $0.01 par value, 40,000 authorized; 12,517 and12,457 shares issued and outstanding, respectively

125


125Additional paid in capital

131,256


129,675Retained earnings

127,736


116,908Accumulated other comprehensive (loss)/income

(969)


79Total stockholders’ equity

258,148


246,787Total liabilities and stockholders’ equity
$
468,030

$
467,932See Notes to Condensed Consolidated Financial Statements.
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  MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSDollars in thousands (unaudited)Three months ended December 31,2010

2009Cash Flows From Operating Activities:Net income
$
10,828

$
7,834Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization

1,492


858Amortization of debt issuance costs

17


11Stock-based compensation

21


70Deferred income taxes

265


(64)Earnings of equity method investees

(73)


(47)Excess tax benefit of exercise of common stock options

(1,389)


(305)Changes in operating assets and liabilities (net of effects of business acquisitions):Receivables

4,069


8,973Inventories

(3,384)


(15,570)Prepaid expenses and other current assets

3,767


524Accounts payable

(24,022)


(8,165)Accrued expenses

2,512


2,592Net cash used in operating activities

(5,897)


(3,289)Cash Flows From Investing Activities:Purchases of property and equipment

(7,022)


(517)Other

60


(36)Net cash used in investing activities

(6,962)


(553)Cash Flows From Financing Activities:Borrowings on line-of-credit

86,329


-Payments on line-of-credit

(74,141)


-Proceeds from issuance of common stock

101


62Proceeds from exercise of stock options

41


14Tax benefit of exercise of common stock options

1,389


305Payment on long-term debt and capital lease obligations

(912)


-Net cash provided by financing activities

12,807


381Effect of Exchange Rate on Cash and Cash Equivalents

(6)


-Decrease in Cash and Cash Equivalents

(58)


(3,461)Cash and Cash Equivalents at Beginning of Period

911


14,302Cash and Cash Equivalents at End of Period
$
853

$
10,841See Notes to Condensed Consolidated Financial Statements.
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  MWI VETERINARY SUPPLY, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Dollars and sterling pounds in thousands, except share and per share data
  (unaudited)
  NOTE 1 — GENERAL
  Basis of Presentation
  The accompanying unaudited condensed consolidated financial statements include the results of operations, 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).  All material intercompany balances have been eliminated.
  In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly, in all material respects, our results for the periods presented. These condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2010 Annual Report on Form 10-K filed with the SEC on November 23, 2010.  The results of operations for the three months ended months ended December 31, 2010 are not necessarily indicative of results to be expected for the entire fiscal year.
  Our unaudited condensed consolidated balance sheet as of September 30, 2010 has been derived from the audited consolidated balance sheet as of that date.
  Use of Estimates
  The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting using accounting principles generally accepted in the United States. In preparing financial information, we use certain estimates and assumptions that may affect the reported amounts and disclosures. Some of these estimates require difficult, subjective and complex judgments about matters that are inherently uncertain. As a result, actual results could differ materially from these estimates. Estimates are used when accounting for, among other items, sales returns, allowance for doubtful accounts, customer incentives, vendor rebates, inventories, goodwill and intangible assets, income taxes, impairment of long-lived assets, depreciation and amortization, employee benefits, unearned income and contingencies. The estimates of fair value of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reported amounts of revenue and expenses for the periods are based on assumptions that we believe to be reasonable.
  Revenue Recognition
  We sell products we source from vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from the vendor. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We recognize revenue from “buy/sell” transactions as product sales when the product is delivered to the customer. We accept product returns from our customers. We estimate returns based on historical experience and recognize these estimated returns as a reduction of product sales. Product returns have historically not been significant to our financial statements. We record revenues net of sales tax.  In an agency relationship, we generally do not purchase and take inventory of products from vendors. We receive an order from a customer, then transmit the order to the vendor, who picks, packs and ships the order to the customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. Commissions are recognized when the services upon which the commissions are based are complete. Gross billings from agency contracts were $70,565 and $54,427 for the three months ended December 31, 2010 and 2009, respectively, and generated commission revenue of $3,714 and $3,574, respectively.
  Cost of Product Sales and Vendor Rebates
  Cost of product sales consist of our inventory product cost, including shipping and delivery costs to and from our distribution centers.  Vendor rebates are recorded based on the terms of the contracts or programs with each vendor.  Many of our vendors’ rebate programs are based on a calendar year.  We may receive quarterly, semi-annual or annual performance-based rebates from third-party vendors based upon attainment of certain sales and/or purchase goals. Sales rebates are classified in the accompanying condensed consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are classified as a reduction of inventory until the product is sold. When the inventory is sold and purchase measures are achieved, purchase rebates are recognized as a reduction to cost of product sales.
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 Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our estimates in the future will continue to be reasonable as our rebates are based on specific vendor program goals and are principally recorded upon achievement of sales or purchase performance measures. Vendors may change or eliminate rebate programs from year to year.
  
 NOTE 2 — EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
  In June 2009, the Financial Accounting Standards Board issued authoritative guidance that amends the consolidation guidance applicable to variable interest entities and requires additional disclosures concerning an enterprise’s continuing involvement with variable interest entities. The guidance is effective for our fiscal year beginning October 1, 2010. We have adopted this and it did not have a material impact on our consolidated financial statements.
  
 NOTE 3—BUSINESS ACQUISITION
  On February 8, 2010, MWI Veterinary Supply Co. (“MWI Co.”) purchased all of the outstanding share capital of Centaur Services Limited (“Centaur”), based in the United Kingdom for an initial purchase price of $44,053, consisting of $42,053 in cash and $2,000 in a note payable due in one year.  Subsequent to the acquisition of Centaur, we funded $2,047 to the pension plan of Centaur as required by the terms of the share purchase agreement.  The purchase price was reduced subsequent to the acquisition date by $1,868 as a result of a post-closing working capital and debt adjustment.  Centaur is a supplier of animal health products to veterinarians in the United Kingdom.  Centaur sells products to both the companion animal market and production animal market.  The acquisition of Centaur has allowed us to expand into the international markets.  We incurred $1,100 of direct acquisition-related expenses during fiscal year 2010.  The intangible assets acquired in the acquisition have estimated useful lives between 1 and 20 years, which include customer relationships, trade names and other intangible assets.  The amount recorded in goodwill will not be deductible for tax purposes.
  The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, which may be adjusted during the allocation period as defined in ASC 280.  These purchase price allocations are based on a combination of valuations and analyses.
  
 Cash

$
674Receivables


32,371Inventories


17,830Other current assets


480Property and equipment


5,275Goodwill


9,483Intangibles


17,658Total assets acquired


83,771Accounts payable


25,811Accrued expenses


5,299Other liabilities


10,476Total liabilities assumed


41,586Net assets acquired

$
42,185
 
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 The following table presents information for Centaur that is included in our condensed consolidated statements of income for the three months ended December 31, 2010:
  
 Centaur's operations included in MWI's resultsThree months ended December 31, 2010Revenues
$
62,534Net Income
$
616
 
 The following table presents supplemental pro forma information as if the acquisition of Centaur had occurred on October 1, 2009 for the period ended December 31, 2009 (unaudited):
  
 Unaudited Pro Forma Consolidated ResultsThree months ended December 31, 2009Revenues
$
295,183Net Income
$
8,389
 
 For the pro forma calculation, we used an average foreign currency exchange rate for the period presented and the annual net income as a percentage of revenues for purposes of determining the net income for interim periods.  The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition on October 1, 2009.  Additionally, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.
  
 NOTE 4—RECEIVABLES
  
 December 31,

September 30,2010

2010Trade
$
168,334

$
177,317Vendor rebates and programs

19,575


14,681187,909


191,998Allowance for doubtful accounts

(2,539)


(2,570)$
185,370

$
189,428
 
 Product sales resulting from transactions with Banfield, The Pet Hospital (“Banfield”) were approximately 6% and 11% of total product sales during the three months ended December 31, 2010 and 2009, respectively. Approximately 8% of our trade receivables resulted from transactions with Banfield as of December 31, 2010 and September 30, 2010.
  
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 NOTE 5—PROPERTY AND EQUIPMENT
  
 December 31,

September 30,2010

2010Land
$
1,466

$
261Building and leasehold improvements

6,749


5,870Machinery, furniture and equipment

19,217


17,495Computer equipment

4,968


4,886Construction in progress

4,638


1,62637,038


30,138Accumulated depreciation

(15,919)


(14,900)$
21,119

$
15,238
 
 Depreciation expense was $1,085 and $651 for the three months ended December 31, 2010 and 2009, respectively.
  
 NOTE 6—GOODWILL AND INTANGIBLES
  The changes in the carrying value of goodwill are as follows:
  
 Goodwill as of September 30, 2010




47,330Foreign currency adjustments




(205)Goodwill as of December 31, 2010



$
47,125
 
 Balances of intangibles are as follows:
  
 December 31,

September 30,Useful Lives

2010

2010Amortizing:Customer relationships

9-20 years

$
24,686

$
25,027Covenants not to compete

1-5 years


806


811Other

3-7 years


453


45825,945


26,296Accumulated amortization




(3,752)


(3,361)22,193


22,935Non-Amortizing:Trade names and patents




3,745


3,775$
25,938

$
26,710
 
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 Amortization expense was $407 and $207 for the three months ended December 31, 2010 and 2009, respectively.  Estimated future annual amortization expense related to intangible assets as of December 31, 2010 follows:
  
 AmountRemainder of 2011
$
1,1982012

1,5792013

1,4952014

1,4892015

1,336Thereafter

15,096$
22,193
 
 NOTE 7—DEBT
  The following table presents the outstanding debt and capital lease obligations as of December 31, 2010 and September 30, 2010:
  
 December 31,


September 30,2010


2010Revolving credit facility
$
17,600

$
9,600Sterling revolving credit facility (1)

4,625


540Note payable to AHN (UK) Holdings Limited (2)

2,000


2,000Capital lease obligations (3)

1,637


1,811Term note

-


773Total debt and capital lease obligations

25,862


14,724Less: Long-term debt and capital lease obligations

(702)


(953)Total debt included in current liabilities
$
25,160

$
13,771(1) The credit facility with Fortis Bank was retired on November 5, 2010, and Centaur entered into a £12,500 unsecured revolving line of credit facility with Wells Fargo Bank, N.A. London Branch.(2) Note payable is related to the acquisition of Centaur and is due February 8, 2011.(3) The capital lease obligations have varying maturity dates.
 
 Revolving Credit Facility — On February 8, 2010 and August 10, 2010, MWI Co., our wholly-owned subsidiary as borrower, entered into a First Amendment (the “First Amendment”) and Second Amendment (the “Second Amendment”), respectively, to its Credit Agreement with us and Memorial Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank, N.A., (collectively, the “lenders”) amending the Credit Agreement dated December 13, 2006 among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the lenders a party thereto (the “facility”).  The First Amendment increased the aggregate revolving commitment of the lenders under the facility from $70,000 to $100,000.  The First Amendment also extended the maturity date of the loans under the facility from December 1, 2011 to March 1, 2013.  The variable interest rate is now equal to the Daily LIBOR Floating Rate or the LIBOR 1-month fixed rate (at MWI Co.’s option) plus a margin ranging from 1.50% to 2.25%, which was previously 1.75% to 2.50% under the First Amendment, and 0.7% to 1.25% under the original facility.  The lenders also receive an unused line fee and letter of credit fee which is now equal to 0.2% of the unused amount of the facility, which was previously 0.125%.  The Second Amendment increased the amount of permitted unsecured indebtedness from $20 million to $30 million.  The facility contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA calculation.  We were in compliance with all of the covenants as of December 31, 2010 and September 30, 2010.  Our outstanding balance on the revolving credit facility at December 31, 2010 and September 30, 2010 was $17,600 and $9,600, and the interest rate was 1.75% as of December 31, 2010.
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 Sterling revolving credit facility— As of September 30, 2010, Centaur operated with a credit facility with Fortis Bank as the lender, which allowed for borrowings in the aggregate of £12,000.  This facility had a variable interest rate equal to a base rate of 0.50% plus GBP one-month LIBOR plus a margin of 0.85%.
  On November 5, 2010, Centaur terminated the Fortis facility and entered into a £12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”).  The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable one month, three month or six month interest period.  Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%.  The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000.  The outstanding balance at December 31, 2010 on the sterling revolving credit facility was £2,990, or $4,625 using the exchange rate on December 31, 2010.  The interest rate was 1.67% as of December 31, 2010.
  
 NOTE 8—FAIR VALUE OF FINANCIAL INSTRUMENTS
  Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and disclosures.  This hierarchy prioritizes inputs to valuation techniques based on observable and unobservable data.  The guidance categorizes these inputs used in measuring fair value into three levels which include the following:
  ·
Level 1 – observable inputs such as quoted prices in active markets;
  ·
Level 2 – inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
  ·
Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
  Financial instruments include cash and cash equivalents, receivables and accounts payable, and the fair values approximate book values due to their short maturities.
  In August 2010, we amended our revolving credit facility in the United States.  Because this amendment was done recently and includes interest rates based on current market conditions, we believe that the estimated fair value of our long-term debt (including current maturities) was materially the same as our carrying value.
  In November 2010, we refinanced our sterling revolving credit facility as discussed in Note 7.  Because this amendment was done recently and includes interest rates based on current market conditions, we believe that the estimated fair value of our long-term debt (including current maturities) was materially the same as our carrying value.
  
 NOTE 9—COMMON STOCK AND STOCK-BASED AWARDS
  2002 Stock Plan
  We have a 2002 Stock Plan (the “2002 Plan”) to provide our directors, executives and other key employees with additional incentives by allowing them to acquire an ownership interest in us and, as a result, encouraging them to contribute to our success. As of December 31, 2010 and September 30, 2010, we had 104,349 and 164,788 shares, respectively, of our common stock available for issuance under the 2002 Plan. The options granted under the 2002 Plan are nonqualified stock options that have an exercise price per share equal to fair market value of the common stock at the time of grant. The term of each option is determined by our board of directors or by a designated committee of the board.  The term of any option may not exceed ten years from the date of grant.  As of December 31, 2010, 43,909 options to purchase common stock were outstanding with a weighted average exercise price of $0.18 per share and expiring through June 2012.
  2005 Stock Plan
  We have a 2005 Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”), under which we may offer restricted and unrestricted shares of our common stock and grant options to purchase shares of our common stock to selected employees and non-employee directors. The purpose of the 2005 Plan is to promote our long-term financial success by attracting, retaining and rewarding eligible participants. As of December 31, 2010 and September 30, 2010, we had 990,968 and 991,970 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of December 31, 2010, 33,700 options to purchase common stock were outstanding with a weighted average exercise price of $17.79 per share and expiring through September 2015.
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 The 2005 Plan permits us to grant stock options (both incentive stock options and non-qualified stock options), restricted and unrestricted stock and deferred stock. The compensation committee will determine the number and type of stock-based awards to each participant, the exercise price of each award, the duration of the award (not to exceed ten years), vesting provisions and all other terms and conditions of such award in individual award agreements. The 2005 Plan provides that upon termination of employment with us, unless determined otherwise by the compensation committee at the time options are granted, the exercise period for vested awards will generally be limited, provided that vested awards will be canceled immediately upon a termination for cause or voluntary termination. The 2005 Plan provides for the cancellation of all unvested awards upon termination of employment with us, unless determined otherwise by the compensation committee at the time awards are granted.
  We granted no common stock options during each of the three months ended December 31, 2010 and 2009.  During the three months ended December 31, 2010 and 2009, we issued 300 and 0 shares of restricted stock under the 2005 Plan.  During the three months ended December 31, 2010 and 2009, we recognized $247 and $95 of compensation expense related to stock grants, respectively.
  We also have an employee stock purchase plan (“ESPP”) that allows substantially all employees to purchase shares of our common stock at 95% of the fair market value on the date of purchase.  The purchase date is the last trading date of the purchase periods, which begin in March, June, September and December.  Employees accumulate amounts through payroll deductions during the purchase period of between 1% and 10% but no more than $20 annually.  An employee is allowed to purchase a maximum of 200 shares per purchase period.  During the three months ended December 31, 2010 and 2009, we issued 1,734 and 1,770 shares, respectively, of our common stock under the ESPP.
  
 NOTE 10—INCOME TAXES
  Our effective tax rate for the three months ended December 31, 2010 and 2009 was 38.3% and 39.1%, respectively.  The decrease in the effective tax rate is primarily due to the impact of the Centaur acquisition that contributed additional earnings at a lower effective tax rate.
  As of December 31, 2010, we had $198 of unrecognized tax benefits, of which $15 would impact our effective rate if recognized. Our policy for classifying interest and penalties associated with unrecognized tax benefits is to include such items in income tax expense.  The amount of interest and penalties recognized during the three months ended December 31, 2010 and 2009 was not material.
  We filed Form 3115 Application of Change in Accounting Method with the Internal Revenue Service during the fiscal year ended September 30, 2008.  We filed an advance consent request for a non-automatic account method change for tax purposes for which we had not received approval prior to our reporting period end.  The method change will make revenue recognition for tax purposes the same as revenue recognized for book purposes. We expect resolution within the next twelve months, which would decrease the liability for unrecognized tax benefits by approximately $175.
  With few exceptions, we are no longer subject to income tax examination for years before 2005 in the U.S. and significant state and local jurisdictions.  We are no longer subject to income tax examination for years before 2009 in significant foreign jurisdictions.
  
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 NOTE 11 — COMPUTATION OF EARNINGS PER SHARE(In thousands, except per share data)
  
 Three months ended December 31,2010

2009Basic

Diluted

Basic

DilutedNet income
$
10,828

$
10,828

$
7,834

$
7,834Weighted average common shares outstanding

12,415


12,415


12,173


12,173Effect of diluted securitiesStock options and restricted stock




68





183Weighted average diluted shares outstanding




12,483





12,356Earnings per share
$
0.87

$
0.87

$
0.64

$
0.63Anti-dilutive shares excluded from calculation




-





-
 
 NOTE 12—RELATED PARTIES
  MWI Co. holds a 50.0% membership interest in Feeders’ Advantage LLC (“Feeders’ Advantage”).  MWI Co. charged Feeders’ Advantage for certain operating and administrative services in the amounts of $241 and $207 for the three months ended December 31, 2010 and 2009, respectively.  Sales of products to Feeders’ Advantage were $14,723 and $11,058, which represented 4% and 5% of total product sales for the three months ended December 31, 2010 and 2009, respectively.
  MWI Co. provides Feeders’ Advantage with a line-of-credit to finance its day-to-day operations. This line-of-credit bears interest at the prime rate. The interest due on the line-of-credit is calculated and charged to Feeders’ Advantage on the last day of each month. Conversely, to the extent MWI Co. has a payable balance due to Feeders’ Advantage, the payable balance accrues interest in favor of Feeders’ Advantage at the average federal funds rates in effect for that month. MWI Co. had a payable balance to Feeders’ Advantage of $686 and $281 as of December 31, 2010 and September 30, 2010, respectively.
  
 NOTE 13—STATEMENTS OF CASH FLOWS – SUPPLEMENTAL AND NON-CASH DISCLOSURES
  
 Three months ended December 31,2010

2009Supplemental DisclosuresCash paid for interest
$
120

$
23Cash paid for income taxes

1,380


340Non-cash ActivitiesEquipment acquisitions financed with accounts payable

92


19
 
 NOTE 14—COMMITMENTS AND CONTINGENCIES
  From time to time, in the normal course of business, we may become a party to legal proceedings that may have an adverse effect on our financial position, results of operations and cash flows. At December 31, 2010, we were not a party to any material pending legal proceedings and were not aware of any claims that could have a material adverse effect on our financial position, results of operations or cash flows.
  
 13
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 NOTE 15—OTHER COMPREHENSIVE INCOME
  The components of comprehensive income were as follows:
  
 Three months ended December 31,2010

2009Net income
$
10,828

$
7,834Other comprehensive loss:Foreign currency translation

(1,048)


-Total comprehensive income
$
9,780

$
7,834
  14
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  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the Board of Directors and Stockholders of
 MWI Veterinary Supply, Inc.
 Meridian, Idaho
 
 We have reviewed the accompanying condensed consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries (the "Corporation") as of December 31, 2010, and the related condensed consolidated statements of income for the three-month periods ended December 31, 2010 and 2009, and of cash flows for the three-month periods ended December 31, 2010 and 2009. These interim financial statements are the responsibility of the Corporation’s management.
  We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
  Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
  We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries as of September 30, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated November 23, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
  /s/ DELOITTE & TOUCHE LLP
 Boise, Idaho
 February 3, 2011
  15
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  Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations
  All dollar amounts are presented in thousands, except for per share amounts.
  Overview
  We are a leading distributor of animal health products to veterinarians in the United States and the United Kingdom. We sell our products to veterinarians in both the companion and production animal markets. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions.  On February 8, 2010, we acquired the outstanding share capital of Centaur Services Limited (“Centaur”), which is a supplier of animal health products in the United Kingdom.  We operate under a single reporting segment.
  Historically, we estimate that approximately two-thirds of our total revenues have been generated from sales to the companion animal market and one-third from sales to the production animal market. The state of the overall economy in both the United States and United Kingdom and consumer spending have impacted both the companion animal and production animal markets, with tightening credit markets, volatile commodity prices in milk, grain, corn and feeder cattle, and changes in weather patterns also affecting demand in the production animal market.  Both the companion animal and production animal markets have been integral to our financial results and we intend to continue supporting both markets.
  Industry
  We believe that the companion animal market in both the United States and United Kingdom has slowed as a result of a decrease in consumer spending.  Historically, growth in the companion animal market has been due to the increasing number of households with companion animals, increased expenditures on animal health and preventative care, an aging pet population, advancements in pharmaceuticals and diagnostic testing and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. While the average order size for companion animal health products is often smaller than production animal health products, companion animal health products typically have higher margins. We intend to continue to penetrate this market through internal growth initiatives and selective acquisitions.  We believe that some of our customers in this market have experienced liquidity issues as a result of the tightening credit markets.
  Product sales in the production animal market in both the United States and United Kingdom are impacted by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns that allow cattle to graze for longer periods and changes in the general economy.  Milk price declines in the dairy market have a significant impact on dairy farmers.  This creates cash-flow challenges for these farmers and in turn, could impact the time it takes for us to collect our outstanding accounts receivable from these customers as well as affect the overall collectability of these accounts.  However, we still believe that it is important to our business to service this market and we intend to continue to support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.
  We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk.  If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay 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.
  Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by the marketing programs or price increase announcements of vendors and distributors, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made.
  16
 Table of Contents
 Sales
  We sell products that we source from our vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products 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 revenues in conformity with generally accepted accounting principles in the United States. In an agency relationship, we generally do not purchase and take inventory of products from our vendors. When we receive an order from our customer, we transmit the order to our vendor, who picks, packs and ships the order to our customer. In some cases, our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer on behalf of our vendor. We receive a commission payment for soliciting the order from our customer and for providing other customer service activities. The aggregate revenues we receive in agency transactions constitute the “commissions” line item on our consolidated statements of income and are recorded in conformity with accounting principles generally accepted in the United States. Our vendors determine the method we use to sell our products. Historically, vendors have occasionally switched between the “buy/sell” and agency models for particular products in response to market conditions related to that particular product. A switch between models can impact our revenues and our operating income. We cannot know in advance when a vendor will switch between the “buy/sell” and agency models or what impact, if any, such a change may have. A switch can occur even with vendors with whom we have written agreements, because most of our agreements with vendors have relatively short terms and are terminable with or without cause on short notice, normally 30 to 90 days. The impact of any individual change from a “buy/sell” to an agency model depends on the costs and expenses associated with a particular product, and can have either a positive or a negative effect on our profitability.
  We typically renegotiate vendor contracts annually.  These vendor contracts may include terms defining margins, rebates, commissions, exclusivity requirements and the manner in which we go to market.  For example, vendors could require us to distribute their products on an exclusive basis, which could cause us to forego distributing competing products which may also be profitable.  Conversely, competitors could obtain exclusive rights to market particular products, which we would be unable to market.  If we lose the right to distribute products under such exclusive agreements, we may lose access to certain products and lose a competitive advantage.  Exclusivity agreements could allow potential competitors to sell products that we cannot offer and erode our market share.  In addition, vendors have the ability to expand the distributors that they use which could have a material adverse effect on our business.
  Many of our vendors’ rebate programs are based on a calendar year.  Historically, the three months ended December 31 has been our most significant quarter for recognition of rebates.  Vendor rebates based on sales are classified in our accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales.
  Historically, our contract with Merial to sell their flea, tick and heartworm products included an exclusivity requirement.  This requirement did not permit us to sell or distribute other competing flea, tick and heartworm products.  Beginning calendar year 2010, we agreed with Merial to begin a non-exclusive arrangement where we are permitted to sell and distribute other competing products.  Some of these competing products were sold under buy-sell arrangements, while others were sold under agency arrangements.  Merial’s flea, tick and heartworm products are primarily sold under an agency arrangement.  This addition of buy-sell arrangements for certain flea, tick and heartworm products has had an impact on how our revenues are reported, since under agency sales, only commissions are reported as revenues, while for buy-sell products the total sale price of the product is reported as revenue.
  Vendor Consolidation
  On November 3, 2009, Merck and Schering-Plough completed their merger under which Merck acquired all of the outstanding stock of Schering-Plough.  Merial was a joint venture between Merck and Sanofi-Aventis, and Sanofi-Aventis acquired Merck’s interest in Merial shortly before Merck and Schering-Plough completed their merger.  On March 9, 2010, Sanofi-Aventis and Merck announced that Sanofi-Aventis exercised its option to combine Merial with Intervet/Schering-Plough, Merck’s animal health business, to form an animal health joint venture that would be equally owned by the new Merck and Sanofi-Aventis.  The completion of the transaction is expected to occur in the next twelve months.  Merial and Intervet-Schering are also two of our largest vendors.  We had contracts in place with both of these vendors that continued through the end of calendar year 2010.  We are currently negotiating new contracts with each of these companies for calendar year 2011.
  The surviving companies from this transaction will have high market shares with respect to certain animal health products, and they could use their increased leverage in the channel to negotiate terms with distributors that are materially worse to the distributor than the terms that we have been able to negotiate with Merial and Intervet-Schering individually while they were competing with each other. There also remains uncertainty related to any changes to the terms that may be included in the vendor contracts we negotiate for the upcoming year as a result of this transaction.  There is also a possibility of product disruption as these companies integrate their operations which could adversely impact our financial results.  Further consolidation among animal health products vendors could result in our vendors further increasing their market share, which could give vendors greater pricing power and make it easier for such vendors to sell their products directly to animal health customers, both of which could decrease our net sales and profitability.
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 Table of Contents
 In the United States, our top ten vendors supplied products that accounted for approximately 71% and 68% of our revenues for the three months ended December 31, 2010 and 2009, respectively, and 71% of our revenues for the fiscal year ended September 30, 2010.  Pfizer supplied products that accounted for approximately 26% and 25% of our revenues during the three months ended December 31, 2010 and 2009, respectively, and 25% of our revenues for our fiscal year ended September 30, 2010.  Of the Pfizer supplied products, production animal products under a livestock agreement accounted for approximately 14% and 13% of our revenues during the three months ended December 31, 2010 and 2009, respectively, and approximately 12% of our revenues for our fiscal year ended September 30, 2010.  Intervet-Schering, a subsidiary of Schering Plough, supplied products that accounted for approximately 11% and 10% of our revenues during the three months ended December 31, 2010 and 2009, respectively, and 10% of our revenues for our fiscal year ended September 30, 2010.  Boehringer Ingelheim supplied products that accounted for approximately 9% and 7% of our revenues during the three months ended December 31, 2010 and 2009, respectively, and 10% of our revenues for our fiscal year ended September 30, 2010.  Merial, a subsidiary of Sanofi-Aventis, supplies the majority of their products to us under an agency relationship.  Commission revenue generated from Merial products accounted for approximately 27% and 53% of total commission revenues during the three months ended December 31, 2010 and 2009, respectively, and 49% of total commission revenues for our fiscal year ended September 30, 2010.
  For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 23, 2010.
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 Results of Operations
  The following table summarizes our results of operations for the three months ended months ended December 31, 2010 and 2009, in dollars and as a percentage of total revenues.
  
 Three months ended December 31,2010

%

2009

%Revenues:Product sales
$
347,737

95.0
%

$
221,479

93.8
%Product sales to related party

14,723

4.0
%


11,058

4.7
%Commissions

3,714

1.0
%


3,574

1.5
%Total revenues

366,174

100.0
%


236,111

100.0
%Cost of product sales

316,102

86.3
%


200,102

84.7
%Gross profit

50,072

13.7
%


36,009

15.3
%Selling, general and administrative expenses

31,047

8.5
%


22,421

9.5
%Depreciation and amortization

1,489

0.4
%


855

0.4
%Operating income

17,536

4.8
%


12,733

5.4
%Other income (expense):Interest expense

(182)

-
%


(40)

-
%Earnings of equity method investees

73

-
%


57

-
%Other

135

-
%


107

-
%Total other income (expense), net

26

-
%


124

-
%Income before taxes

17,562

4.8
%


12,857

5.4
%Income tax expense

(6,734)

(1.8)
%


(5,023)

(2.1)
%Net income
$
10,828

3.0
%

$
7,834

3.3
%Earnings per common share:Basic
$
0.87




$
0.64Diluted
$
0.87




$
0.63Weighted average common shares outstanding (in thousands):Basic

12,415





12,173Diluted

12,483





12,356
  19
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 Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009
  Total Revenues.  Total revenues increased 55.1% to $366,174 for the three months ended December 31, 2010, from $236,111 for the three months ended December 31, 2009.  Of the 55.1% revenue growth, 28.6% was due to organic growth in the United States and 26.5% or $62,534 was related to the acquisition of Centaur.  The growth in organic revenues came from increased business as a result of the bankruptcy and liquidation of a competitor that is no longer in business, a broader product line with new flea, tick and heartworm products, growth from our e-commerce platform and the addition of sales representatives over the past twelve months. The increase in organic revenues during the three months ended December 31, 2010 was partially due to market share gains due to the fact that certain of our existing customers as well as new customers placed additional orders with us because their primary supplier was no longer available to meet their needs.  Organic revenues attributable to existing customers represented approximately 51% of the growth in revenues during the three months ended December 31, 2010.  Organic revenues attributable to new customers represented approximately 49% of the growth in revenues during the three months ended December 31, 2010. For the purpose of calculating growth rates of new and existing customer revenue, we have defined a new customer as a customer that did not purchase product from us in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered an existing customer.  Revenues from new customers for each fiscal quarter are summed to arrive at the estimated year-to-date revenue for new customers.  Additionally, the organic growth was partially due to the increase in revenues from the sale of flea, tick and heartworm products that we did not sell in the same period of the prior fiscal year due to our previously exclusive arrangement with Merial.  Certain new flea, tick and heartworm products that we now distribute are sold under “buy/sell” arrangements while most flea, tick and heartworm products in the past were sold under an agency agreement.  The product sales under a “buy-sell” arrangement results in greater revenue than product sales under an agency arrangement because we recognize product sales under a “buy-sell” arrangement as total sales net of estimated product returns and sales tax, whereas we only recognize commission revenue in product sales under an agency relationship.
  Product sales to related party increased by 33.1% to $14,723 for the three months ended December 31, 2010, from $11,058 for the three months ended December 31, 2009.  Commissions increased 3.9% to $3,714 for the three months ended December 31, 2010, from $3,574 for the three months ended December 31, 2009. Certain incentives were achieved during the quarter ended December 31, 2009 that were not offered during the quarter ended December 31, 2010.  Growth in our gross billings from agency contracts was consistent with our organic growth.
  Gross Profit.  Gross profit increased by 39.1% to $50,072 for the three months ended December 31, 2010, from $36,009 for the three months ended December 31, 2009.  The change in gross profit is primarily a result of increased total revenues as discussed above including the additional gross profit from Centaur.  Gross profit as a percentage of total revenues was 13.7% and 15.3% for the three months ended December 31, 2010 and 2009, respectively.  Gross profit as a percentage of total revenues decreased due to the addition of Centaur because Centaur's gross profit as a percentage of total revenues is generally lower than MWI's, which serves to reduce the overall gross margin of the consolidated Company when compared to our results for the same period in the prior year.  Additionally, our gross margin decreased for the quarter ended December 31, 2010 due to a shift in product mix compared to the same period in the prior year.  Vendor rebates for the three months ended December 31, 2010 increased by approximately $2,300 compared to the three months ended December 31, 2009 due to the organic revenue growth.
  Selling, General and Administrative (“SG&A”).  SG&A expenses increased 38.5% to $31,047 for the three months ended December 31, 2010, from $22,421 for the three months ended December 31, 2009.  This increase was primarily due to the addition of Centaur’s operating expenses and increased operating expenses as a result of the organic revenue growth. SG&A expenses as a percentage of total revenues decreased to 8.5% for the three months ended December 31, 2010 from 9.5% for the three months ended December 31, 2009.  SG&A expenses as a percentage of total revenues decreased due, in part, to the addition of Centaur because Centaur’s SG&A expenses as a percentage of total revenues are generally lower than MWI’s, which serves to reduce the overall SG&A expenses as a percentage of total revenues when compared to our results for the same period in the prior year. Additionally, we had improvement in our SG&A expenses as a percentage of revenues due to the organic revenue growth.
  Other Income (Expense).Other income (expense) decreased 79.0% to $26 in income for the three months ended December 31, 2010, from $124 in income for the three months ended December 31, 2009 primarily due to an increase in interest expense which came as a result from borrowing on our revolving credit facility to finance the Centaur acquisition.
  Income Tax Expense.Our effective tax rate for the three months ended December 31, 2010 and 2009 was 38.3% and 39.1%, respectively.  The decrease in the effective tax rate is primarily due to the impact of the Centaur acquisition that contributed additional earnings at a lower effective tax rate.
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 Critical Accounting Policies
  The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.  The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K filed with the SEC on November 23, 2010.
  Liquidity and Capital Resources
  Our principal sources of liquidity are cash flows generated from operations and borrowings on our credit facilities. We use capital primarily to fund day-to-day operations and to maintain sufficient inventory levels in order to promptly fulfill customer orders and to expand our operations and sales growth. We believe our capital resources, including our ability to borrow funds from our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next twelve months.
  Our lenders may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy and increased financial instability of many borrowers.  As a result, the lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all.  Our financial condition and results of operations could be adversely affected if we were unable to draw funds under our revolving credit facility because of a lender default or if we fail to obtain other cost-effective financing.
  We generally extend some level of credit to our customers. If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to 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 products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition.
  On February 8, 2010 and August 10, 2010, MWI Co., our wholly-owned subsidiary as borrower, entered into a First Amendment (the “First Amendment”) and Second Amendment (the “Second Amendment”), respectively, to its Credit Agreement with us and Memorial Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank, N.A., (collectively, the “lenders”) amending the Credit Agreement dated December 13, 2006 among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the lenders a party thereto (the “facility”).  The First Amendment increased the aggregate revolving commitment of the lenders under the facility from $70,000 to $100,000.  The First Amendment also extended the maturity date of the loans under the facility from December 1, 2011 to March 1, 2013.  The variable interest rate is now equal to the Daily LIBOR Floating Rate or the LIBOR 1-month fixed rate (at MWI Co.’s option) plus a margin ranging from 1.50% to 2.25%, which was previously 1.75% to 2.50% under the First Amendment, and 0.7% to 1.25% under the facility.  The lenders also receive an unused line fee and letter of credit fee which is now equal to 0.2% of the unused amount of the facility, which was previously 0.125%.  The Second Amendment increased the amount of permitted unsecured indebtedness from $20 million to $30 million.  The facility contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA calculation.  We were in compliance with both of these covenants as of September 30, 2010.  Our outstanding balance on the revolving credit facility at December 31, 2010 and September 30, 2010 was $17,600 and $9,600, respectively, and the interest rate was 1.75% as of December 31, 2010.
  On November 5, 2010, Centaur entered into a £12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”).  The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable one month, three month or six month interest period.  Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%.  The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000.  Our outstanding balance on the revolving credit facility at December 31, 2010 was £2,990, or $4,625 using the current exchange rate as of December 31, 2010, and the interest rate was 1.67% as of December 31, 2010.
  Operating Activities.  For the three months ended December 31, 2010, cash used in operations was $5,897 and was primarily attributable to net income of $10,828 offset by changes in working capital.  Accounts payable decreased $24,022 as strategic inventory purchases were made during the quarter ended September 30, 2010 to support our organic growth of that quarter, and payments for those purchases were made during the quarter ended December 31, 2010.  Receivables decreased $4,069 as receivables with extended payment terms from the quarter ended September 30, 2010 were collected during the quarter ended December 31, 2010.  Inventories increased $3,384 to support the continued organic growth of 28.6% during the quarter ended December 31, 2010.
  For the three months ended December 31, 2009, cash used in operations was $3,289 and was primarily attributable to net income of $7,834, coupled with a decrease of receivables of $8,973 due to collection of receivables with extended payment terms that related to sales from prior periods.  This improvement in cash was offset by an increase in inventory of $15,570 due to the strategic purchase of inventory from certain vendors as incentives were offered for those purchases and a decrease in accounts payable of $8,165 due primarily to the timing of payment to vendors for our payment of inventory purchases.
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 Table of Contents
 Investing Activities.  For the three months ended December 31, 2010, net cash used in investing activities was $6,962 and was primarily due to capital expenditures of $7,022 which primarily related to an office building purchased in Boise, Idaho for our headquarters as well as a new distribution center in Visalia, California to accommodate the growth needs in that region.
  For the three months ended December 31, 2009, net cash used in investing activities was $553 and was primarily due to capital expenditures of $517 related to distribution center infrastructure, including the relocation of the Holland, Michigan distribution center in September 2009 and technology investments.
  Financing Activities.  For the three months ended December 31, 2010, net cash provided by financing activities was $12,807, which was primarily due to net borrowings of $12,188 on our credit facilities.  Our revolving credit facilities are used to meet our working capital requirements and the amounts borrowed fluctuate based on timing of payables and collection of receivables.  This was coupled with the tax benefit from stock option exercises of $1,389.
  For the three months ended December 31, 2009, net cash provided by financing activities was $381, which was primarily due to the tax benefit from stock option exercises of $305 and common stock issued under our employee stock purchase plan of $62.
  Contractual Obligations and Guarantees
  For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 23, 2010 with the SEC.
  
 Item 3.  Quantitative and Qualitative Disclosures About Market Risk
  We are exposed to market risks primarily from changes in interest rates, in particular, the Daily LIBOR Floating Rate, and foreign currency translation risk. We do not engage in financial transactions for trading or speculative purposes.  We do not hedge the translation of foreign currency profits into U.S. dollars.  We continually evaluate our foreign currency exchange rate risk and the different options available for managing such risk.
  We are now exposed to foreign currency risk due to the acquisition of Centaur.  Prior to this acquisition, we had very limited foreign currency risk exposure.  A hypothetical 10% change in the value of the U.S. dollar in relation to the British Pound, which is the Company’s most significant foreign currency exposure, would have changed net sales for the three months ended December 31, 2010 by approximately $6,000. This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impact of the currency exchange movements on cost of sales and operating expenses.
  The interest payable on the facility is based on variable interest rates and is affected by changes in market interest rates. The outstanding balance on the revolving credit facility as of December 31, 2010 was $17,600.  Therefore, there was limited exposure to market risks as of this date.  If there had been a balance on the facility of $100,000, which is the maximum available amount on the facility, a change of 10% from the interest rate as of December 31, 2010, which was approximately 1.75% (Daily LIBOR Floating Rate plus a margin of 1.5%), would have changed interest by $44 for the three months ended December 31, 2010.
  
 Item 4.  Controls and Procedures
  Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of December 31, 2010.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
  There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
  
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 Table of Contents
  PART II.  OTHER INFORMATION
  Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995
  This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the amount and timing of interest expense, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.
  Forward-looking statements are only predictions and are not guarantees of our performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
  ·
the impact of vendor consolidation on our business;
  ·
changes in or availability of vendor contracts or rebate programs;
  ·
vendor rebates based upon attaining certain growth goals;
  ·
changes in the way vendors introduce/deliver products to market;
  ·
exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors;
  ·
risks associated with our international operations;
  ·
transitional challenges associated with acquisitions, including the failure to achieve anticipated synergies;
  ·
financial risks associated with acquisitions;
  ·
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 by one of our vendors;
  ·
seasonality;
  ·
the timing and effectiveness of marketing programs or price changes offered by our vendors;
  ·
the timing of the introduction of new products and services by our vendors;
  ·
the ability to borrow on our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all;
  ·
risks from potential increases in variable interest rates;
  ·
the impact of tightening credit standards and/or access to credit on behalf of our customers and suppliers;
  ·
unforeseen litigation;
  ·
a disruption caused by adverse weather or other natural conditions or disasters;
  ·
inability to ship products to the customer as a result of technological or shipping disruptions; and
  ·
competition.
  Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.
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 Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of MWI Veterinary Supply, Inc.
  
 Item 1.  Legal Proceedings
  We are not currently a party to any material pending legal proceedings and are not aware of any claims that could have a material adverse effect on our financial position, results of operations or cash flows.
  
 Item 1A.  Risk Factors
  There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
  
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
  The table below provides information concerning our repurchase of shares of our common stock during the three months ended December 31, 2010.
  
 Issuer Purchases of Equity SecuritiesTotal Number of

Maximum Number (orTotal




Shares Purchased

Approximate DollarNumber

Average

as Part of Publicly

Value) of Shares that Mayof Shares

Price Paid

Announced Plans

Yet Be Purchased UnderPeriod

Purchased

per Share

or Programs

the Plans or ProgramsOctober 1 to October 31, 2010

3,942
(1)
$
57.34

—

—November 1 to November 30, 2010

—


—

—

—December 1 to December 31, 2010

—


—

—

—Total

3,942

$
57.34

—

—(1) These shares were withheld upon the vesting of employee stock grants in connection with payment of required withholding taxes.
 
 Item 3.  Defaults Upon Senior Securities
  None.
  Item 4.  Removed and Reserved
  None.
  Item 5.  Other Information
  None.
  Item 6.  Exhibits
  10.1

Sterling Revolving Credit Facility between Centaur Services Limited and Wells Fargo, National Association London Branch dated November 5, 2010, incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed November 10, 201010.2

Continuing Guaranty of MWI Veterinary Supply Co. dated November 5, 2010, incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed November 10, 201015

Letter re: Unaudited Interim Financial Information31.1

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

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
  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  MWI Veterinary Supply, Inc.(Registrant)Date: February 3, 2011

/s/ Mary Patricia B. ThompsonMary Patricia B. ThompsonSenior Vice President of Finance and Administration, Chief Financial Officer
 
  25