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 THESECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly period ended March 31, 2010**

** **

**OR**

 

**o**         TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the transition periodfrom                      to                      **

** **

**Commission File Number:  000-51468**

 

----

 

**MWIVETERINARY SUPPLY, INC.**

(Exact name of registrantas specified in its Charter)

 

----

 

| **Delaware**                                | ** ** | **02-0620757**                           |
|---------------------------------------------|------------|------------------------------------------|
| (State of  Incorporation)                   |       | (I.R.S. Employer  Identification Number) |
|                                        |       |                                     |
| **651 S.  Stratford Drive, Suite 100** | ** ** | ** **                               |
| **Meridian,  ID**                           | ** ** | **83642**                                |
| (Address of principal  executive offices)   |       | (Zip Code)                               |

 

**(208)955-8930**

(Registrant’s telephonenumber, including area code)

 

----

 

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  (Do not check if a smaller reporting company) |   | Smaller reporting  company o |

 

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

 

The number of shares ofthe registrant’s common stock, $0.01 par value, outstanding as of April 30,2010 was 12,277,361.

 

 

 

----

Table of Contents

** **

**MWIVETERINARY SUPPLY, INC.**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                    | ** ** |
|-------------------|---------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                          |       |
| **Item 1.**       | **Financial  Statements (Unaudited)**                                                                         | ** ** |
|              | Condensed  Consolidated Statements of Income for the three and six months ended  March 31, 2010 and 2009 | 3          |
|              |                                                                                                          |       |
|              | Condensed  Consolidated Balance Sheets as of March 31, 2010 and September 30,  2009                 | 4          |
|              |                                                                                                          |       |
|              | Condensed  Consolidated Statements of Cash Flows for the six months ended March 31,  2010 and 2009       | 5          |
|              |                                                                                                          |       |
|              | Notes to Condensed Consolidated Financial Statements                                                          | 6          |
|              |                                                                                                          |       |
|              | Report of Independent Registered Public Accounting  Firm                                                      | 14         |
|              |                                                                                                          |       |
| **Item  2.**      | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**               | 15         |
|              |                                                                                                          |       |
| **Item  3.**      | **Quantitative  and Qualitative Disclosures About Market Risk**                                               | 21         |
|              |                                                                                                          |       |
| **Item  4.**      | **Controls  and Procedures**                                                                                  | 22         |
|              |                                                                                                          |       |
| **PART II.** | **OTHER  INFORMATION**                                                                                        | ** ** |
|              |                                                                                                          |       |
|              | **Cautionary Statement**                                                                                      | 22         |
|              |                                                                                                          |       |
| **Item  1.**      | **Legal  Proceedings**                                                                                        | 23         |
| ** **        | ** **                                                                                                    | ** ** |
| **Item  1A.**     | **Risk  Factors**                                                                                             | 24         |
| ** **        | ** **                                                                                                    | ** ** |
| **Item  2.**      | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                              | 24         |
| ** **        |                                                                                                          |       |
| **Item  3.**      | **Defaults  Upon Senior Securities**                                                                          | 25         |
| ** **        |                                                                                                          |       |
| **Item  4.**      | **Submission  of Matters to a Vote of Security Holders**                                                      | 25         |
| ** **        |                                                                                                          |       |
| **Item  5.**      | **Other  Information**                                                                                        | 25         |
| ** **        |                                                                                                          |       |
| **Item  6.**      | **Exhibits**                                                                                                  | 26         |

 

2

----

Table of Contents

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**Dollarsand shares in thousands, except per share data(unaudited)**

 
| ** **                                    | ** ** | **Three months ended March 31,** | ** ** | **Six months ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                     |       |                                  |       |                                |       |   |   |   |   |
| Product sales                                 |       | $                                     | 271,893    |                                | $          | 199,620 |   | $ | 493,372 |   | $ | 416,236 |   |
| Product sales to  related party               |       | 10,516                                |       | 11,137                              |       | 21,574 |   | 23,467 |   |
| Commissions                                   |       | 4,188                                 |       | 3,755                               |       | 7,762 |   | 6,628 |   |
| Total revenues                                |       | 286,597                               |       | 214,512                             |       | 522,708 |   | 446,331 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Cost of product sales                         |       | 247,075                               |       | 182,878                             |       | 447,177 |   | 381,042 |   |
| Gross profit                                  |       | 39,522                                |       | 31,634                              |       | 75,531 |   | 65,289 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Selling, general and  administrative expenses |       | 25,592                                |       | 21,498                              |       | 48,013 |   | 44,631 |   |
| Depreciation and  amortization                |       | 1,266                                 |       | 867                                 |       | 2,121 |   | 1,702 |   |
| Operating income                              |       | 12,664                                |       | 9,269                               |       | 25,397 |   | 18,956 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Other income (expense):                       |       |                                  |       |                                |       |   |   |   |   |
| Interest expense                              |       | (178                                  | )          | (75                                 | )          | (218 | ) | (139 | ) |
| Earnings of equity  method investees          |       | 53                                    |       | 55                                  |       | 110 |   | 121 |   |
| Other                                         |       | 135                                   |       | 127                                 |       | 242 |   | 276 |   |
| Total other income  (expense), net            |       | 10                                    |       | 107                                 |       | 134 |   | 258 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Income before taxes                           |       | 12,674                                |       | 9,376                               |       | 25,531 |   | 19,214 |   |
| Income tax expense                            |       | (5,003                                | )          | (3,589                              | )          | (10,026 | ) | (7,478 | ) |
| Net income                                    |       | $                                     | 7,671      |                                | $          | 5,787 |   | $ | 15,505 |   | $ | 11,736 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Earnings per common  share:                   |       |                                  |       |                                |       |   |   |   |   |
| Basic                                         |       | $                                     | 0.63       |                                | $          | 0.48 |   | $ | 1.27 |   | $ | 0.97 |   |
| Diluted                                       |       | $                                     | 0.62       |                                | $          | 0.47 |   | $ | 1.25 |   | $ | 0.95 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Weighted average common  shares outstanding:  |       |                                  |       |                                |       |   |   |   |   |
| Basic                                         |       | 12,207                                |       | 12,076                              |       | 12,190 |   | 12,073 |   |
| Diluted                                       |       | 12,376                                |       | 12,296                              |       | 12,366 |   | 12,296 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

3

----

Table of Contents

 

** MWIVETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**Dollars and shares in thousands, except per sharedata  (unaudited)**

 
| ** **                                                                                                       | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| **Assets**                                                                                                       |       |               |       |                   |       |
|                                                                                                             |       |               |       |                   |       |
| Current Assets:                                                                                                  |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                       |       | $                  | 866        |                   | $          | 14,302 |   |
| Receivables, net                                                                                                 |       | 178,564            |       | 142,485                |       |
| Inventories                                                                                                      |       | 144,340            |       | 116,119                |       |
| Prepaid expenses and  other current assets                                                                       |       | 4,367              |       | 3,946                  |       |
| Deferred income taxes                                                                                            |       | 2,152              |       | 1,517                  |       |
| Total current assets                                                                                             |       | 330,289            |       | 278,369                |       |
|                                                                                                             |       |               |       |                   |       |
| Property and equipment,  net                                                                                     |       | 13,579             |       | 9,313                  |       |
| Goodwill                                                                                                         |       | 48,098             |       | 37,610                 |       |
| Intangibles, net                                                                                                 |       | 26,698             |       | 10,194                 |       |
| Other assets, net                                                                                                |       | 2,802              |       | 2,433                  |       |
| Total assets                                                                                                     |       | $                  | 421,466    |                   | $          | 337,919 |   |
|                                                                                                             |       |               |       |                   |       |
| **Liabilities  And Stockholders’ Equity**                                                                   |       |               |       |                   |       |
|                                                                                                             |       |               |       |                   |       |
| Current Liabilities:                                                                                             |       |               |       |                   |       |
| Credit facilities                                                                                                |       | $                  | 23,136     |                   | $          | — |   |
| Accounts payable                                                                                                 |       | 149,977            |       | 117,830                |       |
| Accrued expenses                                                                                                 |       | 14,029             |       | 10,767                 |       |
| Note payable                                                                                                     |       | 2,000              |       | —                 |       |
| Current maturities of  long-term debt and capital lease obligations                                              |       | 1,558              |       | 97                     |       |
| Total current  liabilities                                                                                       |       | 190,700            |       | 128,694                |       |
|                                                                                                             |       |               |       |                   |       |
| Deferred income taxes                                                                                            |       | 5,249              |       | 1,298                  |       |
|                                                                                                             |       |               |       |                   |       |
| Long-term debt and  capital lease obligations                                                                    |       | 1,089              |       | —                 |       |
|                                                                                                             |       |               |       |                   |       |
| Other long-term  liabilities                                                                                     |       | 1,137              |       | —                 |       |
|                                                                                                             |       |               |       |                   |       |
| Commitments and  contingencies                                                                                   |       |               |       |                   |       |
|                                                                                                             |       |               |       |                   |       |
| **Stockholders’  Equity**                                                                                   |       |               |       |                   |       |
| Common stock $0.01 par  value, 40,000 authorized; 12,271 and 12,196 shares issued and outstanding,  respectively |       | 123                |       | 122                    |       |
| Additional paid in  capital                                                                                      |       | 125,937            |       | 124,337                |       |
| Retained earnings                                                                                                |       | 97,231             |       | 83,468                 |       |
| Total stockholders’  equity                                                                                 |       | 223,291            |       | 207,927                |       |
| Total liabilities and  stockholders’ equity                                                                 |       | $                  | 421,466    |                   | $          | 337,919 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

4

----

Table of Contents

** **

**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Dollars in thousands (unaudited)**

 
| ** **                                                                                  | ** ** | **Six months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| **Cash Flows From Operating Activities:**                                                   |       |                                |       |   |   |
| Net  income                                                                                 |       | $                                   | 15,505     |   | $ | 11,736 |   |
| Adjustments  to reconcile net income to net cash provided by/(used in)operating activities: |       |                                |       |   |   |
| Depreciation  and amortization                                                              |       | 2,127                               |       | 1,708 |   |
| Amortization  of debt issuance costs                                                        |       | 25                                  |       | 21 |   |
| Stock-based  compensation                                                                   |       | 396                                 |       | 137 |   |
| Deferred  income taxes                                                                      |       | (272                                | )          | (186 | ) |
| Earnings  of equity method investees                                                        |       | (110                                | )          | (121 | ) |
| Loss  on disposal of property and equipment                                                 |       | 4                                   |       | 28 |   |
| Tax  benefit of common stock options                                                        |       | (973                                | )          | (224 | ) |
| Pension  payment                                                                            |       | (2,047                              | )          | — |   |
| Changes  in operating assets and liabilities (net of effects of acquisitions):              |       |                                |       |   |   |
| Receivables                                                                                 |       | (4,971                              | )          | (6,518 | ) |
| Inventories                                                                                 |       | (11,113                             | )          | 1,421 |   |
| Prepaid  expenses and other current assets                                                  |       | 181                                 |       | 412 |   |
| Accounts  payable                                                                           |       | 7,424                               |       | (24,570 | ) |
| Accrued  expenses                                                                           |       | (966                                | )          | (793 | ) |
| Net  cash provided by/(used in) operating activities                                        |       | 5,210                               |       | (16,949 | ) |
|                                                                                        |       |                                |       |   |   |
| **Cash Flows From Investing Activities:**                                                   |       |                                |       |   |   |
| Business  acquisitions, net of cash acquired of $674 in 2010                                |       | (41,379                             | )          | 117 |   |
| Purchases  of property and equipment                                                        |       | (845                                | )          | (1,372 | ) |
| Other                                                                                       |       | (210                                | )          | (50 | ) |
| Net  cash used in investing activities                                                      |       | (42,434                             | )          | (1,305 | ) |
|                                                                                        |       |                                |       |   |   |
| **Cash Flows From Financing Activities:**                                                   |       |                                |       |   |   |
| Borrowings  on line-of-credit                                                               |       | 62,442                              |       | 135,200 |   |
| Payments  on line-of-credit                                                                 |       | (39,300                             | )          | (120,500 | ) |
| Issuance  of common stock                                                                   |       | 112                                 |       | 127 |   |
| Proceeds  from stock options                                                                |       | 96                                  |       | 12 |   |
| Tax  benefit of common stock options                                                        |       | 973                                 |       | 224 |   |
| Debt  issuance costs                                                                        |       | (116                                | )          | — |   |
| Payment  on long-term debt                                                                  |       | (396                                | )          | (97 | ) |
| Net  cash provided by financing activities                                                  |       | 23,811                              |       | 14,966 |   |
|                                                                                        |       |                                |       |   |   |
| Effect  of Exchange Rate on Cash and Cash Equivalents                                       |       | (23                                 | )          | — |   |
|                                                                                        |       |                                |       |   |   |
| **Decrease in Cash and Cash Equivalents**                                                   |       | (13,436                             | )          | (3,288 | ) |
|                                                                                        |       |                                |       |   |   |
| Cash  and Cash Equivalents at Beginning of Period                                           |       | 14,302                              |       | 3,419 |   |
|                                                                                        |       |                                |       |   |   |
| Cash  and Cash Equivalents at End of Period                                                 |       | $                                   | 866        |   | $ | 131 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

5

----

Table of Contents

 

**MWI VETERINARY SUPPLY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**Dollars 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.

 

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 and six months ended March 31,2010 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, amongother items, sales returns, allowance for doubtful accounts, customerincentives, vendor rebates, inventories, goodwill and intangible assets, incometaxes, impairment of long-lived assets, depreciation and amortization, employeebenefits, unearned income and contingencies. The estimates of fair value ofassets and liabilities and the disclosure of contingent assets and liabilitiesas of the balance sheet date and reported amounts of revenue and expenses forthe periods are based on assumptions 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$87,857 and $75,471 for the three months ended March 31, 2010 and 2009,respectively, and generated commission revenue of $4,188 and $3,755,respectively.  Gross billings from agencycontracts were $142,284 and $123,137 for the six months ended March 31,2010 and 2009, respectively, and generated commission revenue of $7,762 and$6,628, respectively.

 

6

----

Table of Contents

 

**Costof Product Sales and Vendor Rebates**

 

*Cost of product salesconsist of our inventory product cost, including shipping and delivery costs toand from our distribution centers. Vendor rebates are recorded based on the terms of the contracts orprograms 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 purchase performancemeasures. Vendors may change or eliminate rebate programs from year to 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 under ASC810.  This accounting standard amends theconsolidation guidance applicable to variable interest entities and requiresadditional disclosures concerning an enterprise’s continuing involvement withvariable interest entities. The statement is effective for our fiscal yearbeginning October 1, 2010. We are currently evaluating the expectedimpact, if any, that this standard will have on our consolidated financialstatements.

 

**NOTE 3**—**BUSINESS ACQUISITION**

 

OnFebruary 8, 2010, MWI Veterinary Supply Co. (“MWI Co.”) purchased all ofthe outstanding share capital of Centaur Services Limited (“Centaur”), based inthe United Kingdom for a purchase price of $44,053, consisting of $42,053 incash and a $2,000 note payable due in one year. Subsequent to the acquisition of Centaur, we funded $2,047 to thepension plan as required by the terms of the share purchase agreement.  The purchase price is subject to apost-closing working capital and debt adjustment.  Centaur is a supplier of animal health products to veterinariansin the United Kingdom.  Centaur sellsproducts to both the companion animal market and production animal market.  The acquisition of Centaur has allowed us toexpand into the international markets.  We incurred $1,090 of directacquisition-related expenses.  Theintangible assets have estimated useful lives between 1 and 20 years.  The amount recorded in goodwill will not bedeductible for tax purposes.

 

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition, which may be adjusted duringthe allocation period as defined in ASC 280. These purchase price allocations are based on a combination of valuationsand analyses.

 
| Cash                       |   | $      | 674    |   |
|----------------------------|--------|--------|--------|--------|
| Receivables                |   | 32,527 |   |
| Inventories                |   | 17,830 |   |
| Property and equipment     |   | 5,275  |   |
| Intangibles                |   | 17,658 |   |
| Goodwill                   |   | 10,883 |   |
| Other assets               |   | 480    |   |
| Total assets acquired      |   | 85,327 |   |
|                       |   |   |   |
| Accounts payable           |   | 25,811 |   |
| Accrued expenses           |   | 5,562  |   |
| Other liabilities          |   | 9,901  |   |
| Total liabilities  assumed |   | 41,274 |   |
|                       |   |   |   |
| Net assets acquired        |   | $      | 44,053 |   |

 

7

----

Table of Contents

 

Thefollowing table presents information for Centaur that is included in ourcondensed consolidated statements of income from the acquisition date of February 8,2010 through the three and six months ended March 31, 2010:

 
| ** ** | ** ** | **Centaur’s operations  included in MWI’s results** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| Revenues   |       | $                                                             | 33,606     |   |
| Net Income |       | $                                                             | 580        |   |

 

Thefollowing table presents supplemental pro forma information as if theacquisition of Centaur had occurred on October 1, 2009 for the periodsended March 31, 2010 and on October 1, 2008 for the periods ended March 31,2009:

 
| ** ** | ** ** | **Unaudited Pro Forma Consolidated Results** | ** ** |
|------------|------------|------------------------------------------------------------------|------------|
| ** ** | ** ** | **Three months ended March 31,**             | ** ** | **Six months ended March 31,** | ** ** |
| ** ** | ** ** | **2010**                                                         | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues   |       | $                                                                | 310,641    |   | $ | 261,150 |   | $ | 607,328 |   | $ | 543,356 |   |
| Net Income |       | $                                                                | 8,162      |   | $ | 6,225 |   | $ | 16,577 |   | $ | 12,942 |   |

 

Forthe pro forma calculation, we used an average foreign currency exchange ratefor each of the periods presented and the annual net income as a percentage ofrevenues for purposes of determining the net income for interim periods.  The unaudited pro forma consolidated resultsare not necessarily indicative of what our consolidated results of operationswould have been had we completed the acquisition on October 1, 2009 and onOctober 1, 2008.  Additionally, theunaudited pro forma consolidated results do not purport to project the futureresults of operations of the combined company.

 

**NOTE 4**—**RECEIVABLES**

 
| ** **                       | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| Trade                            |       | $                  | 168,981    |                   | $          | 132,369 |   |
| Vendor rebates and  programs     |       | 13,172             |       | 13,122                 |       |
|                             |       | 182,153            |       | 145,491                |       |
| Allowance for doubtful  accounts |       | (3,589             | )          | (3,006                 | )          |
|                             |       | $                  | 178,564    |                   | $          | 142,485 |   |

 

Product sales resultingfrom transactions with Banfield, The Pet Hospital (“Banfield”) wereapproximately 10% and 11% of total product sales during the three months ended March 31,2010 and 2009, respectively. Product sales resulting from transactions withBanfield were approximately 10% of total product sales during each of the sixmonths ended March 31, 2010 and 2009. Approximately 13% of our trade receivables resulted from transactionswith Banfield as of March 31, 2010 and September 30, 2009.

 

**NOTE 5**—**PROPERTY AND EQUIPMENT**

 
| ** **                           | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                           | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| Land                                 |       | $                  | 20         |                   | $          | 20 |   |
| Building and leasehold  improvements |       | 8,694              |       | 3,566                  |       |
| Machinery, furniture  and equipment  |       | 18,167             |       | 12,792                 |       |
| Computer equipment                   |       | 5,947              |       | 3,325                  |       |
| Construction in  progress            |       | 167                |       | 1,140                  |       |
|                                 |       | 32,995             |       | 20,843                 |       |
| Accumulated  depreciation            |       | (19,416            | )          | (11,530                | )          |
|                                 |       | $                  | 13,579     |                   | $          | 9,313 |   |

 

Depreciation expense was$962 and $662 for the three months ended March 31, 2010 and 2009,respectively.  Depreciation expense was$1,613 and $1,291 for the six months ended March 31, 2010 and 2009,respectively.

 

8

----

Table of Contents

** **

**NOTE 6**—**INTANGIBLES**

 
| ** **                | ** ** | ** **       | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|---------------------------|------------|------------------|------------|--------------------|------------|------------------------|------------|
| ** **                | ** ** | **Useful Lives** | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| Amortizing:               |       |             |       |               |       |                   |       |
| Customer relationships    |       | 9-20 years       |       | $                  | 24,283     |                   | $          | 9,076 |   |
| Covenants not to  compete |       | 1-5 years        |       | 800                |       | 686                    |       |
| Other                     |       | 3-7 years        |       | 483                |       | 257                    |       |
|                      |       |             |       | 25,566             |       | 10,019                 |       |
| Accumulated  amortization |       |             |       | (2,577             | )          | (2,177                 | )          |
|                      |       |             |       | 22,989             |       | 7,842                  |       |
| Non-Amortizing:           |       |             |       |               |       |                   |       |
| Trade names and patents   |       |             |       | 3,709              |       | 2,352                  |       |
|                      |       |             |       | $                  | 26,698     |                   | $          | 10,194 |   |

 

Amortization expense was$307 and $208 for the three months ended March 31, 2010 and 2009,respectively.  Amortization expense was$514 and $417 for the six months ended March 31, 2010 and 2009,respectively.  Estimated future annualamortization expense related to intangible assets as of March 31, 2010follows:

 
| ** **         | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| Remainder of  2010 |       | $          | 795        |   |
| 2011               |       | 1,581      |       |
| 2012               |       | 1,552      |       |
| 2013               |       | 1,468      |       |
| 2014               |       | 1,462      |       |
| Thereafter         |       | 16,131     |       |
|               |       | $          | 22,989     |   |

 

Theabove projection of amortization expense includes preliminary estimates ofintangible assets and lives associated with the acquisition of Centaur.  These amounts may be adjusted during theallocation period as defined in ASC 805.

 

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

 

Thefollowing table presents the outstanding debt and capital lease obligations asof March 31, 2010:

 
| ** **                                     | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| Revolving credit  facility                     |       | $                  | 22,400     |                   | $          | — |   |
| Fortis credit facility                         |       | 736                |       | —                 |       |
| Note payable to AHN  (UK) Holdings Limited (1) |       | 2,000              |       | —                 |       |
| Capital lease  obligations (2)                 |       | 1,846              |       | —                 |       |
| Term note (2)                                  |       | 801                |       | —                 |       |
| Other long-term debt                           |       | —             |       | 97                     |       |
| Total debt and capital  lease obligations      |       | 27,783             |       | 97                     |       |
|                                                |            |                    |            |                        |            |  |  |

 

----

(1) Note payable is related to the acquisition ofCentaur and is due one year from acquisition which was February 8, 2010.

(2) Term note and capital lease obligations wereassumed as a result of the acquisition of Centaur.  The term note matures in March 2011 andthe capital lease obligations have varying maturity dates.

 

**Revolvingcredit facility**—OnFebruary 8, 2010, MWI Co., our wholly-owned subsidiary as borrower,entered into a First Amendment to its Credit Agreement (the “First Amendment”)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 theCredit Agreement dated December 13, 2006 among MWI Co., MWI VeterinarySupply, Inc., Memorial Pet Care, Inc. and the lenders a party thereto(the “facility”).  The First Amendmentincreased the aggregate revolving commitment of the lenders under the facilityfrom 

 

9

----

Table of Contents

 

$70,000 to $100,000.  The First Amendment also extended thematurity date of the loans under the facility from December 1, 2011 to March 1,2013.  The variable interest rate is nowequal to the Daily LIBOR Floating Rate or the LIBOR 1-month fixed rate (at MWICo.’s option) plus a margin ranging from 1.75% to 2.50%, which was previously0.7% to 1.25% under the facility prior to the First Amendment.  The lenders also receive an unused line feeand letter of credit fee which is now equal to 0.2% of the unused amount of thefacility, which was previously 0.125%. Our outstanding balance on the facilitywas $22,400 and $0 at March 31, 2010 and September 30, 2009,respectively, and the interest rate for the facility was 1.98% as of March 31,2010.

 

**Fortiscredit facility**—Centauroperates with a credit facility (“Fortis facility”) with Fortis Bank as thelender.  The Centaur facility allows forborrowings in the aggregate of £12,000. The Fortis facility has a variable interest rate equal to a base rateplus a margin of 0.85%.  It is our intentto replace the Fortis facility within six months of the date of theacquisition, which was February 8, 2010. The outstanding balance at March 31, 2010 on the Fortis facilitywas £488, or $736 using the exchange rate on March 31, 2010.  The interest rate for the Fortis facility was1.89% as of March 31, 2010.

 

**NOTE 8**—**FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Forcertain of our financial instruments, including cash and cash equivalents,receivables and accounts payable, the fair values approximate book values dueto their short maturities.

 

InFebruary 2010, we amended our facility. Because this amendment was done in the quarter ended March 31, 2010and includes interest rates based on current market conditions, we believe thatthe 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 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 March 31, 2010 and 2009, we had 283,654 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 March 31,2010, 223,214 options to purchase common stock were outstanding with a weightedaverage exercise price of $0.18 per share and expiring through June 2012.

 

*2005 Stock Plan*

* *

In July 2005, we adopted the 2005 Stock-Based Award and IncentiveCompensation Plan (the “2005 Plan”). Under the 2005 Plan as amended, we mayoffer restricted and unrestricted shares of our common stock and grant optionsto purchase 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 March 31,2010 and 2009 we had 1,053,570 and 1,081,411 shares, respectively, of ourcommon stock available for issuance under the 2005 Plan. As of March 31,2010, 51,455 options to purchase common stock were outstanding with a weightedaverage exercise price of $17.84 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 and unrestricted stockand deferred stock. The compensation committee will determine the number andtype of stock-based awards to each participant, the exercise price of eachaward, the duration of the award (not to exceed ten years), vesting provisionsand all other terms and conditions of such award in individual awardagreements. The 2005 Plan provides that upon termination of employment with us,unless determined otherwise by the compensation committee at the time optionsare granted, 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.

 

10

----

Table of Contents

 

We granted no commonstock options during each of the six months ended March 31, 2010 and2009.  During the six months ended March 31,2010 and 2009, we issued 2,000 and 0 shares of restricted stock under the 2005Plan.  We also granted 6,000 and 0 ofunrestricted stock to non-employee directors during the six months ended March 31,2010 and 2009, respectively.  During thethree months ended March 31, 2010 and 2009, we recognized $335 and $89 ofcompensation expense related to stock grants, respectively.  During the six months ended March 31,2010 and 2009, we recognized $430 and $179 of compensation expense related tostock 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 annually.  An employeeis allowed to purchase a maximum of 200 shares per purchase period.  During the three months ended March 31,2010 and 2009, we issued 1,275 and 2,269 shares, respectively, of our commonstock under the ESPP.  During the sixmonths ended March 31, 2010 and 2009, we issued 3,045 and 5,326 shares,respectively, of our common stock under the ESPP.  As of March 31, 2010, there were 486,386shares available to be issued under the ESPP.

 

**NOTE 10**—**EMPLOYEE BENEFIT PLANS**

 

As a result of the acquisition of Centaur, weassumed a defined benefit pension plan for United Kingdom employees.  This plan was frozen prior to the acquisitionof Centaur to future participants.  Sincethis defined benefit pension plan was a result of the acquisition of Centaur,we recorded the liability at the estimated fair value at the date of purchasebased on actuarial reports at that time. Subsequent to the acquisition of Centaur, we funded $2,047 to thepension plan as required by the terms of the share purchase agreement.  The liability recorded as of March 31,2010 was £755, or $1,137 using the exchange rate on March 31, 2010.

 

**NOTE 11**—**INCOME TAXES**

 

Oureffective tax rate for the three months ended March 31, 2010 and 2009 was39.5% and 38.3%, respectively.  Oureffective tax rate for the six months ended March 31, 2010 and 2009 was39.3% and 38.9%, respectively.  Theincrease in the effective tax rate is due to the non-deductibility of directacquisition-related expenses for tax purposes.

 

Asof March 31, 2010, we had $205 of unrecognized tax benefits, of which $15would impact our effective rate if recognized. Our policy for classifying interestand penalties associated with unrecognized tax benefits is to include suchitems in income tax expense.  The amountof interest and penalties recognized during the three and six months ended March 31,2010 and 2009 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 revenuerecognition for tax purposes the same as revenue recognized for book purposes.We expect resolution within the next twelve months which would decrease theliability for unrecognized tax benefits by approximately $182.

 

Withfew exceptions, we are no longer subject to income tax examination for yearsbefore 2004 in the U.S. and significant state and local jurisdictions.  We are no longer subject to income taxexamination for years before 2008 in significant foreign jurisdictions.

 

11

----

## Table of Contents

 

## **NOTE 12 —COMPUTATION OF EARNINGS PER SHARE***(Inthousands, except per share data)*

 
| ** **                                      | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **Basic**                             | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                      |       | $                                     | 7,671      |   | $ | 7,671 |   | $ | 5,787 |   | $ | 5,787 |   |
| Weighted average common  shares outstanding     |       | 12,207                                |       | 12,207 |   | 12,076 |   | 12,076 |   |
| Effect of diluted  securities                   |       |                                  |       |   |   |   |   |   |   |
| Stock options and  restricted stock             |       |                                  |       | 169 |   |   |   | 220 |   |
| Weighted average  diluted shares outstanding    |       |                                  |       | 12,376 |   |   |   | 12,296 |   |
| Earnings per share                              |       | $                                     | 0.63       |   | $ | 0.62 |   | $ | 0.48 |   | $ | 0.47 |   |
| Anti-dilutive shares excluded  from calculation |       |                                  |       | — |   |   |   | — |   |

 
| ** **                                      | ** ** | **Six months ended March 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **Basic**                           | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                      |       | $                                   | 15,505     |   | $ | 15,505 |   | $ | 11,736 |   | $ | 11,736 |   |
| Weighted average common  shares outstanding     |       | 12,190                              |       | 12,190 |   | 12,073 |   | 12,073 |   |
| Effect of diluted  securities                   |       |                                |       |   |   |   |   |   |   |
| Stock options and  restricted stock             |       |                                |       | 176 |   |   |   | 223 |   |
| Weighted average shares  outstanding            |       |                                |       | 12,366 |   |   |   | 12,296 |   |
| Earnings per share                              |       | $                                   | 1.27       |   | $ | 1.25 |   | $ | 0.97 |   | $ | 0.95 |   |
| Anti-dilutive shares excluded  from calculation |       |                                |       | — |   |   |   | — |   |

 

**NOTE 13**—**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 $184 and $193for the three months ended March 31, 2010 and 2009, respectively, and $392and $372 for the six months ended March 31, 2010 and 2009,respectively.  Sales of products to Feeders’Advantage were $10,516 and $11,138 for the three months ended March 31,2010 and 2009, respectively, which represented 4% and 5% of total product salesfor the three months ended March 31, 2010 and 2009, respectively.  Sales of products to Feeders’ Advantage were$21,574 and $23,468 for the six months ended March 31, 2010 and 2009,respectively, which represented 4% and 5% of total product sales for the sixmonths ended March 31, 2010 and 2009, respectively.

 

MWI Co. provides Feeders’Advantage with a line-of-credit to finance its day-to-day operations. Thisline-of-credit bears interest at the prime rate. The interest due on theline-of-credit is calculated and charged to Feeders’ Advantage on the last dayof each month. Conversely, to the extent MWI Co. has a payable balance due toFeeders’ Advantage, the payable balance accrues interest in favor of Feeders’Advantage at the average federal funds rates in effect for that month. MWI Co.had a payable balance to Feeders’ Advantage of $1,164 and $210 as of March 31,2010 and September 30, 2009, respectively.

 

12

----

Table ofContents

 

**NOTE 14**—**  STATEMENTS OFCASH FLOWS — SUPPLEMENTAL AND NON-CASH DISCLOSURES**

 
| ** **                                             | ** ** | **Six months ended March 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| *Supplemental  Disclosures*                            |       |                                |       |   |   |
| Cash paid for interest                                 |       | $                                   | 143        |   | $ | 104 |   |
| Cash paid for income  taxes                            |       | 9,563                               |       | 7,152 |   |
| *Non-cash  Activities*                                 |       |                                |       |   |   |
| Note payable issued related to Centaur acquisition     |       | 2,000                               |       | — |   |
| Equipment acquisitions  financed with accounts payable |       | 77                                  |       | 39 |   |
|                                                        |            |                                     |            |  |  |  |  |

 

*Restatement of Statements ofCash Flows* — We have restated the presentation of borrowings on the credit facilityfor the six months ended March 31, 2009. Related amounts had previouslybeen presented on a net basis, rather than on a gross basis in accordance withASC 230. The correction had no effect on net cash used in financing activities.

 

**NOTE 15**—**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 March 31, 2010, 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.

##  

**NOTE 16**—**OTHERCOMPREHENSIVE INCOME**

 

Thecomponents of comprehensive income (loss) were as follows:

 
| ** **                    | ** ** | **Three months ended March 31,** | ** ** | **Six months ended March 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                    |       | $                                     | 7,671      |                                | $          | 5,787 |   | $ | 15,505 |   | $ | 11,736 |   |
| Other comprehensive  loss:    |       |                                  |       |                                |       |   |   |   |   |
| Foreign currency  translation |       | (1,742                                | )          | —                              |       | (1,742 | ) | — |   |
| Total comprehensive  income   |       | $                                     | 5,929      |                                | $          | 5,787 |   | $ | 13,763 |   | $ | 11,736 |   |

 

13

----

**Table ofContents**

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board of Directorsand Stockholders of

MWI Veterinary Supply, Inc.

Meridian, Idaho

 

We have reviewed theaccompanying condensed consolidated balance sheet of MWI Veterinary Supply, Inc.and subsidiaries (the “Corporation”) as of March 31, 2010, and the relatedcondensed consolidated statements of income for the three and six-month periodsended March 31, 2010 and 2009, and of cash flows for the six-month periodsended March 31, 2010 and 2009. These interim financial statements are the responsibility of theCorporation’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 andaccounting matters.  It is substantiallyless in scope than an audit conducted in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole.  Accordingly, we do notexpress such an opinion.

 

Based on our 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, Idaho

May 6, 2010

 

14

----

Table of Contents

 

**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 distributor of animal health products toveterinarians across the United States and in the United Kingdom. We market ourproducts to veterinarians in both the companion and production animal markets.Our growth has primarily been from internal growth initiatives and, to a lesserextent, 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 approximatelytwo-thirds of our revenues have been generated from sales to the companionanimal market and one-third from sales to the production animal market. Thestate of the overall economy and consumer spending have impacted both markets,with tightening credit markets, volatile commodity prices in milk, grain, cornand feeder cattle, and changes in weather patterns also affecting demand in theproduction animal market.  Both marketshave been integral to our financial results and we intend to continue supportingboth markets.

 

*Industry*

 

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 is importantto our business to service this market and we intend to continue to supportproduction animal veterinarians with a broad range of products and value-addedservices. Historically, sales in this market have been largely driven byspending on animal health products to improve productivity, weight gain anddisease 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 forproduction animal products are directly related to medical procedures performedby veterinarians 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.

 

*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 

 

15

----

Table of Contents

 

accepted accounting principles in the United States.In an agency relationship, we generally do not purchase and take inventory ofproducts from our vendors. When we receive an order from our customer, wetransmit the order to our vendor, who picks, packs and ships the order to ourcustomer. In some cases, our vendor invoices and collects payment from ourcustomer, while in other cases we invoice and collect payment from our customeron behalf of our vendor. We receive a commission payment for soliciting theorder 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 inconformity 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 forparticular products in response to market conditions related to that particularproduct. A switch between models can impact our revenues and our operatingincome. 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 canoccur even with vendors with whom we have written agreements, because most ofour agreements with vendors have relatively short terms and are terminable withor without cause on short notice, normally 30 to 90 days. The impact ofany individual change from a “buy/sell” to an agency model depends on the costsand expenses associated with a particular product, and can have either apositive or a negative effect on our profitability.

 

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.  For calendar year 2010, we agreed with Merialto begin a non-exclusive arrangement 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 primarily sold under an agency arrangement. This addition of buy-sell arrangements for certain flea, tick andheartworm products will have an impact on how our revenues are reported, since underagency sales, only commissions are reported as revenues, while for buy-sellproducts the total sale price of the product is reported as revenue.

 

*Vendor Consolidation*

 

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.  Wehave either received or reviewed contracts for calendar year 2010 from thesevendors.  Based on these contracts, we donot believe that the impact of the changes described will have a materialimpact on our results for fiscal 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.  On March 9,2010, Sanofi-Aventis and Merck announced that Sanofi-Aventis exercised itsoption to combine Merial with Intervet/Schering-Plough, Merck’s animal healthbusiness.  The completion of thetransaction is expected to occur in the next twelve months.  Merial and Intervet-Schering are also two ofour larger vendors.  We have receivedcontracts for calendar year 2010 from these vendors.  Based on these contracts, we do not believethat the impact of the changes described will have a material impact on ourresults for fiscal 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 tonegotiate with Pfizer, Fort Dodge, Boehringer Ingelheim, Merial andIntervet-Schering individually while they were competing with each other. Therealso remains uncertainty related to any changes to the terms that may beincluded in the vendor contracts we negotiate for the upcoming year as a resultof these transactions.  There is also apossibility of product disruption as these companies integrate their operationswhich could adversely impact our financial results.  Further consolidation among animal healthproduct vendors could result in our vendors further increasing their marketshare, which could give vendors greater pricing power and make it easier forsuch vendors to sell their products directly to animal health customers, bothof which could decrease our net sales and profitability.

 

16

----

Table ofContents

 

Ourtop ten vendors supplied products that accounted for approximately 70% of ourrevenues for each of the six months ended March 31, 2010 and 2009,respectively, and 74% of our revenues for the fiscal year ended September 30,2009.  Pfizer supplied products thataccounted for approximately 26% of our revenues during each of the six monthsended March 31, 2010 and 2009, 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 12% and 16% of our revenues during the six monthsended March 31, 2010 and 2009, respectively, and approximately 14% of ourrevenues for our fiscal year ended September 30, 2009.  Fort Dodge supplied products that accountedfor 11% of our revenues during the six months ended March 31, 2009, and11% of our revenues for our fiscal year ended September 30, 2009.  Intervet-Schering, a subsidiary of ScheringPlough, supplied products that accounted for approximately 11% and 10% of ourrevenues during the six months ended March 31, 2010 and 2009,respectively, and 11% of our revenues for our fiscal year ended September 30,2009.  Boehringer Ingelheim suppliedproducts that accounted for approximately 9% and 4% of our revenues during thesix months ended March 31, 2010 and 2009, 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 52% of totalcommission revenues for each of the six months ended March 31, 2010 and2009, and 56% of total commission revenues for our fiscal year 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 thevendors and are a reduction of inventory until the product is sold.  When the inventory is sold, purchase rebatesare recognized as a reduction to cost of product sales. Many of our vendors’rebate programs are based on a calendar year.

 

*Acquisitions*

 

InFebruary 2010, we acquired the outstanding share capital of Centaur.  Based in Castle Cary, England, Centaur is asupplier of animal health products to veterinarians in the United Kingdom.  Centaur sells products to both the companionanimal market and production animal market.

 

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.

 

17

----

Table ofContents

 

**Results of Operations**

 

Thefollowing table summarizes our results of operations for the three and sixmonths ended March 31, 2010 and 2009, in dollars and as a percentage oftotal revenues.

 
| ** **                                                  | ** ** | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                              | ** ** | **%**                               | ** ** | **2009** | ** ** | **%** | ** ** | **2010** | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** |
| Revenues:                                                   |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                               |       | $                                     | 271,893    |                                | 94.9       | % | $ | 199,620 |   | 93.1 | % | $ | 493,372 |   | 94.4 | % | $ | 416,236 |   | 93.3 | % |
| Product sales to  related party                             |       | 10,516                                |       | 3.7                                 | %          | 11,137 |   | 5.2 | % | 21,574 |   | 4.1 | % | 23,467 |   | 5.2 | % |
| Commissions                                                 |       | 4,188                                 |       | 1.4                                 | %          | 3,755 |   | 1.7 | % | 7,762 |   | 1.5 | % | 6,628 |   | 1.5 | % |
| Total revenues                                              |       | 286,597                               |       | 100.0                               | %          | 214,512 |   | 100.0 | % | 522,708 |   | 100.0 | % | 446,331 |   | 100.0 | % |
|                                                        |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product sales                                       |       | 247,075                               |       | 86.2                                | %          | 182,878 |   | 85.3 | % | 447,177 |   | 85.6 | % | 381,042 |   | 85.4 | % |
| Gross profit                                                |       | 39,522                                |       | 13.8                                | %          | 31,634 |   | 14.7 | % | 75,531 |   | 14.4 | % | 65,289 |   | 14.6 | % |
|                                                        |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses               |       | 25,592                                |       | 8.9                                 | %          | 21,498 |   | 10.0 | % | 48,013 |   | 9.2 | % | 44,631 |   | 10.0 | % |
| Depreciation and  amortization                              |       | 1,266                                 |       | 0.5                                 | %          | 867 |   | 0.4 | % | 2,121 |   | 0.4 | % | 1,702 |   | 0.4 | % |
| Operating income                                            |       | 12,664                                |       | 4.4                                 | %          | 9,269 |   | 4.3 | % | 25,397 |   | 4.8 | % | 18,956 |   | 4.2 | % |
|                                                        |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                     |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                            |       | (178                                  | )          | 0.0                                 | %          | (75 | ) | 0.0 | % | (218 | ) | 0.0 | % | (139 | ) | 0.0 | % |
| Earnings of equity  method investees                        |       | 53                                    |       | 0.0                                 | %          | 55 |   | 0.0 | % | 110 |   | 0.0 | % | 121 |   | 0.0 | % |
| Other                                                       |       | 135                                   |       | 0.0                                 | %          | 127 |   | 0.1 | % | 242 |   | 0.1 | % | 276 |   | 0.1 | % |
| Total other income  (expense), net                          |       | 10                                    |       | 0.0                                 | %          | 107 |   | 0.1 | % | 134 |   | 0.1 | % | 258 |   | 0.1 | % |
|                                                        |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before taxes                                         |       | 12,674                                |       | 4.4                                 | %          | 9,376 |   | 4.4 | % | 25,531 |   | 4.9 | % | 19,214 |   | 4.3 | % |
| Income tax expense                                          |       | (5,003                                | )          | -1.7                                | %          | (3,589 | ) | -1.7 | % | (10,026 | ) | -1.9 | % | (7,478 | ) | -1.7 | % |
| Net income                                                  |       | $                                     | 7,671      |                                | 2.7        | % | $ | 5,787 |   | 2.7 | % | $ | 15,505 |   | 3.0 | % | $ | 11,736 |   | 2.6 | % |
|                                                        |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per common  share:                                 |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                       |       | $                                     | 0.63       |                                |       |   | $ | 0.48 |   |   |   | $ | 1.27 |   |   |   | $ | 0.97 |   |   |   |
| Diluted                                                     |       | $                                     | 0.62       |                                |       |   | $ | 0.47 |   |   |   | $ | 1.25 |   |   |   | $ | 0.95 |   |   |   |
|                                                        |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average common  shares outstanding (in thousands): |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                       |       | 12,207                                |       |                                |       | 12,076 |   |   |   | 12,190 |   |   |   | 12,073 |   |   |   |
| Diluted                                                     |       | 12,376                                |       |                                |       | 12,296 |   |   |   | 12,366 |   |   |   | 12,296 |   |   |   |

 

18

----

Table of Contents

 

**Three Months Ended March 31, 2010 Compared to ThreeMonths Ended March 31, 2009**

 

*Total Revenues*.  Total revenues increased 33.6% to $286,597for the three months ended March 31, 2010, from $214,512 for the threemonths ended March 31, 2009. Included in total revenues for the quarter ended March 31, 2010were $33,606 related to the acquisition of Centaur.  Excluding this acquisition, our revenuesattributable to existing customers represented approximately 63% of the growthof total revenues during the quarter ended March 31, 2010.  For the purpose of calculating growth ratesof new and existing customer revenue, we have defined a new customer as acustomer that did not purchase product from us in the corresponding fiscalquarter of the prior year, with the remaining customer base being consideredexisting customers.   This increase inrevenues during the three months ended March 31, 2010 is partially due toimproving market conditions, market share gains and the addition of flea, tickand heartworm products that we did not sell in the same period of the priorfiscal year as a result of not entering into an exclusive agreement on theMerial products.  Product sales torelated party decreased by 5.6% to $10,516 for the three months ended March 31,2010, from $11,137 for the three months ended March 31, 2009.  Commissions increased 11.5% to $4,188 for thethree months ended March 31, 2010, from $3,755 for the three months ended March 31,2009.

 

*Gross Profit*.  Gross profit increased by 24.9% to $39,522for the three months ended March 31, 2010, from $31,634 for the three monthsended March 31, 2009.  Gross profitwas benefited by our revenue growth and the addition of Centaur.  Gross profit as a percentage of totalrevenues was 13.8% and 14.7% for the three months ended March 31, 2010 and2009, respectively.  Gross profit as apercentage of total revenues decreased due to the addition of Centaur becauseCentaur’s gross profit as a percentage of total revenues is generally lowerthan MWI’s, which serves to reduce the overall gross margin of the consolidatedCompany when compared to our results for the same period in the prioryear.  Vendor rebates for the threemonths ended March 31, 2010 increased by approximately $475 compared tothe three months ended March 31, 2009.

 

*Selling, General and Administrative (“SG&A”)*.  SG&A expenses increased 19.0% to $25,592for the three months ended March 31, 2010, from $21,498 for the threemonths ended March 31, 2009. SG&A expenses increased primarily due to the acquisition of Centaurand our revenue growth.  SG&Aexpenses as a percentage of total revenues improved to 8.9% for the threemonths ended March 31, 2010 compared to 10.0% for the three months ended March 31,2009.  SG&A expenses as a percentageof total revenues decreased due to the addition of Centaur because Centaur’sSG&A expenses as a percentage of total revenues are generally lower thanMWI’s, which serves to reduce the overall SG&A expenses as a percentage oftotal revenues when compared to our results for the same period in the prioryear.  Additionally, included in theincrease in SG&A expenses for the quarter ended March 31, 2010 aredirect acquisition-related expenses of $915 incurred in connection with theacquisition of Centaur.  Excluding theseexpenses, our SG&A expenses as a percentage of total revenues improved to8.6% for the three months ended March 31, 2010.

 

*Other Income (Expense). *Otherincome (expense) decreased 90.7% to $10 for the three months ended March 31,2010, from $107 for the three months ended March 31, 2009 primarily due toan increase in interest expense which came as a result from borrowing on ourrevolving credit facility to finance the Centaur acquisition.

 

*Income Tax Expense*.  Our effective tax rate for the three monthsended March 31, 2010 and 2009 was 39.5% and 38.3%, respectively.  The increase in the effective tax rate isprimarily due to the non-deductibility of direct acquisition-related expensesfor tax purposes.

 

**Six Months Ended March 31, 2010 Compared to Six MonthsEnded March 31, 2009**

 

*Total Revenues*.  Total revenues increased 17.1% to $522,708for the six months ended March 31, 2010, from $446,331 for the six monthsended March 31, 2009.  Included intotal revenues for the six months ended March 31, 2010 were $33,606related to the acquisition of Centaur. Excluding this acquisition, our revenues attributable to existingcustomers represented approximately 32% of the growth of total revenues duringthe six months ended March 31, 2010. Additionally, revenues increased during the six months ended March 31,2010 primarily due to improving market conditions, market share gains and theaddition of flea, tick and heartworm products that we did not sell in the sameperiod of the prior fiscal year as a result of not entering into an exclusiveagreement on the Merial products. Product sales to related party decreased by 8.1% to $21,574 for the sixmonths ended March 31, 2010, from $23,467 for the six months ended March 31,2009.  Commissions increased 17.1% to$7,762 for the six months ended March 31, 2010, from $6,628 for the sixmonths ended March 31, 2009.

 

19

----

Table ofContents

* *

*Gross Profit*.  Gross profitincreased by 15.7% to $75,531 for the six months ended March 31, 2010, from$65,289 for the six months ended March 31, 2009.  Gross profit as a percentage of totalrevenues was 14.4% and 14.6% for the six months ended March 31, 2010 and 2009,respectively.  Vendor rebates for the sixmonths ended March 31, 2010 decreased by approximately $375 compared to the sixmonths ended March 31, 2009.  Thisdecrease was primarily a result of the elimination of the livestock rebateopportunity from one of our largest vendors, partially offset by improvementsin rebates from other vendors.

 

*Selling, General and Administrative (“SG&A”)*. SG&A expenses increased 7.6% to $48,013 for the six months endedMarch 31, 2010, from $44,631 for the six months ended March 31, 2009.  SG&A expenses as a percentage of totalrevenues improved to 9.2% for the six months ended March 31, 2010 compared to10.0% for the six months ended March 31, 2009. Included in the increase in SG&A expenses are directacquisition-related expenses of $1,090 related to the acquisition ofCentaur.  Excluding these expenses our SG&Aexpenses as a percentage of revenues improved to 9.0% for the six months endedMarch 31, 2010.

 

*Other Income (Expense)*. Other income (expense) decreased 48.1% to $134 for the six months endedMarch 31, 2010, from $258 for the six months ended March 31, 2009.  The decrease was primarily due to an increasein interest expense which came as a result from borrowing on our revolvingcredit facility for the Centaur acquisition.

 

*Income Tax Expense*.  Our effective tax rate for the six monthsended March 31, 2010 and 2009 was 39.3% and 38.9%, respectively.  The increase in the effective tax rate is dueto the non-deductibility of direct acquisition-related expenses for taxpurposes.

 

**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 credit facilities. We use capital primarily to fundday-to-day operations and to maintain sufficient inventory levels in order topromptly fulfill customer orders and to expand our operations and sales growth.We believe our capital resources, including our ability to borrow funds fromour credit facilities, will be sufficient to meet our anticipated cash needsfor at least the next twelve months. Bank of America, N.A. and Wells Fargo, N.A. are the lenders under ourrevolving credit facility.  The revolvingcredit facility allows for borrowings in the aggregate of $100,000, matures March 1,2013 and has a variable interest rate equal to the Daily LIBOR Floating Rate orthe LIBOR 1-month fixed rate plus a margin ranging from 1.75% to 2.50%.  The lenders also receive an unused line feeand letter of credit fee equal to 0.2% of the unused amount of the revolvingcredit facility. Our outstanding balance on the revolving credit facility at March 31,2010 was $22,400, and the interest rate was 1.98% as of March 31, 2010.

 

Thefacility contains certain financial covenants as well as other non-financialrestrictive covenants. As of March 31, 2010, we were in compliance with allcovenants in the facility.

 

Our lenders may havesuffered losses related to their lending and other financial relationships,especially because of the general weakening of the national economy andincreased 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 six months ended March 31, 2010,cash provided by operations was $5,210 and was primarily attributable to netincome of $15,505, an increase in accounts receivable of $4,971 due to theincrease in revenues partially offset by the collection of accounts that hadextended billing terms in prior periods, an increase in inventories of $11,113due to the addition of inventory to accommodate the increase in revenues, andan increase in accounts payable of $7,424 due to the increase in inventory andthe timing of payments for inventory.

 

20

----

Table of Contents

 

For the six months ended March 31,2009, cash used in operations was $16,949 and was primarily attributable to netincome of $11,736, an increase in receivables of $6,518 due to revenue growthand the impact of extended receivable terms which were due during the threemonths ended June 30, 2009, a decrease in inventories of $1,421 due toeffective management of inventory, partially offset by strategic inventorypurchases that were made in December 2008 ahead of vendor price increases,and a decrease in accounts payable of $24,570 due primarily to payment ofinventory that was purchased in December 2008.

 

*InvestingActivities.*  For the six months ended March 31, 2010,net cash used in investing activities was $42,434 and was primarily due toacquisition of Centaur of $41,379, net of cash acquired of $674, and capitalexpenditures of $845 related to distribution center infrastructure, includingthe relocation of the Holland, Michigan distribution center in September 2009and technology investments.

 

For the six months ended March 31,2009, net cash used in investing activities was $1,305 and was primarily due tocapital expenditures of $1,372 related to distribution center infrastructure,including the relocation of the Dallas distribution center in November 2008and technology investments.

 

*Financing Activities.*  For the six months ended March 31, 2010, net cashprovided by financing activities was $23,811, which was primarily due to netborrowings of $23,142 on our revolving credit facilities.  Our revolving credit facilities are used tofinance our working capital requirements and fluctuates based on timing of payablesand collection of receivables.  This wascoupled with the tax benefit from stock option exercises of $973.

 

For the six months ended March 31,2009, net cash provided by financing activities was $14,966, which wasprimarily due to use of $14,700 on our revolving credit facility.  Our revolving credit facility is used tofinance our working capital requirements and fluctuates based on timing ofpayables and collection of receivables.

 

**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. The following is a table that represents the contractual andother long-term obligations of Centaur (in thousands):

 
| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**                                 | ** ** | **1 Year or less** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **More than 5 Years** | ** ** |
| Fortis credit  facility(1)                           |       | $                                         | 736        |   | $ | 736 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating lease  commitments                         |       | 623                                       |       | 213 |   | 346 |   | 64 |   | — |   |
| Term note                                            |       | 801                                       |       | 801 |   | — |   | — |   | — |   |
| Interest on term  note and Fortis credit facility(2) |       | 23                                        |       | 23 |   | — |   | — |   | — |   |
| Capital lease  obligations(3)                        |       | 1,846                                     |       | 757 |   | 1,038 |   | 50 |   | 1 |   |
| Total  contractual obligations                       |       | $                                         | 4,029      |   | $ | 2,530 |   | $ | 1,384 |   | $ | 114 |   | $ | 1 |   |

 

----

(1)          The Fortis credit facility balance at March 31,2010 was £488, or $736, using the exchange rate on March 31, 2010.  It was assumed that the facility will beterminated within one year.

 

(2)             For debt instruments with variable interestrates, interest has been calculated for all future periods using the rates ineffect at March 31, 2010.

 

(3)             Capital lease obligations includes amounts forwarehouse automation system and certain vehicle leases.

 

**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.

 

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 March 31, 2010 was $22,400.   The interest rate on this facility at March 31,2010 was 1.98%.  A change of 10% from theinterest rate as of March 31, 2010 (Daily LIBOR Floating Rate plus 1.75%),would have changed interest by $5 for the quarter ended March 31, 2010.

 

21

----

Table of Contents

 

**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 March 31, 2010.  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,except as described below, in the Company’s internal control over financialreporting that occurred during the Company’s most recently completed fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

In accordance with SECguidance regarding the reporting of internal control over financial reportingin connection with an acquisition, management may omit an assessment of anacquired business’ internal control over financial reporting from management’sassessment of internal control over financial reporting for a period not toexceed one year. Accordingly, the Company has excluded Centaur Services Limitedfrom the scope of management’s assessment of the effectiveness of the Company’sinternal control over financial reporting as of March 31, 2010.  Total assets and total revenues of CentaurServices Limited represented approximately 13.2% and 6.4%, respectively, of therelated consolidated financial statement amounts as of, and for the quarterended, March 31, 2010.

 

**PART II. OTHER INFORMATION**

 

**CautionaryStatement for Purposes of “Safe Harbor Provisions” of the Private SecuritiesLitigation Reform Act of 1995**

*This quarterly report on Form 10-Qcontains forward-looking statements within the meaning of the federalsecurities laws. Statements that are not historical facts, including statementsabout our beliefs and expectations, are forward-looking statements.Forward-looking statements include statements preceded by, followed by or thatinclude 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 expectedbusiness outlook, anticipated financial and operating results, our businessstrategy and means to implement our strategy, our objectives, the amount andtiming of capital expenditures, the amount and timing of interest expense, thelikelihood 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 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;*

 

·                  *risks associated with our international operations;*

 

·                  *transitional challenges associated with acquisitions,including the failure to achieve anticipated synergies;*

 

22

----

Table of Contents

 

·                  *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 byone of our vendors;*

 

·                  *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;*

 

·                  *risks from potential increases in variable interest rates;*

 

·                  *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,such reports 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.

##  

On April 19, 2010,we received a Civil Investigative Demand from the Federal Trade Commissionseeking various documents concerning certain products that we distribute forPfizer, Inc.  The products areRimadyl, Clavamox and Simplicef.  TheCivil Investigative Demand also seeks information on the generic forms of theseproducts.  The subpoena states that theinvestigation is to determine whether Pfizer or others have engaged in anyunfair methods of competition.  We are inthe process of gathering these documents in response to the demand and intendto fully cooperate with this investigation. At this time, we have not beennotified that we are a target of this investigation but we are unable topredict the timing and outcome of this matter.

 

23

----

## Table of Contents

 

## **Item1A.  Risk Factors**

##  

## Otherthan with respect to the risk factors set forth below, there havebeen 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 yearended September 30, 2009.

##  

***Risks associated with ourinternational operations.***

*** ***

On February 8, 2010,we acquired the outstanding share capital of Centaur Services Limited (“Centaur”).  Centaur is based in the United Kingdom anduses the British pound as its functional currency.  Prior to this acquisition, we had verylimited exposure to international risks. International operations are subjectto risks that may materially adversely affect our business, results of operationsand financial condition.  The risks thatour international operations are subject to include, among other things:

 

·                  difficulties and costs relating to staffing andmanaging foreign operations;

 

·                  difficulties in establishing channels ofdistribution;

 

·                  fluctuations in the value of foreign currencies;

 

·                  repatriation of cash from our foreign operations tothe United States;

 

·                  regulatory requirements;

 

·                  foreign countries may impose additional withholdingtaxes or otherwise tax our foreign income;

 

·                  separate operating and financial systems;

 

·                  disaster recovery;

 

·                  unexpected difficulties in importing or exportingour products;

 

·                  imposition of import/export duties, quotas,sanctions or penalties;

 

·                  liability related to the defined benefit plan; and

 

·                  unexpected regulatory, economic and politicalchanges in foreign markets.

 

## **We onlyhave one distribution center in the United Kingdom and any catastrophic eventcould materially impact our results.**

##  

## Weconduct all of our fulfillment operations in the United Kingdom from ourdistribution center in Castle Cary, England. This facility contains all of ourproduct inventory. A natural disaster or other catastrophic event, such as anearthquake, fire, flood, severe storm, break-in, server or systems failure,terrorist attack, or other comparable event at this facility would causeinterruptions or delays in our business and loss of inventory and could renderus unable to process or fulfill customer orders in a timely manner, or at all.Further, we have a limited disaster recovery plan, and our business interruptioninsurance may not adequately compensate us for losses that may occur, includingwith respect to any lost profits for any period in which the business is notable to operate.  In the event that asignificant part of this facility was destroyed or our operations were interrupted for any extended period oftime, our business, financial condition, and operating results would be harmed.

##  

## **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 March 31, 2010.

 

24

----

Table of Contents

 

**IssuerPurchases of Equity Securities**

 
| **Period**                                       | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May Yet  Be Purchased Under  the Plans or  Programs** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| January 1,  2010 to January 31, 2010   |       | —                                  |       | —                              |       | —                                                                                         |       | —                                                                                                                      |       |
| February 1,  2010 to February 28, 2010 |       | 80                                      |       | $                                   | 42.25      |                                                                                           | —     |                                                                                                                        | —     |   |
| March 1,  2010 to March 31, 2010       |       | 151                                     |       | $                                   | 43.14      |                                                                                           | —     |                                                                                                                        | —     |   |
| Total                                            |       | 231                                     | (1)        | $                                   | 42.83      |                                                                                           | —     |                                                                                                                        | —     |   |

 

----

(1)          These shares were withheld upon thevesting of employee restricted stock grants in connection with payment ofrequired withholding taxes.

 

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

##  

None.

 

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

##  

The Company held itsAnnual Meeting of Stockholders on February 9, 2010 and transacted thefollowing business:

 

1)              Election of Directors

 
| **Nominee**                  | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** | **Broker Non-Vote** | ** ** |
|------------------------------|------------|---------------|------------|--------------------|------------|---------------------|------------|
| Keith E. Alessi              |       | 6,721,304     |       | 4,750,487          |       | 385,596             |       |
| Bruce C. Bruckmann           |       | 10,740,615    |       | 731,176            |       | 385,596             |       |
| James F. Cleary, Jr.    |       | 11,450,399    |       | 21,392             |       | 385,596             |       |
| John F. McNamara             |       | 11,420,332    |       | 51,459             |       | 385,596             |       |
| A. Craig Olson               |       | 11,450,982    |       | 20,809             |       | 385,596             |       |
| Robert N. Rebholtz, Jr. |       | 11,436,423    |       | 35,368             |       | 385,596             |       |
| William J. Robison           |       | 11,420,332    |       | 51,459             |       | 385,596             |       |

 

2)              Ratification of Appointment ofIndependent Registered Public Accountant

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Vote** | ** ** |
|---------------|------------|-------------------|------------|-----------------|------------|---------------------|------------|
| 11,589,943    |       | 262,297           |       | 5,147           |       | 0                   |       |

 

## **Item5.  Other Information**

##  

None.

 

25

----

Table of Contents

 

**Item 6. Exhibits**

 
| 2.1    | Agreement Relating to the Sale and Purchase of the Entire Issued Share  Capital of Centaur Services Limited dated February 8, 2010 by and among  MWI Veterinary Supply Co., MWI Supply (UK Acquisition) Limited, AHN (UK)  Holdings Limited and AHN International, LLC, incorporated herein by reference  to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed  February 12, 2010 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1    | Non-Disclosure and Non-Competition Agreement dated  as of September 10, 2006 by and among MWI Veterinary Supply Co. and John  Francis                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1   | 2010 Livestock Products Distribution Agreement  between MWI Veterinary Supply, Inc. and Pfizer, Inc. effective as  of January 1, 2010 †                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2   | 2009 Livestock Products Distribution Agreement  between MWI Veterinary Supply, Inc. and Pfizer, Inc. effective as  of January 1, 2009 †                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3   | 2009 Pfizer Equine Products Marketing Agreement  between MWI Veterinary Supply Co. and Pfizer Inc. effective as of  January 1, 2009 †                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4   | Companion Animal AAHA MARKETLink Management  Agreement between MWI Veterinary Supply Co. and Pfizer Inc. effective as of  March 1, 2009 †                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5   | 2009 Strategic Brands Distribution Agreement between  MWI Veterinary Supply, Inc. and Pfizer Inc. effective as of  January 1, 2009 †                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6   | Companion Animal Select Brands Distribution  Agreement between MWI Veterinary Supply, Inc. and Pfizer Inc. effective  as of January 1, 2009 †                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   | Companion Animal AAHA MARKETLink Management  Agreement between MWI Veterinary Supply, Co. and Pfizer, Inc. effective  as of September 1, 2009 †                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   | 2010-2011 Merial Independent Sales Agent Agreement  between MWI Veterinary Supply Co. and Merial Limited effective as of  January 1, 2010 †                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   | Distributor Agreement between MWI Veterinary Supply  Co. and Intervet Inc., dba as Intervet/Schering Plough Animal Health  effective as of December 1, 2009 †                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  | First Amendment to Credit Agreement dated February 8, 2010 by and  among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co., Memorial  Pet Care, Inc., Bank of America, N.A and Wells Fargo Bank, N.A.,  incorporated herein by reference to Exhibit 10.1 of the Company’s  Current Report on Form 8-K filed February 12, 2010                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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                                                                                                                                                                                                                                                                                     |

 

----

† Certain portions of theexhibit have been omitted pursuant to a confidential treatment requestsubmitted to and approved by the SEC.

 

26

----

Table of Contents

 

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: May 6, 2010 |     | /s/ Mary Patricia B. Thompson                                                    |
|                   |     | Mary Patricia B. Thompson                                                        |
| * *               | * * | *Senior  Vice President of Finance and  Administration, Chief Financial Officer* |

 

27

----