Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30, 2010**

 

**OR**

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

 

**For the transition periodfrom               to          **

 

**CommissionFile Number:  000-51468**

 

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**MWIVETERINARY SUPPLY, INC.**

(Exactname of registrant as specified in its Charter)

 

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

 

**(208) 955-8930**

(Registrant’s telephone number, including area code)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No x

 

Thenumber of shares of the registrant’s common stock, $0.01 par value, outstandingas of July 26, 2010 was 12,339,353.

 

 

 

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**MWI VETERINARY SUPPLY, INC.**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                    | ** ** |
|-------------------|--------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                         |       |
| **Item 1.**       | **Financial Statements (Unaudited)**                                                                         | ** ** |
|              | Condensed Consolidated Statements of Income for the  three and nine months ended June 30, 2010 and 2009 | 3          |
|              |                                                                                                         |       |
|              | Condensed Consolidated Balance Sheets as of  June 30, 2010 and September 30, 2009                  | 4          |
|              |                                                                                                         |       |
|              | Condensed Consolidated Statements of Cash Flows for  the nine months ended June 30, 2010 and 2009       | 5          |
|              |                                                                                                         |       |
|              | Notes to Condensed Consolidated Financial Statements                                                         | 6          |
|              |                                                                                                         |       |
|              | Report of Independent Registered Public Accounting  Firm                                                     | 15         |
|              |                                                                                                         |       |
| **Item 2.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**              | 16         |
|              |                                                                                                         |       |
| **Item 3.**       | **Quantitative  and Qualitative Disclosures About Market Risk**                                              | 22         |
|              |                                                                                                         |       |
| **Item 4.**       | **Controls and  Procedures**                                                                                 | 22         |
|              |                                                                                                         |       |
| **PART II.** | **OTHER INFORMATION**                                                                                        | ** ** |
|              |                                                                                                         |       |
| ** **        | **Cautionary Statement**                                                                                     | 22         |
|              |                                                                                                         |       |
| **Item 1.**       | **Legal Proceedings**                                                                                        | 24         |
| ** **        | ** **                                                                                                   | ** ** |
| **Item 1A.**      | **Risk Factors**                                                                                             | 24         |
| ** **        | ** **                                                                                                   | ** ** |
| **Item 2.**       | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                             | 24         |
|              |                                                                                                         |       |
| **Item 3.**       | **Defaults  Upon Senior Securities**                                                                         | 24         |
|              |                                                                                                         |       |
| **Item 4.**       | **Removed and Reserved**                                                                                     | 24         |
|              |                                                                                                         |       |
| **Item 5.**       | **Other Information**                                                                                        | 24         |
|              |                                                                                                         |       |
| **Item 6.**       | **Exhibits**                                                                                                 | 25         |

 

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**PART I.  FINANCIALINFORMATION**

 

**Item 1.    Financial Statements**

 

**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

**Dollars and shares in thousands,except per share data**

**(unaudited)**

 
| ** **                                    | ** ** | **Three months ended June 30,** | ** ** | **Nine months ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **2010**                        | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues:                                     |       |                            |       |                           |       |   |   |   |   |
| Product  sales                                |       | $                               | 334,242    |                           | $          | 231,743 |   | $ | 827,614 |   | $ | 647,979 |   |
| Product  sales to related party               |       | 9,113                           |       | 12,075                         |       | 30,687 |   | 35,542 |   |
| Commissions                                   |       | 4,332                           |       | 3,645                          |       | 12,094 |   | 10,273 |   |
| Total  revenues                               |       | 347,687                         |       | 247,463                        |       | 870,395 |   | 693,794 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| Cost  of product sales                        |       | 303,750                         |       | 212,980                        |       | 750,927 |   | 594,022 |   |
| Gross  profit                                 |       | 43,937                          |       | 34,483                         |       | 119,468 |   | 99,772 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 27,435                          |       | 22,748                         |       | 75,448 |   | 67,379 |   |
| Depreciation  and amortization                |       | 1,438                           |       | 844                            |       | 3,559 |   | 2,546 |   |
| Operating  income                             |       | 15,064                          |       | 10,891                         |       | 40,461 |   | 29,847 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| Other  income (expense):                      |       |                            |       |                           |       |   |   |   |   |
| Interest  expense                             |       | (171                            | )          | (63                            | )          | (389 | ) | (202 | ) |
| Earnings  of equity method investees          |       | 45                              |       | 53                             |       | 155 |   | 174 |   |
| Other                                         |       | 57                              |       | 130                            |       | 299 |   | 406 |   |
| Total  other income (expense), net            |       | (69                             | )          | 120                            |       | 65 |   | 378 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| Income  before taxes                          |       | 14,995                          |       | 11,011                         |       | 40,526 |   | 30,225 |   |
| Income  tax expense                           |       | (5,858                          | )          | (4,395                         | )          | (15,884 | ) | (11,873 | ) |
|                                          |       |                            |       |                           |       |   |   |   |   |
| Net  income                                   |       | $                               | 9,137      |                           | $          | 6,616 |   | $ | 24,642 |   | $ | 18,352 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| Earnings  per common share:                   |       |                            |       |                           |       |   |   |   |   |
| Basic                                         |       | $                               | 0.74       |                           | $          | 0.55 |   | $ | 2.02 |   | $ | 1.52 |   |
| Diluted                                       |       | $                               | 0.74       |                           | $          | 0.54 |   | $ | 1.99 |   | $ | 1.49 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| Weighted  average common shares outstanding:  |       |                            |       |                           |       |   |   |   |   |
| Basic                                         |       | 12,265                          |       | 12,079                         |       | 12,215 |   | 12,075 |   |
| Diluted                                       |       | 12,408                          |       | 12,303                         |       | 12,380 |   | 12,298 |   |

 

See Notes to Condensed Consolidated FinancialStatements.

 

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**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**Dollars and shares in thousands,except per share data**

**(unaudited)**

 
| ** **                                                                                                       | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **2010**          | ** ** | **2009**               | ** ** |
| **Assets**                                                                                                       |       |              |       |                   |       |
|                                                                                                             |       |              |       |                   |       |
| Current  Assets:                                                                                                 |       |              |       |                   |       |
| Cash  and cash equivalents                                                                                       |       | $                 | 908        |                   | $          | 14,302 |   |
| Receivables,  net                                                                                                |       | 185,674           |       | 142,485                |       |
| Inventories                                                                                                      |       | 141,515           |       | 116,119                |       |
| Prepaid  expenses and other current assets                                                                       |       | 4,410             |       | 3,946                  |       |
| Deferred  income taxes                                                                                           |       | 2,069             |       | 1,517                  |       |
| Total  current assets                                                                                            |       | 334,576           |       | 278,369                |       |
|                                                                                                             |       |              |       |                   |       |
| Property  and equipment, net                                                                                     |       | 13,609            |       | 9,313                  |       |
| Goodwill                                                                                                         |       | 46,297            |       | 37,610                 |       |
| Intangibles,  net                                                                                                |       | 26,300            |       | 10,194                 |       |
| Other  assets, net                                                                                               |       | 2,685             |       | 2,433                  |       |
| Total  assets                                                                                                    |       | $                 | 423,467    |                   | $          | 337,919 |   |
|                                                                                                             |       |              |       |                   |       |
| **Liabilities And Stockholders’ Equity**                                                                    |       |              |       |                   |       |
|                                                                                                             |       |              |       |                   |       |
| Current  Liabilities:                                                                                            |       |              |       |                   |       |
| Credit  facilities                                                                                               |       | $                 | 15,885     |                   | $          | — |   |
| Accounts  payable                                                                                                |       | 148,832           |       | 117,830                |       |
| Accrued  expenses                                                                                                |       | 14,131            |       | 10,767                 |       |
| Note  payable                                                                                                    |       | 2,000             |       | —                 |       |
| Current  maturities of long-term debt and capital lease obligations                                              |       | 1,505             |       | 97                     |       |
| Total  current liabilities                                                                                       |       | 182,353           |       | 128,694                |       |
|                                                                                                             |       |              |       |                   |       |
| Deferred  income taxes                                                                                           |       | 5,329             |       | 1,298                  |       |
|                                                                                                             |       |              |       |                   |       |
| Long-term  debt and capital lease obligations                                                                    |       | 917               |       | —                 |       |
|                                                                                                             |       |              |       |                   |       |
| Other  long-term liabilities                                                                                     |       | 1,117             |       | —                 |       |
|                                                                                                             |       |              |       |                   |       |
| Commitments  and contingencies (see Note 15)                                                                     |       |              |       |                   |       |
|                                                                                                             |       |              |       |                   |       |
| **Stockholders’ Equity**                                                                                    |       |              |       |                   |       |
| Common  stock $0.01 par value, 40,000 authorized; 12,326 and 12,196 shares issued and  outstanding, respectively |       | 123               |       | 122                    |       |
| Additional  paid in capital                                                                                      |       | 127,224           |       | 124,337                |       |
| Retained  earnings                                                                                               |       | 106,404           |       | 83,468                 |       |
| Total  stockholders’ equity                                                                                 |       | 233,751           |       | 207,927                |       |
| Total  liabilities and stockholders’ equity                                                                 |       | $                 | 423,467    |                   | $          | 337,919 |   |

 

SeeNotes to Condensed Consolidated Financial Statements.

 

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**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Dollars in thousands (unaudited)**

 
| ** **                                                                                    | ** ** | **Nine months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                    | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| **Cash Flows From Operating Activities:**                                                     |       |                                |       |   |   |
| Net  income                                                                                   |       | $                                   | 24,642     |   | $ | 18,352 |   |
| Adjustments  to reconcile net income to net cash provided by/(used in) operating  activities: |       |                                |       |   |   |
| Depreciation  and amortization                                                                |       | 3,568                               |       | 2,555 |   |
| Amortization  of debt issuance costs                                                          |       | 41                                  |       | 32 |   |
| Stock-based  compensation                                                                     |       | 490                                 |       | 221 |   |
| Deferred  income taxes                                                                        |       | (108                                | )          | (499 | ) |
| Earnings  of equity method investees                                                          |       | (155                                | )          | (174 | ) |
| (Gain)/loss  on disposal of property and equipment                                            |       | (9                                  | )          | 28 |   |
| Tax  benefit of common stock options                                                          |       | (1,829                              | )          | (225 | ) |
| Pension  payment                                                                              |       | (2,047                              | )          | — |   |
| Changes  in operating assets and liabilities (net of effects of acquisitions):                |       |                                |       |   |   |
| Receivables                                                                                   |       | (12,072                             | )          | (2,245 | ) |
| Inventories                                                                                   |       | (8,282                              | )          | (159 | ) |
| Prepaid  expenses and other current assets                                                    |       | 155                                 |       | 603 |   |
| Accounts  payable                                                                             |       | 6,365                               |       | (16,282 | ) |
| Accrued  expenses                                                                             |       | (159                                | )          | 640 |   |
| Net  cash provided by operating activities                                                    |       | 10,600                              |       | 2,847 |   |
|                                                                                          |       |                                |       |   |   |
| **Cash Flows From Investing Activities:**                                                     |       |                                |       |   |   |
| Business  acquisitions, net of cash acquired of $674 in 2010                                  |       | (39,511                             | )          | 117 |   |
| Purchases  of property and equipment                                                          |       | (1,862                              | )          | (1,649 | ) |
| Other                                                                                         |       | (97                                 | )          | 5 |   |
| Net  cash used in investing activities                                                        |       | (41,470                             | )          | (1,527 | ) |
|                                                                                          |       |                                |       |   |   |
| **Cash Flows From Financing Activities:**                                                     |       |                                |       |   |   |
| Borrowings  on line-of-credit                                                                 |       | 124,776                             |       | 179,000 |   |
| Payments  on line-of-credit                                                                   |       | (108,900                            | )          | (179,000 | ) |
| Issuance  of common stock                                                                     |       | 178                                 |       | 188 |   |
| Proceeds  from stock options                                                                  |       | 368                                 |       | 15 |   |
| Tax  benefit of common stock options                                                          |       | 1,829                               |       | 225 |   |
| Debt  issuance costs                                                                          |       | (116                                | )          | — |   |
| Payment  on long-term debt and capital lease obligations                                      |       | (616                                | )          | (97 | ) |
| Net  cash provided by financing activities                                                    |       | 17,519                              |       | 331 |   |
|                                                                                          |       |                                |       |   |   |
| Effect  of Exchange Rate on Cash and Cash Equivalents                                         |       | (43                                 | )          | — |   |
|                                                                                          |       |                                |       |   |   |
| **Increase/(Decrease) in Cash and Cash Equivalents**                                          |       | (13,394                             | )          | 1,651 |   |
|                                                                                          |       |                                |       |   |   |
| Cash  and Cash Equivalents at Beginning of Period                                             |       | 14,302                              |       | 3,419 |   |
|                                                                                          |       |                                |       |   |   |
| Cash  and Cash Equivalents at End of Period                                                   |       | $                                   | 908        |   | $ | 5,070 |   |

 

SeeNotes to Condensed Consolidated Financial Statements.

 

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**MWI VETERINARY SUPPLY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Dollars in thousands, except pershare data(unaudited)**

 

**NOTE 1 — GENERAL**

 

**Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements include theresults of operations, financial position and cash flows of MWI VeterinarySupply, Inc. and its wholly-owned subsidiaries (collectively referred toas “we,” “us,” and “our” throughout this Form 10-Q).  All material intercompany balances have beeneliminated.

 

Inthe opinion of our management, the accompanying unaudited condensedconsolidated financial statements include all adjustments necessary to presentfairly, in all material respects, our results for the periods presented. Thesecondensed consolidated financial statements have been prepared by us pursuantto the rules and regulations 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 nine months ended June 30,2010 are not necessarily indicative of results to be expected for the entirefiscal year.

 

Ourunaudited condensed consolidated balance sheet as of September 30, 2009has been derived from the audited consolidated balance sheet as of that date.

 

**Use of Estimates**

 

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

 

**Revenue Recognition**

 

Wesell products we source from vendors to our customers through either a “buy/sell”transaction or an agency relationship with our vendors. In a “buy/sell”transaction, we purchase or take inventory of products from the vendor. When acustomer places an order with us, we pick, pack, ship and invoice the customerfor the order. We recognize revenue from “buy/sell” transactions as productsales when the product is delivered to the customer. We accept product returnsfrom our customers. We estimate returns based on historical experience andrecognize these estimated returns as a reduction of product sales. Productreturns have historically not been significant to our financial statements. Werecord revenues net of sales tax.  In anagency relationship, we generally do not purchase and take inventory ofproducts from vendors. We receive an order from a customer, then transmit theorder to the vendor, who picks, packs and ships the order to the customer. Insome cases, the vendor invoices and collects payment from the customer, whilein other cases we invoice and collect payment from the customer on behalf ofthe vendor. We receive a commission payment for soliciting the order from thecustomer and for providing other customer service activities. Commissions arerecognized when the services upon which the commissions are based are complete.Gross billings from agency contracts were $92,504 and $72,960 for the threemonths ended June 30, 2010 and 2009, respectively, and generatedcommission revenue of $4,332 and $3,645, respectively.  Gross billings from agency contracts were$234,788 and $196,097 for the nine months ended June 30, 2010 and 2009,respectively, and generated commission revenue of $12,094 and $10,273,respectively.

 

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**Cost of Product Sales and Vendor Rebates**

 

Cost of product sales consist of ourinventory product cost, including shipping and delivery costs to and from ourdistribution centers.  Vendor rebates arerecorded based on the terms of the contracts or programs with each vendor.  Many of our vendors’ rebateprograms are based on a calendar year.  We may receive quarterly, semi-annual or annual performance-basedrebates from third-party vendors based upon attainment of certain sales and/orpurchase goals. Sales rebates are classified in the accompanying condensedconsolidated statements of income as a reduction to cost of product sales atthe time the sales performance measures are achieved. Purchase rebates aremeasured against inventory purchases from the vendors and are classified as areduction of inventory until the product is sold. When the inventory is soldand purchase measures are achieved, purchase rebates are recognized as areduction to cost of product sales.

 

Historically, actual results have notsignificantly deviated from those determined using the estimates describedabove. We expect that our estimates in the future will continue to bereasonable as our rebates are based on specific vendor program goals and areprincipally 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**

 

InJune 2009, the Financial Accounting Standards Board issued authoritativeguidance that amends the consolidation guidance applicable to variable interestentities and requires additional disclosures concerning an enterprise’scontinuing involvement with variable interest entities. The guidance iseffective for our fiscal year beginning October 1, 2010. We are currentlyevaluating the expected impact, if any, that this standard will have on ourconsolidated financial statements.

 

**NOTE 3**—**BUSINESSACQUISITION**

 

On February 8, 2010, MWI Veterinary Supply Co.(“MWI Co.”) purchased all of the outstanding share capital of Centaur ServicesLimited (“Centaur”), based in the United Kingdom for an initial purchase priceof $44,053, consisting of $42,053 in cash and $2,000 in a note payable due inone year.  Subsequent to the acquisitionof Centaur, we funded $2,047 to the pension plan as required by the terms ofthe share purchase agreement.  Thepurchase price was reduced during the three months ended June 30, 2010 by$1,868 as a result of a post-closing working capital and debt adjustment.  Centaur is a supplier of animal healthproducts to veterinarians in the United Kingdom.  Centaur sells products to both the companionanimal market and production animal market. The acquisition of Centaur has allowed us to expand into theinternational markets.  We incurred $1,100 of directacquisition-related expenses.  Theintangible assets acquired in the acquisition have estimated useful livesbetween 1 and 20 years.  The amountrecorded in goodwill will not be deductible for tax purposes.

 

The following table summarizes the fair values ofthe assets acquired and liabilities assumed at the date of acquisition, whichmay be adjusted during the allocation period as defined in ASC 280.  These purchase price allocations are based ona combination of valuations and analyses.

 
| Cash                       |   | $      | 674    |   |
|----------------------------|--------|--------|--------|--------|
| Receivables                |   | 32,527 |   |
| Inventories                |   | 17,830 |   |
| Property  and equipment    |   | 5,275  |   |
| Intangibles                |   | 17,658 |   |
| Goodwill                   |   | 9,015  |   |
| Other  assets              |   | 480    |   |
| Total  assets acquired     |   | 83,459 |   |
|                       |   |   |   |
| Accounts  payable          |   | 25,811 |   |
| Accrued  expenses          |   | 5,562  |   |
| Other  liabilities         |   | 9,901  |   |
| Total  liabilities assumed |   | 41,274 |   |
|                       |   |   |   |
| Net  assets acquired       |   | $      | 42,185 |   |

 

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The following table presents information for Centaurthat is included in our condensed consolidated statements of income from theacquisition date of February 8, 2010 through the three and nine monthsended June 30, 2010:

 
| ** **  | ** ** | **Centaur’s operations included in MWI’s   results** | ** ** |
|-------------|------------|----------------------------------------------------------------|------------|
| ** **  | ** ** | **Three months ended  June 30, 2010**                     | ** ** | **Nine months ended  June 30, 2010** | ** ** |
| Revenues    |       | $                                                              | 57,665     |   | $ | 91,271 |   |
| Net  Income |       | $                                                              | 564        |   | $ | 1,144 |   |

 

The following table presents supplemental pro formainformation as if the acquisition of Centaur had occurred on October 1,2009 for the periods ended June 30, 2010 and on October 1, 2008 forthe periods ended June 30, 2009 (unaudited):

 
| ** **  | ** ** | **Unaudited Pro Forma Consolidated Results** | ** ** |
|-------------|------------|----------------------------------------------|------------|
| ** **  | ** ** | **Nine months ended June 30,**          | ** ** |
| ** **  | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Revenues    |       | $                                            | 955,011    |   | $ | 844,723 |   |
| Net  Income |       | $                                            | 25,727     |   | $ | 20,067 |   |

 

For the pro forma calculation, we used an averageforeign currency exchange rate for each of the periods presented and the annualnet income as a percentage of revenues for purposes of determining the netincome for interim periods.  Theunaudited pro forma consolidated results are not necessarily indicative of whatour consolidated results of operations would have been had we completed theacquisition on October 1, 2009 and on October 1, 2008.  Additionally, the unaudited pro formaconsolidated results do not purport to project the future results of operationsof the combined company.

 

**NOTE 4**—**RECEIVABLES**

 
| ** **                       | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2010**          | ** ** | **2009**               | ** ** |
| Trade                            |       | $                 | 170,349    |                   | $          | 132,369 |   |
| Vendor  rebates and programs     |       | 17,999            |       | 13,122                 |       |
|                             |       | 188,348           |       | 145,491                |       |
| Allowance  for doubtful accounts |       | (2,674            | )          | (3,006                 | )          |
|                             |       | $                 | 185,674    |                   | $          | 142,485 |   |

 

Productsales resulting from transactions with Banfield, The Pet Hospital (“Banfield”)were approximately 9% and 12% of total product sales during the three monthsended June 30, 2010 and 2009, respectively. Product sales resulting fromtransactions with Banfield were approximately 10% of total product sales duringeach of the nine months ended June 30, 2010 and 2009.  Approximately 13% of our trade receivablesresulted from transactions with Banfield as of June 30, 2010 and September 30,2009.

 

**NOTE 5**—**PROPERTYAND EQUIPMENT**

 
| ** **                           | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                           | ** ** | **2010**          | ** ** | **2009**               | ** ** |
| Land                                 |       | $                 | 249        |                   | $          | 20 |   |
| Building  and leasehold improvements |       | 5,756             |       | 3,566                  |       |
| Machinery,  furniture and equipment  |       | 16,471            |       | 12,792                 |       |
| Computer  equipment                  |       | 4,697             |       | 3,325                  |       |
| Construction  in progress            |       | 266               |       | 1,140                  |       |
|                                 |       | 27,439            |       | 20,843                 |       |
| Accumulated  depreciation            |       | (13,830           | )          | (11,530                | )          |
|                                 |       | $                 | 13,609     |                   | $          | 9,313 |   |

 

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Depreciationexpense was $1,046 and $640 for the three months ended June 30, 2010 and2009, respectively.  Depreciation expensewas $2,659 and $1,931 for the nine months ended June 30, 2010 and 2009,respectively.

 

**NOTE 6**—**GOODWILLAND INTANGIBLES**

 

Thechanges in the carrying value of goodwill for the nine months ended June 30,2010 are as follows:

 
| September 30,  2009      |   | $      | 37,610 |   |
|-------------------------------|--------|--------|--------|--------|
| Acquisition  activity         |   | 9,015  |   |
| Foreign  currency adjustments |   | (328   | )      |
| June 30,  2010           |   | 46,297 |   |

 

Balancesof other intangible assets excluding goodwill are as follows:

 
| ** **                | ** ** | ** **       | ** ** | **June 30,** | ** ** | **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       |       | 447               |       | 257                    |       |
|                      |       |             |       | 25,530            |       | 10,019                 |       |
| Accumulated  amortization |       |             |       | (2,939            | )          | (2,177                 | )          |
|                      |       |             |       | 22,591            |       | 7,842                  |       |
| Non-Amortizing:           |       |             |       |              |       |                   |       |
| Trade  names and patents  |       |             |       | 3,709             |       | 2,352                  |       |
|                      |       |             |       | $                 | 26,300     |                   | $          | 10,194 |   |

 

Amortizationexpense was $395 and $207 for the three months ended June 30, 2010 and2009, respectively.  Amortization expensewas $909 and $624 for the nine months ended June 30, 2010 and 2009,respectively.  Estimated future annualamortization expense related to intangible assets as of June 30, 2010follows:

 
| ** **        | ** ** | **Amount** | ** ** |
|-------------------|------------|------------|------------|
| Remainder of 2010 |       | $          | 397        |   |
| 2011              |       | 1,581      |       |
| 2012              |       | 1,552      |       |
| 2013              |       | 1,468      |       |
| 2014              |       | 1,462      |       |
| Thereafter        |       | 16,131     |       |
|              |       | $          | 22,591     |   |

 

The above projection of amortization expenseincludes preliminary estimates of intangible assets and lives associated withthe acquisition of Centaur.  Theseamounts may be adjusted during the allocation period as defined in ASC 805.

 

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**NOTE 7**—**CREDITFACILITY AND LONG-TERM DEBT**

 

The following table presents the outstanding debtand capital lease obligations as of June 30, 2010:

 
| ** **                                          | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **2010**          | ** ** | **2009**               | ** ** |
| Revolving  credit facility                          |       | $                 | 13,400     |                   | $          | — |   |
| Fortis  credit facility                             |       | 2,485             |       | —                 |       |
| Note  payable to AHN (UK) Holdings Limited (1)      |       | 2,000             |       | —                 |       |
| Capital  lease obligations (2)                      |       | 1,653             |       | —                 |       |
| Term  note (2)                                      |       | 769               |       | —                 |       |
| Other  long-term debt                               |       | —            |       | 97                     |       |
| Total  debt and capital lease obligations           |       | 20,307            |       | 97                     |       |
| Less:  Long-term debt and capital lease obligations |       | (917              | )          | —                 |       |
| Total  debt included in current liabilities         |       | 19,390            |       | 97                     |       |
|                                                     |            |                   |            |                        |            |  |  |

 

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(1) Note payable isrelated to the acquisition of Centaur and is due one year from the date of theacquisition, which was February 8, 2010.

(2) Term note andcapital lease obligations were assumed as a result of the acquisition ofCentaur.  The term note matures in March 2011and the capital lease obligations have varying maturity dates.

 

**Revolving credit facility**—On February 8, 2010,MWI Co., our wholly-owned subsidiary as borrower, entered into a FirstAmendment to its Credit Agreement (the “First Amendment”) with us and MemorialPet Care, Inc., as guarantors, and Bank of America, N.A. and Wells FargoBank, N.A., (collectively, the “lenders”) amending the Credit Agreement dated December 13,2006 among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc.and the lenders a party thereto (the “facility”).  The First Amendment increased the aggregaterevolving commitment of the lenders under the facility from $70,000 to$100,000.  The First Amendment alsoextended the maturity date of the loans under the facility from December 1,2011 to March 1, 2013.  The variableinterest rate is now equal to the Daily LIBOR Floating Rate or the LIBOR1-month fixed rate (at MWI Co.’s option) plus a margin ranging from 1.75% to2.50%, which was previously 0.7% to 1.25% under the facility prior to the FirstAmendment.  The lenders also receive anunused line fee and letter of credit fee which is now equal to 0.2% of theunused amount of the facility, which was previously 0.125%. Our outstandingbalance on the facility was $13,400 and $0 at June 30, 2010 and September 30,2009, respectively, and the interest rate for the facility was 2.06% as of June 30,2010.    The facility contains financialcovenants, including a fixed charge ratio and a funded debt to EBITDAcalculation.  We were in compliance withboth of these covenants as of June 30, 2010.

 

**Fortis credit facility**—Centaur operates with acredit facility (“Fortis facility”) with Fortis Bank as the lender.  The Centaur facility allows for borrowings inthe aggregate of £12,000.  The Fortisfacility has a variable interest rate equal to a base rate of 0.50% plus GBPone-month LIBOR plus a margin of 0.85%. It is our intent to replace the Fortis facility within the next sixmonths.  The outstanding balance at June 30,2010 on the Fortis facility was £1,649, or $2,485 using the exchange rate on June 30,2010.  The interest rate for the Fortisfacility was 1.90% as of June 30, 2010.

 

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

 

Current fair value accounting guidance includes ahierarchy that is intended to increase consistency and comparability in fairvalue measurements and disclosures.  Thishierarchy prioritizes inputs to valuation techniques based on observable andunobservable data.  The guidancecategorizes these inputs used in measuring fair value into three levels whichinclude the following:

 

·                  Level 1 — observable inputs such as quoted prices in active markets;

 

·                  Level 2 — inputs, other than quoted prices, that are observable for theasset or liability, either directly or indirectly.  These include quoted prices for similarassets or liabilities in active markets and quoted prices for identical orsimilar assets or liabilities in markets that are not active; and

 

·                  Level 3 — unobservable inputs in which there is little or no market data,which require the reporting entity to develop its own assumptions.

 

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For certain of our financial instruments, includingcash and cash equivalents, receivables and accounts payable, the fair valuesapproximate book values due to their short maturities.

 

In February 2010, we amended our facility.  Because this amendment was done in thequarter ended March 31, 2010 and includes interest rates based on currentmarket conditions, we believe that the estimated fair value of our long-termdebt (including current maturities) was materially the same as our carryingvalue.

 

We have been reviewing market prices related to therefinance of the Fortis credit facility. Based on this pricing, we believe that the estimated fair value  for the Fortis credit facility was materiallythe same as our carrying value.

 

**NOTE 9**—**COMMONSTOCK AND STOCK-BASED AWARDS**

 

*2002 Stock Plan*

 

We have a 2002 Stock Plan (the “2002 Plan”)to provide our directors, executives and other key employees with additionalincentives by allowing them to acquire an ownership interest in us and, as aresult, encouraging them to contribute to our success. As of June 30, 2010and 2009, we had 244,304 and 402,220 shares, respectively, of our common stockavailable for issuance under the 2002 Plan. The options granted under the 2002Plan are nonqualified stock options that have an exercise price per share equalto fair market value of the common stock at the time of grant. The term of eachoption is determined by our board of directors or by a designated committee ofthe board.  The term of any option maynot exceed ten years from the date of grant. As of June 30, 2010, 183,864 options to purchase common stock wereoutstanding with a weighted average exercise price of $0.18 per share and expiringthrough June 2012.

 

*2005 Stock Plan*

 

In July 2005, we adopted the 2005Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”). Under the2005 Plan as amended, we may offer restricted and unrestricted shares of ourcommon stock and grant options to purchase shares of our common stock toselected employees and non-employee directors. The purpose of the 2005 Plan isto promote our long-term financial success by attracting, retaining andrewarding eligible participants. As of June 30, 2010 and 2009 we had1,038,852 and 1,081,404 shares, respectively, of our common stock available forissuance under the 2005 Plan. As of June 30, 2010, 36,578 options topurchase common stock were outstanding with a weighted average exercise priceof $17.88 per share and expiring through September 2015.

 

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

 

Wegranted no common stock options during each of the nine months ended June 30,2010 and 2009.  During the nine monthsended June 30, 2010 and 2009, we issued 2,000 and 0 shares of restrictedstock under the 2005 Plan.  We alsogranted 6,000 and 0 of unrestricted stock to non-employee directors during thenine months ended June 30, 2010 and 2009, respectively.  During the three months ended June 30,2010 and 2009, we recognized $98 and $86 of compensation expense related tostock grants, respectively.  During thenine months ended June 30, 2010 and 2009, we recognized $528 and $265 ofcompensation expense related to stock grants, respectively.

 

Wealso have an employee stock purchase plan (“ESPP”) that allows substantiallyall employees to purchase shares of our common stock at 95% of the fair marketvalue on the date of purchase.  Thepurchase date is the last trading date of the purchase periods, which begin inMarch, June, September and December. Employees accumulate amounts through payroll deductions during thepurchase period of between 1% and 10% but no more than $20 annually.  An employee is allowed to purchase a maximumof 200 shares per purchase period. During the three months ended June 30, 2010 and 2009, we issued1,408 and 2,211 shares, respectively, of our common stock under the ESPP.  During the nine months ended June 30,2010 and 2009, we issued 4,454 and 7,537 shares, respectively, of our commonstock under the ESPP.  As of June 30,2010, there were 484,977 shares available to be issued under the ESPP.

 

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**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.  Werecorded the liability at the estimated fair value at the date of theacquisition.  Subsequent to the acquisitionof Centaur, we funded $2,047 to the pension plan as required by the terms ofthe share purchase agreement.  Theliability recorded as of June 30, 2010 was £741, or $1,117 using theexchange rate on June 30, 2010.

 

**NOTE 11**—**INCOME TAXES**

 

Oureffective tax rate for the three months ended June 30, 2010 and 2009 was39.1% and 39.9%, respectively.  Oureffective tax rate for the nine months ended June 30, 2010 and 2009 was39.2% and 39.3%, respectively.  Thedecrease in the effective tax rate is primarily due to the impact of theCentaur acquisition.

 

Asof June 30, 2010, we had $205 of unrecognized tax benefits, of which $15would impact our effective rate if recognized. Our policy for classifyinginterest and penalties associated with unrecognized tax benefits is to includesuch items in income tax expense.  Theamount of interest and penalties recognized during the three and nine monthsended June 30, 2010 and 2009 was not material.

 

Wefiled Form 3115 Application of Change in Accounting Method with the InternalRevenue Service during the fiscal year ended September 30, 2008.  We filed an advance consent request for anon-automatic account method change for tax purposes for which we had notreceived 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.

 

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**NOTE 12 — COMPUTATION OFEARNINGS PER SHARE***(In thousands, except per share data)*

 
| ** **                                      | ** ** | **Three months ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **Basic**                       | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net  income                                     |       | $                               | 9,137      |   | $ | 9,137 |   | $ | 6,616 |   | $ | 6,616 |   |
| Weighted  average common shares outstanding     |       | 12,265                          |       | 12,265 |   | 12,079 |   | 12,079 |   |
| Effect  of diluted securities                   |       |                            |       |   |   |   |   |   |   |
| Stock  options and restricted stock             |       |                            |       | 143 |   |   |   | 224 |   |
| Weighted  average diluted shares outstanding    |       |                            |       | 12,408 |   |   |   | 12,303 |   |
| Earnings  per share                             |       | $                               | 0.74       |   | $ | 0.74 |   | $ | 0.55 |   | $ | 0.54 |   |
| Anti-dilutive  shares excluded from calculation |       |                            |       | — |   |   |   | — |   |

 
| ** **                                      | ** ** | **Nine months ended June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **Basic**                           | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net  income                                     |       | $                                   | 24,642     |   | $ | 24,642 |   | $ | 18,352 |   | $ | 18,352 |   |
| Weighted  average common shares outstanding     |       | 12,215                              |       | 12,215 |   | 12,075 |   | 12,075 |   |
| Effect  of diluted securities                   |       |                                |       |   |   |   |   |   |   |
| Stock  options and restricted stock             |       |                                |       | 165 |   |   |   | 223 |   |
| Weighted  average shares outstanding            |       |                                |       | 12,380 |   |   |   | 12,298 |   |
| Earnings  per share                             |       | $                                   | 2.02       |   | $ | 1.99 |   | $ | 1.52 |   | $ | 1.49 |   |
| Anti-dilutive  shares excluded from calculation |       |                                |       | — |   |   |   | — |   |

 

**NOTE 13**—**RELATED PARTIES**

 

MWICo. holds a 50.0% membership interest in Feeders’ Advantage LLC (“Feeders’Advantage”).  MWI Co. charged Feeders’Advantage for certain operating and administrative services in the amounts of$172 and $189 for the three months ended June 30, 2010 and 2009,respectively, and $563 and $562 for the nine months ended June 30, 2010and 2009, respectively.  Sales ofproducts to Feeders’ Advantage were $9,113 and $12,075 for the three monthsended June 30, 2010 and 2009, respectively, which represented 3% and 5% oftotal product sales for the three months ended June 30, 2010 and 2009,respectively.  Sales of products toFeeders’ Advantage were $30,687 and $35,542 for the nine months ended June 30,2010 and 2009, respectively, which represented 4% and 5% of total product salesfor the nine months ended June 30, 2010 and 2009, respectively.

 

MWICo. provides Feeders’ Advantage with a line-of-credit to finance its day-to-dayoperations. This line-of-credit bears interest at the prime rate. The interestdue on the line-of-credit is calculated and charged to Feeders’ Advantage onthe last day of each month. Conversely, to the extent MWI Co. has a payablebalance due to Feeders’ Advantage, the payable balance accrues interest infavor of Feeders’ Advantage at the average federal funds rates in effect forthat month. MWI Co. had a payable balance to Feeders’ Advantage of $1,567 and$210 as of June 30, 2010 and September 30, 2009, respectively.

 

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

 
| ** **                                             | ** ** | **Nine months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| *Supplemental Disclosures*                             |       |                                |       |   |   |
| Cash  paid for interest                                |       | $                                   | 258        |   | $ | 149 |   |
| Cash  paid for income taxes                            |       | 13,563                              |       | 11,300 |   |
| *Non-cash Activities*                                  |       |                                |       |   |   |
| Note  payable issued related to Centaur acquisition    |       | 2,000                               |       | — |   |
| Equipment  acquisitions financed with accounts payable |       | 130                                 |       | 21 |   |
|                                                        |            |                                     |            |  |  |  |  |

 

 

*Restatement of Statements of Cash Flows* — We have restated the presentation of borrowings on the credit facilityfor the nine months ended June 30, 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**

 

From time to time, in thenormal course of business, we may become a party to legal proceedings that mayhave an adverse effect on our financial position, results of operations andcash flows. At June 30, 2010, we were not a party to any material pendinglegal proceedings and were not aware of any claims that could have a materialadverse effect on our financial position, results of operations or cash flows.

 

**NOTE 16**—**OTHER COMPREHENSIVE INCOME**

 

The components of comprehensive income (loss) wereas follows:

 
| ** **                    | ** ** | **Three months ended June 30,** | ** ** | **Nine months ended June 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2010**                             | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income                   |       | $                                    | 9,137      |                                | $          | 6,616 |   | $ | 24,642 |   | $ | 18,352 |   |
| Other  comprehensive loss:    |       |                                 |       |                                |       |   |   |   |   |
| Foreign  currency translation |       | 36                                   |       | —                              |       | (1,706 | ) | — |   |
| Total  comprehensive income   |       | $                                    | 9,173      |                                | $          | 6,616 |   | $ | 22,936 |   | $ | 18,352 |   |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of

MWIVeterinary Supply, Inc.

Meridian, Idaho

 

Wehave reviewed the accompanying condensed consolidated balance sheet of MWIVeterinary Supply, Inc. and subsidiaries (the “Corporation”) as of June 30,2010, and the related condensed consolidated statements of income for thethree-month and nine-month periods ended June 30, 2010 and 2009, and ofcash flows for the nine-month periods ended June 30, 2010 and 2009. Theseinterim financial statements are the responsibility of the Corporation’smanagement.

 

Weconducted our reviews in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Basedon our reviews, we are not aware of any material modifications that should bemade to such condensed consolidated interim financial statements for them to bein conformity with accounting principles generally accepted in the UnitedStates of America.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheet ofMWI Veterinary Supply, Inc. and subsidiaries as of September 30,2009, and the related consolidated statements of income, stockholders’ equity,and cash flows for the year then ended (not presented herein); and in ourreport dated November 20, 2009, we expressed an unqualified opinion onthose consolidated financial statements. In our opinion, the information setforth in the accompanying condensed consolidated balance sheet as of September 30,2009 is fairly stated, in all material respects, in relation to the consolidatedbalance sheet from which it has been derived.

 

 

/s/DELOITTE & TOUCHE LLP

Boise, Idaho

July 29,2010

 

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**Item 2.    Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*All dollar amounts are presented in thousands, except for per shareamounts.*

 

**Overview**

 

Weare a distributor of animal health products to veterinarians across the UnitedStates and in the United Kingdom. We market our products to veterinarians inboth the companion and production animal markets. Our growth has primarily beenfrom internal growth initiatives and, to a lesser extent, selectiveacquisitions.  On February 8, 2010,we acquired the outstanding share capital of Centaur Services Limited (“Centaur”),which is a supplier of animal health products in the United Kingdom.  We operate under a single reporting segment.

 

Historically,we estimate that approximately two-thirds of our revenues have been generatedfrom sales to the companion animal market and one-third from sales to theproduction animal market. The state of the overall economy and consumerspending have impacted both markets, with tightening credit markets, volatilecommodity prices in milk, grain, corn and feeder cattle, and changes in weatherpatterns also affecting demand in the production animal market.  Both markets have been integral to ourfinancial results and we intend to continue supporting both markets.

 

*Industry*

 

Webelieve that the companion animal market has slowed as a result of a decreasein consumer spending.  Historically,growth in the companion animal market has been due to the increasing number ofhouseholds with companion animals, increased expenditures on animal health andpreventative care, an aging pet population, advancements in pharmaceuticals anddiagnostic testing and extensive marketing programs sponsored by companionanimal nutrition and pharmaceutical companies. While the average order size forcompanion animal health products is often smaller than production animal healthproducts, companion animal health products typically have higher margins. Weintend to continue to penetrate this market through internal growth initiativesand selective acquisitions.

 

Productsales in the production animal market have been negatively impacted byvolatility in commodity prices such as milk, corn, grain and feeder cattle,changes in weather patterns that allow cattle to graze for longer periods andchanges in the general economy.  Milkprice declines in the dairy market over the last two years have had asignificant impact on dairy farmers. This has created cash-flow challenges for these farmers and in turn, hasimpacted the time it takes for us to collect our outstanding accountsreceivable from these customers. However, we still believe that it is important to our business toservice this market and we intend to continue to support production animalveterinarians with a broad range of products and value-added services.Historically, sales in this market have been largely driven by spending onanimal health products to improve productivity, weight gain and diseaseprevention, as well as a growing focus on food safety.

 

Wegenerally extend some level of credit to our customers without requiringcollateral, which exposes us to credit risk. If customers’ cash flow or operating and financial performancedeteriorates, or if they are unable to make scheduled payments or obtain othersources of credit, they may not be able to pay or may delay payment to us, orin some cases may return products to us.******Wecontinually assess our customers’ ability to pay us and adjust our allowancefor 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 price increaseannouncements of vendors and distributors, which can cause veterinarians topurchase production animal health products earlier than those products areneeded. This kind of early purchasing may reduce our sales in the months thesepurchases would have otherwise been made.

 

*Sales*

 

Wesell products that we source from our vendors to our customers through either a“buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell”transaction, we purchase or take inventory of products from our vendors. When acustomer places an order with us, we pick, pack, ship and invoice the customerfor the order. We record sales from “buy/sell” transactions, which account forthe vast majority of our business, as revenues in conformity with generallyaccepted accounting principles in the United States. In an agency relationship,we generally do not purchase and take inventory of products from our vendors.When we receive an order from our customer, we transmit the order to ourvendor, 

 

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whopicks, packs and ships the order to our customer. In some cases, our vendorinvoices and collects payment from our customer, while in other cases weinvoice and collect payment from our customer on behalf of our vendor. Wereceive a commission payment for soliciting the order from our customer and forproviding other customer service activities. The aggregate revenues we receive inagency transactions constitute the “commissions” line item on our consolidatedstatements of income and are recorded in conformity with accounting principlesgenerally accepted in the United States. Our vendors determine the method weuse to sell our products. Historically, vendors have occasionally switchedbetween the “buy/sell” and agency models for particular products in response tomarket conditions related to that particular product. A switch between modelscan impact our revenues and our operating income. We cannot know in advancewhen a vendor will switch between the “buy/sell” and agency models or whatimpact, if any, such a change may have. A switch can occur even with vendorswith whom we have written agreements because most of our agreements withvendors have relatively short terms and are terminable with or without cause onshort notice, normally 30 to 90 days. The impact of any individual changefrom a “buy/sell” to an agency model depends on the costs and expensesassociated with a particular product, and can have either a positive or anegative effect on our profitability.

 

Historically,our contract with Merial to sell their flea, tick and heartworm productsincluded an exclusivity requirement. This requirement did not permit us to sell or distribute other competingflea, tick and heartworm products.  Forcalendar year 2010, we agreed with Merial to begin a non-exclusive arrangementwhere we are permitted to sell and distribute other competing products.  Some of these competing products will be soldunder buy-sell arrangements, while others will be sold under agencyarrangements.  Merial’s flea, tick andheartworm products are primarily sold under an agency arrangement.  This addition of buy-sell arrangements forcertain flea, tick and heartworm products will have an impact on how ourrevenues are reported, since under agency sales, only commissions are reportedas revenues, while for buy-sell products the total sale price of the product isreported as revenue.

 

*VendorConsolidation*

 

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 received contracts for calendar year 2010 from these vendors.  Based on these contracts, we do not believethat these changes described will have a material impact on our results forfiscal 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 these changes described will have a material impact on our results forfiscal 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 be includedin the vendor contracts we negotiate for the upcoming year as a result of thesetransactions.  There is also apossibility of product disruption as these companies integrate their operationswhich could adversely impact our financial results.  Further consolidation among animal 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.

 

Ourtop ten vendors supplied products that accounted for approximately 68% and 74%of our revenues for the nine months ended June 30, 2010 and 2009,respectively, and 74% of our revenues for the fiscal year ended September 30,2009.  Pfizer supplied products thataccounted for approximately 25% and 24% of our revenues during the nine monthsended June 30, 

 

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2010and 2009, respectively, and  24% of ourrevenues for our fiscal year ended September 30, 2009.  Of the Pfizer supplied products, productionanimal products under a livestock agreement accounted for approximately 11% and14% of our revenues during the nine months ended June 30, 2010 and 2009,respectively, and approximately 14% of our revenues for our fiscal year ended September 30,2009.  Fort Dodge supplied products thataccounted for 11% of our revenues during the nine months ended June 30,2009, and 11% of our revenues for our fiscal year ended September 30,2009.  Intervet-Schering, a subsidiary ofSchering Plough, supplied products that accounted for approximately 10% and 11%of our revenues during the nine months ended June 30, 2010 and 2009,respectively, and 11% of our revenues for our fiscal year ended September 30,2009.  Boehringer Ingelheim suppliedproducts that accounted for approximately 10% and 4% of our revenues during thenine months ended June 30, 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 50% and 55%of total commission revenues for each of the nine months ended June 30,2010 and 2009, and 56% of total commission revenues for our fiscal year ended September 30,2009.

 

*VendorRebates*

 

We typically renegotiatevendor contracts annually.  These vendorcontracts may include terms defining rebates, commissions and exclusivityrequirements. Vendor rebates based on sales are classified in our accompanyingconsolidated statements of income as a reduction to cost of product sales atthe time the sales performance measures are achieved.  Purchase rebates are measured againstinventory purchases from the vendors and are a reduction of inventory until theproduct is sold.  When the inventory issold, purchase rebates are 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.

 

Formore information on our business, see our Annual Report on Form 10-K filedwith the SEC on November 20, 2009.

 

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**Results of Operations**

 

Thefollowing table summarizes our results of operations for the three and ninemonths ended June 30, 2010 and 2009, in dollars and as a percentage oftotal revenues.

 
| ** **                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Nine Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                             | ** ** | **%**                               | ** ** | **2009** | ** ** | **%** | ** ** | **2010** | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** |
| Revenues:                                                   |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product  sales                                              |       | $                                    | 334,242    |                                | 96.1       | % | $ | 231,743 |   | 93.6 | % | $ | 827,614 |   | 95.1 | % | $ | 647,979 |   | 93.4 | % |
| Product  sales to related party                             |       | 9,113                                |       | 2.6                                 | %          | 12,075 |   | 4.9 | % | 30,687 |   | 3.5 | % | 35,542 |   | 5.1 | % |
| Commissions                                                 |       | 4,332                                |       | 1.3                                 | %          | 3,645 |   | 1.5 | % | 12,094 |   | 1.4 | % | 10,273 |   | 1.5 | % |
| Total  revenues                                             |       | 347,687                              |       | 100.0                               | %          | 247,463 |   | 100.0 | % | 870,395 |   | 100.0 | % | 693,794 |   | 100.0 | % |
|                                                        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of product sales                                      |       | 303,750                              |       | 87.4                                | %          | 212,980 |   | 86.1 | % | 750,927 |   | 86.3 | % | 594,022 |   | 85.6 | % |
| Gross  profit                                               |       | 43,937                               |       | 12.6                                | %          | 34,483 |   | 13.9 | % | 119,468 |   | 13.7 | % | 99,772 |   | 14.4 | % |
|                                                        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses               |       | 27,435                               |       | 7.9                                 | %          | 22,748 |   | 9.2 | % | 75,448 |   | 8.7 | % | 67,379 |   | 9.7 | % |
| Depreciation  and amortization                              |       | 1,438                                |       | 0.4                                 | %          | 844 |   | 0.3 | % | 3,559 |   | 0.4 | % | 2,546 |   | 0.4 | % |
| Operating  income                                           |       | 15,064                               |       | 4.3                                 | %          | 10,891 |   | 4.4 | % | 40,461 |   | 4.6 | % | 29,847 |   | 4.3 | % |
|                                                        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  income (expense):                                    |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  expense                                           |       | (171                                 | )          | 0.0                                 | %          | (63 | ) | 0.0 | % | (389 | ) | 0.0 | % | (202 | ) | 0.0 | % |
| Earnings  of equity method investees                        |       | 45                                   |       | 0.0                                 | %          | 53 |   | 0.0 | % | 155 |   | 0.0 | % | 174 |   | 0.0 | % |
| Other                                                       |       | 57                                   |       | 0.0                                 | %          | 130 |   | 0.1 | % | 299 |   | 0.0 | % | 406 |   | 0.0 | % |
| Total  other income (expense), net                          |       | (69                                  | )          | 0.0                                 | %          | 120 |   | 0.1 | % | 65 |   | 0.0 | % | 378 |   | 0.0 | % |
|                                                        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  before taxes                                        |       | 14,995                               |       | 4.3                                 | %          | 11,011 |   | 4.5 | % | 40,526 |   | 4.6 | % | 30,225 |   | 4.3 | % |
| Income  tax expense                                         |       | (5,858                               | )          | -1.7                                | %          | (4,395 | ) | -1.8 | % | (15,884 | ) | -1.8 | % | (11,873 | ) | -1.7 | % |
| Net  income                                                 |       | $                                    | 9,137      |                                | 2.6        | % | $ | 6,616 |   | 2.7 | % | $ | 24,642 |   | 2.8 | % | $ | 18,352 |   | 2.6 | % |
|                                                        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings  per common share:                                 |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                       |       | $                                    | 0.74       |                                |       |   | $ | 0.55 |   |   |   | $ | 2.02 |   |   |   | $ | 1.52 |   |   |   |
| Diluted                                                     |       | $                                    | 0.74       |                                |       |   | $ | 0.54 |   |   |   | $ | 1.99 |   |   |   | $ | 1.49 |   |   |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted  average common shares outstanding (in thousands): |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                       |       | 12,265                               |       |                                |       | 12,079 |   |   |   | 12,215 |   |   |   | 12,075 |   |   |   |
| Diluted                                                     |       | 12,408                               |       |                                |       | 12,303 |   |   |   | 12,380 |   |   |   | 12,298 |   |   |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

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**Three Months Ended June 30, 2010 Compared to ThreeMonths Ended June 30, 2009**

 

*Total Revenues*.  Total revenues increased 40.5% to $347,687for the three months ended June 30, 2010, from $247,463 for the threemonths ended June 30, 2009.  Of the40.5% revenue growth, 23.3% or $57,665 was related to the acquisition ofCentaur.  Excluding this acquisition, ourrevenues attributable to existing customers represented approximately 43% ofthe growth of total revenues during the quarter ended June 30, 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 June 30, 2010 is partially due tomarket share gains and the sale of flea, tick and heartworm products that wedid not sell in the same period of the prior fiscal year due to our previouslyexclusive arrangement with Merial. Certain new flea, tick and heartworm products that we now distribute aresold under “buy/sell” arrangements while all flea, tick and heartworm productsin the past were sold under an agency agreement.  The product sales under a “buy-sell”arrangement results in greater revenue than product sales under an agencyarrangement because we recognize product sales under a “buy-sell” arrangementas total sales net of estimated product returns and sales tax, whereas we onlyrecognize commission revenue in product sales under an agencyrelationship.  Product sales to relatedparty decreased by 24.5% to $9,113 for the three months ended June 30,2010, from $12,075 for the three months ended June 30, 2009.  Commissions increased 18.8% to $4,332 for thethree months ended June 30, 2010, from $3,645 for the three months ended June 30,2009.

 

*Gross Profit*.  Gross profit increased by 27.4% to $43,937for the three months ended June 30, 2010, from $34,483 for the threemonths ended June 30, 2009.  Grossprofit was benefited by our revenue growth and the addition of Centaur.  Gross profit as a percentage of totalrevenues was 12.6% and 13.9% for the three months ended June 30, 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 June 30, 2010 increased by approximately $540 compared to thethree months ended June 30, 2009.

 

*Selling, General and Administrative (“SG&A”)*.  SG&A expenses increased 20.6% to $27,435for the three months ended June 30, 2010, from $22,748 for the threemonths ended June 30, 2009. SG&A expenses increased primarily due to the acquisition of Centaur andour revenue growth.  SG&A expenses asa percentage of total revenues decreased to 7.9% for the three months ended June 30,2010 from 9.2% for the three months ended June 30, 2009.  SG&A expenses as a percentage of totalrevenues decreased due, in part, 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, we had an improvement in our allowance for doubtfulaccounts as a result of payments made by certain customers.

 

*Other Income (Expense). *Other income (expense) decreased 157.5% to$69 in expense for the three months ended June 30, 2010, from $120 inincome for the three months ended June 30, 2009 primarily due to anincrease 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 June 30, 2010 and 2009 was 39.1% and 39.9%, respectively.  The decrease in the effective tax rate isprimarily due to the impact of the Centaur acquisition.

 

**Nine Months Ended June 30, 2010 Compared to Nine MonthsEnded June 30, 2009**

 

*Total Revenues*.  Total revenues increased 25.5% to $870,395for the nine months ended June 30, 2010, from $693,794 for the nine monthsended June 30, 2009.  Included intotal revenues for the nine months ended June 30, 2010 were $91,271related to the acquisition of Centaur. Excluding this acquisition, our revenues attributable to existingcustomers represented approximately 37% of the growth of total revenues duringthe nine months ended June 30, 2010. Additionally, revenues increased during the nine months ended June 30,2010 primarily due to market share gains and the addition of flea, tick andheartworm products that we did not sell in the same period of the prior fiscalyear as a result of not entering into an exclusive agreement on the Merialproducts.  Product sales to related partydecreased by 13.7% to $30,687 for the nine months ended June 30, 2010,from $35,542 for the nine months ended June 30, 2009.  Commissions increased 17.7% to $12,094 forthe nine months ended June 30, 2010, from $10,273 for the nine monthsended June 30, 2009.

 

*Gross Profit*.  Gross profit increased by 19.7% to $119,468for the nine months ended June 30, 2010, from $99,772 for the nine monthsended June 30, 2009.  Gross profitas a percentage of total revenues was 13.7% and 14.4% for the nine months endedJune 30, 2010 and 2009, respectively. Vendor rebates for the nine months ended June 30, 2010 increased byapproximately $165 compared to the nine months ended June 30, 2009.  This increase was primarily a result of theincrease in revenues, partially offset by the elimination in our Decemberquarter of the livestock rebate opportunity from one of our largest vendors.

 

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* *

*Selling, General and Administrative (“SG&A”)*.  SG&A expenses increased12.0% to $75,448 for the nine months ended June 30, 2010, from $67,379 for thenine months ended June 30, 2009. SG&A expenses as a percentage of total revenues improved to 8.7% forthe nine months ended June 30, 2010 compared to 9.7% for the nine months endedJune 30, 2009.  Included in the increasein SG&A expenses are direct acquisition-related expenses of $1,100 relatedto the acquisition of Centaur.

* *

*Other Income (Expense). *Other income (expense) decreased 82.8% to$65 in income for the nine months ended June 30, 2010, from $378 in incomefor the nine months ended June 30, 2009. The decrease was primarily due to an increase in interest expense whichcame as a result from borrowing on our revolving credit facility for theCentaur acquisition.

 

**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.

 

**Liquidityand 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 June 30,2010 was $13,400, and the interest rate was 2.06% as of June 30, 2010.

 

Thefacility contains certain financial covenants as well as other non-financialrestrictive covenants.  As of June 30,2010, we were in compliance with all covenants in the facility.

 

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

 

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

 

*Operating Activities*.  For the nine months ended June 30, 2010,cash provided by operations was $10,600 and was primarily attributable to netincome of $24,642 partially offset by an increase in accounts receivable of$12,072 due to the increase in revenues.  The increase in inventories of $8,282 and accounts payable of $6,365were both due to the increase in revenues.

 

Forthe nine months ended June 30, 2009, cash provided by operations was$2,847 and was primarily attributable to net income of $18,352, partiallyoffset by an increase of receivables of $2,245 due to revenue growth partiallyoffset by collection of receivables with extended payment terms that related tosales from prior periods, and a decrease in accounts payable of $16,282 dueprimarily to the timing of payment to vendors for strategic inventorypurchases.

 

*Investing Activities.*  For the nine months ended June 30, 2010,net cash used in investing activities was $41,470 and was primarily due toacquisition of Centaur of $39,511, net of cash acquired of $674, and capitalexpenditures of $1,862 related to distribution center infrastructure, includingthe relocation of the Holland, Michigan distribution center in September 2009and technology investments.

 

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Forthe nine months ended June 30, 2009, net cash used in investing activitieswas $1,527 and was primarily due to capital expenditures of $1,649 related todistribution center infrastructure, including the relocation of the Dallasdistribution center in November 2008 and technology investments.

 

*Financing Activities.*  For the nine months ended June 30,2010, net cash provided by financing activities was $17,519, which wasprimarily due to net borrowings of $15,876 on our credit facilities.  Our revolving credit facility was used tofinance the Centaur acquisition. Additionally, our credit facilities are used to meet our working capitalrequirements and the amounts borrowed fluctuate based on timing of payables andcollection of receivables.  This was coupledwith the tax benefit from stock option exercises of $1,829.

 

Forthe nine months ended June 30, 2009, net cash provided by financingactivities was $331, which was primarily due to common stock issued under ouremployee stock purchase plan and the tax benefit of from stock optionexercises.

 

**ContractualObligations and Guarantees**

 

Forinformation on our contractual obligations and guarantees, see our AnnualReport on Form 10-K filed on November 20, 2009 with the SEC and ourQuarterly Report on Form 10-Q filed on May 6, 2010 with the SEC.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

TheCompany is exposed to market risks primarily from changes in interest rates ,in particular, the Daily LIBOR Floating Rate, and foreign currency translationrisk. The Company does not engage in financial transactions for trading orspeculative purposes.  We do not hedgethe translation of foreign currency profits into U.S. dollars.

 

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 June 30, 2010 was $13,400.   The interest rate on this facility at June 30,2010 was 2.06%.  A change of 10% from theinterest rate as of June 30, 2010 (Daily LIBOR Floating Rate plus 1.75%),would have changed interest by $7 for the quarter ended June 30, 2010.

 

**Item 4.  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 June 30, 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.

 

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

 

**PART II.  OTHER INFORMATION**

 

**Cautionary Statement forPurposes of “Safe Harbor Provisions” of the Private Securities Litigation ReformAct of 1995***This quarterly report on Form 10-Q containsforward-looking statements within the meaning of the federal securities laws.Statements that are not historical facts, including statements about ourbeliefs and expectations, are forward-looking statements. Forward-lookingstatements include statements preceded by, followed by or that include thewords “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,”“estimate,” “target,” “project,” “intend” and similar expressions. Thesestatements include, among others, statements regarding our expected businessoutlook, anticipated financial and operating results, our business strategy andmeans to implement our strategy, our objectives, the amount and timing ofcapital expenditures, the amount and timing of interest expense, the likelihoodof our success in expanding our business, financing plans, budgets, workingcapital needs and sources of liquidity.*

 

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*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:*

 

·                            *theimpact of vendor consolidation on our business;*

 

·                            *changesin or availability of vendor contracts or rebate programs;*

 

·                            *vendorrebates based upon attaining certain growth goals;*

 

·                            *changesin the way vendors introduce/deliver products to market;*

 

·                            *exclusivityrequirements with certain vendors that may prohibit us from distributingcompeting products manufactured by other vendors;*

 

·                            *risksassociated with our international operations;*

 

·                            *transitionalchallenges associated with acquisitions, including the failure to achieveanticipated synergies;*

 

·                            *financialrisks associated with acquisitions;*

 

·                            *theimpact of general economic trends on our business;*

 

·                            *therecall of a significant product by one of our vendors;*

 

·                            *extendedshortage or backorder of a significant product by one of our vendors;*

 

·                            *seasonality;*

 

·                            *thetiming and effectiveness of marketing programs or price changes offered by ourvendors;*

 

·                            *thetiming of the introduction of new products and services by our vendors;*

 

·                            *theability to borrow on our revolving credit facility, extend the terms of ourrevolving credit facility or obtain alternative financing on favorable terms orat all;*

 

·                            *risksfrom potential increases in variable interest rates;*

 

·                            *theimpact of tightening credit standards and/or access to credit on behalf of ourcustomers and suppliers;*

 

·                            *unforeseenlitigation;*

 

·                            *adisruption caused by adverse weather or other natural conditions;*

 

·                            *inabilityto ship products to the customer as a result of technological or shippingdisruptions; 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.*

 

*Investors should also beaware that while we do, from time to time, communicate with securitiesanalysts, it is against our policy to disclose any material non-publicinformation or other confidential commercial information. Accordingly,stockholders should not assume that we agree with any statement or reportissued by any analyst irrespective of the content of the statement or report.Furthermore, we have a policy against issuing or confirming financial forecastsor projections issued by others. Thus, to the extent that reports issued bysecurities analysts contain any projections, forecasts or opinions, suchreports are not the responsibility of MWI Veterinary Supply, Inc.*

 

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**Item 1.  Legal Proceedings**

 

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

 

OnApril 19, 2010, we received a Civil Investigative Demand from the FederalTrade Commission seeking various documents concerning certain products that wedistribute for Pfizer, Inc.  Theproducts are Rimadyl, Clavamox and Simplicef. The Civil Investigative Demand also seeks information on the genericforms of these products.  The subpoenastates that the investigation is to determine whether Pfizer or others haveengaged in any unfair methods of competition. We have responded to the demand and intend to fully cooperate with thisinvestigation. At this time, we have not been notified that we are a target ofthis investigation but we are unable to predict the timing and outcome of thismatter.

 

**Item 1A.  Risk Factors**

 

There have been no material changes from the riskfactors disclosed in the “Risk Factors” section of the Company’s Annual Reporton Form 10-K for the fiscal year ended September 30, 2009, asmodified by the risk factors disclosed in the “Risk Factors” section of theCompany’s Quarterly Report on Form 10-Q for the three months ended March 31,2010.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

 

The table below providesinformation concerning our repurchase of shares of our common stock during thethree months ended June 30, 2010.

 

**Issuer Purchases of Equity Securities**

 
| **Period**                                | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May Yet  Be Purchased Under  the Plans or  Programs** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| April 1, 2010 to April 30, 2010 |       | —                                  |       | —                              |       | —                                                                                         |       | —                                                                                                                      |       |
| May 1, 2010 to May 31, 2010     |       | —                                  |       | —                              |       | —                                                                                         |       | —                                                                                                                      |       |
| June 1, 2010 to June 30, 2010   |       | 79                                      |       | $                                   | 48.15      |                                                                                           | —     |                                                                                                                        | —     |   |
| Total                                     |       | 79                                      | (1)        | $                                   | 48.15      |                                                                                           | —     |                                                                                                                        | —     |   |

 

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(1)          These shares were withheldupon the vesting of employee restricted stock grants in connection with paymentof required withholding taxes.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4.  Removed and Reserved**

 

None.

 

**Item 5.  Other Information**

 

None.

 

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**Item 6.  Exhibits**

 
| 10.1   |   | 2010  Pfizer Equine Products Marketing Agreement between MWI Veterinary Supply Co.  and Pfizer, Inc. effective as of January 1, 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                    |

 

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†Certain portions of the exhibit have been omitted pursuant to a confidentialtreatment request submitted to and approved by the SEC.

 

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SIGNATURE

 

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

 
|                      | MWI Veterinary Supply, Inc.                                                 |
|---------------------------|----------------------------------------------------------------------------------|
|                      | (Registrant)                                                                     |
|                      |                                                                             |
|                      |                                                                             |
| Date:  July 29, 2010 | /s/  Mary Patricia B. Thompson                                                   |
|                      | Mary  Patricia B. Thompson                                                       |
| * *                  | *Senior Vice President of  Finance and  Administration, Chief Financial Officer* |

 

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