**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**
| **x**                                        | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|                                         |       |                                                                                                                  |
| **For the  quarter ended December 31, 2006** |
| ** **                                   |
| **OR**                                       |
| ** **                                   |
| **o**                                        | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                         |

 

**For thetransition periodfrom                      to**

**CommissionFile Number:  000-51468**

**MWI VETERINARY SUPPLY, INC.**

(Exact name ofRegistrant as specified in its Charter)

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

 

**(800) 824-3703**

(Registrant’stelephone number, including area code)

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Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes x No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. 

| Large Accelerated Filer    o |   | Accelerated Filer  x |   | Non-Accelerated Filer  o |
|----------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Act). Yes o No x

The number of shares of the Registrant’s common stock,$0.01 par value, outstanding as of January 31, 2007 was 11,563,766

 

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**MWIVETERINARY SUPPLY, INC.**

**INDEX**
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                              | ** ** | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------|------------|------------|
|         |       |                                                                                                   |       |       |
| **Item 1.**  | ** ** | **Financial Statements  (Unaudited)**                                                                  | ** ** | ** ** |
|         |       | Condensed Consolidated Statements of Income for the  three months ended December 31, 2006 and 2005     |       |       |
|         |       |                                                                                                   |       |       |
|         |       | Condensed Consolidated Balance Sheets as of December  31, 2006 and September 30, 2006                  |       |       |
|         |       |                                                                                                   |       |       |
|         |       | Condensed Consolidated Statements of Cash Flows for  the three months ended December 31, 2006 and 2005 |       |       |
|         |       |                                                                                                   |       |       |
|         |       | Notes to Condensed Consolidated Financial Statements                                                   |       |       |
|         |       |                                                                                                   |       |       |
|         |       | Report of Independent Registered Public Accounting  Firm                                               |       |       |
|         |       |                                                                                                   |       |       |
| **Item 2.**  | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**        |       |       |
|         |       |                                                                                                   |       |       |
| **Item 3.**  | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk**                                        |       |       |
|         |       |                                                                                                   |       |       |
| **Item 4.**  | ** ** | **Controls and Procedures**                                                                            |       |       |
|         |       |                                                                                                   |       |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                  | ** ** | ** ** |
|         |       |                                                                                                   |       |       |
|         | ** ** | **Cautionary Statement**                                                                               |       |       |
|         |       |                                                                                                   |       |       |
| **Item 1.**  | ** ** | **Legal Proceedings**                                                                                  |       |       |
| ** **   | ** ** | ** **                                                                                             | ** ** | ** ** |
| **Item 1A.** | ** ** | **Risk Factors**                                                                                       |       |       |
| ** **   | ** ** | ** **                                                                                             | ** ** | ** ** |
| **Item 2.**  | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                       |       |       |
| ** **   | ** ** | ** **                                                                                             | ** ** | ** ** |
| **Item 3.**  | ** ** | **Defaults Upon  Senior Securities**                                                                   |       |       |
| ** **   | ** ** | ** **                                                                                             | ** ** | ** ** |
| **Item 4.**  | ** ** | **Submission of  Matters to a Vote of Security Holders**                                               |       |       |
| ** **   | ** ** | ** **                                                                                             | ** ** | ** ** |
| **Item 5.**  | ** ** | **Other Information**                                                                                  |       |       |
| ** **   | ** ** | ** **                                                                                             | ** ** | ** ** |
| **Item  6.** | ** ** | **Exhibits**                                                                                           |       |       |

 

2

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**PARTI.  FINANCIAL INFORMATION**

**Item 1.    Financial Statements**

**MWI VETERINARY SUPPLY, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(in thousands, except per sharedata)**

**(unaudited)**
| ** **                                    | ** ** | **Three months ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Revenues:                                     |       |                                                    |       |   |   |
| Product sales                                 |       | $                                                       | 149,787    |   | $ | 127,048 |   |
| Product sales to  related party               |       | 9,559                                                   |       | 9,355 |   |
| Commissions                                   |       | 1,699                                                   |       | 1,413 |   |
| Total revenues                                |       | 161,045                                                 |       | 137,816 |   |
|                                          |       |                                                    |       |   |   |
| Cost of product sales                         |       | 135,296                                                 |       | 115,064 |   |
| Gross profit                                  |       | 25,749                                                  |       | 22,752 |   |
|                                          |       |                                                    |       |   |   |
| Selling, general and  administrative expenses |       | 17,694                                                  |       | 14,553 |   |
| Depreciation and  amortization                |       | 569                                                     |       | 442 |   |
| Operating income                              |       | 7,486                                                   |       | 7,757 |   |
|                                          |       |                                                    |       |   |   |
| Other income (expense):                       |       |                                                    |       |   |   |
| Interest expense                              |       | (269                                                    | )          | (555 | ) |
| Earnings of  equity method investees          |       | 45                                                      |       | 45 |   |
| Other                                         |       | 90                                                      |       | 90 |   |
| Total other expense,  net                     |       | (134                                                    | )          | (420 | ) |
| Income before taxes                           |       | 7,352                                                   |       | 7,337 |   |
| Income tax expense                            |       | (2,748                                                  | )          | (2,898 | ) |
|                                          |       |                                                    |       |   |   |
| Net income                                    |       | $                                                       | 4,604      |   | $ | 4,439 |   |
|                                          |       |                                                    |       |   |   |
| Earnings per common  share:                   |       |                                                    |       |   |   |
| Basic                                         |       | $                                                       | .40        |   | $ | .42 |   |
| Diluted                                       |       | $                                                       | .39        |   | $ | .41 |   |
|                                          |       |                                                    |       |   |   |
| Weighted average common  shares outstanding:  |       |                                                    |       |   |   |
| Basic                                         |       | 11,559                                                  |       | 10,578 |   |
| Diluted                                       |       | 11,860                                                  |       | 10,864 |   |
|                                          |       |                                                    |       |   |   |

 

See Notes toCondensed Consolidated Financial Statements

3

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**MWIVETERINARY SUPPLY, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(dollarsand shares in thousands, except per share data)**

**(unaudited)**
| ** **                                                                                                      | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                      | ** ** | **2006**              | ** ** | **2006**               | ** ** |
| **Assets**                                                                                                      | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current Assets:                                                                                                 |       |                  |       |                   |       |
| Cash                                                                                                            |       | $                     | 37         |                   | $          | 37 |   |
| Receivables, net                                                                                                |       | 89,773                |       | 99,518                 |       |
| Inventories                                                                                                     |       | 98,628                |       | 85,083                 |       |
| Prepaid expenses and other current assets                                                                       |       | 2,069                 |       | 2,651                  |       |
| Deferred income taxes                                                                                           |       | 638                   |       | 502                    |       |
| Total current assets                                                                                            |       | 191,145               |       | 187,791                |       |
|                                                                                                            |       |                  |       |                   |       |
| Property and  equipment, net                                                                                    |       | 7,600                 |       | 7,053                  |       |
| Goodwill                                                                                                        |       | 31,562                |       | 31,562                 |       |
| Intangibles, net                                                                                                |       | 2,314                 |       | 2,381                  |       |
| Other assets,  net                                                                                              |       | 1,906                 |       | 1,772                  |       |
| Total assets                                                                                                    |       | $                     | 234,527    |                   | $          | 230,559 |   |
|                                                                                                            |       |                  |       |                   |       |
| **Liabilities  And Stockholders’ Equity**                                                                  | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current  Liabilities:                                                                                           |       |                  |       |                   |       |
| Line-of-credit                                                                                                  |       | $                     | 1,880      |                   | $          | 10,559 |   |
| Accounts payable                                                                                                |       | 89,469                |       | 82,561                 |       |
| Accrued expenses                                                                                                |       | 7,926                 |       | 6,919                  |       |
| Current maturities of long-term debt                                                                            |       | 97                    |       | 97                     |       |
| Total current liabilities                                                                                       |       | 99,372                |       | 100,136                |       |
|                                                                                                            |       |                  |       |                   |       |
| Deferred income  taxes                                                                                          |       | 460                   |       | 505                    |       |
| Long-term debt                                                                                                  |       | 292                   |       | 292                    |       |
| Commitments and  contingencies                                                                                  |       |                  |       |                   |       |
|                                                                                                            |       |                  |       |                   |       |
| **Stockholders’  Equity**                                                                                  | ** ** | ** **            | ** ** | ** **             | ** ** |
| Common stock $0.01 par value, 20,000 authorized;  11,564 and 11,549 shares issued and outstanding, respectively |       | 116                   |       | 115                    |       |
| Additional paid in capital                                                                                      |       | 107,987               |       | 107,594                |       |
| Retained earnings                                                                                               |       | 26,632                |       | 22,028                 |       |
| Unearned compensation – restricted stock                                                                   |       | (332                  | )          | (111                   | )          |
| Total stockholders’ equity                                                                                 |       | 134,403               |       | 129,626                |       |
| Total liabilities and  stockholders’ equity                                                                |       | $                     | 234,527    |                   | $          | 230,559 |   |

 

See Notes to CondensedConsolidated Financial Statements

4

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**MWIVETERINARY SUPPLY, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**
| ** **                                                                                   | ** ** | **Three months ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                                       | 4,604      |   | $ | 4,439 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                                |       | 571                                                     |       | 445 |   |
| Amortization of debt issuance costs                                                          |       | 31                                                      |       | 35 |   |
| Stock-based compensation expense                                                             |       | 20                                                      |       | — |   |
| Deferred income taxes                                                                        |       | (180                                                    | )          | (76 | ) |
| Earnings of equity method investees                                                          |       | (45                                                     | )          | (45 | ) |
| Tax benefit of common stock options                                                          |       | (67                                                     | )          | (14 | ) |
| Other                                                                                        |       | (10                                                     | )          | (10 | ) |
| Changes in operating assets and liabilities:                                                 |       |                                                    |       |   |   |
| Receivables                                                                                  |       | 9,744                                                   |       | 279 |   |
| Inventories                                                                                  |       | (13,546                                                 | )          | (3,171 | ) |
| Prepaid expenses and other current assets                                                    |       | 557                                                     |       | 93 |   |
| Accounts payable                                                                             |       | 6,844                                                   |       | (5,078 | ) |
| Accrued expenses                                                                             |       | 1,075                                                   |       | 1,632 |   |
| Net cash provided by (used in) operating activities                                          |       | 9,598                                                   |       | (1,471 | ) |
|                                                                                         |       |                                                    |       |   |   |
| **Cash  Flows From Investing Activities:**                                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                          |       | (977                                                    | )          | (1,182 | ) |
| Other                                                                                        |       | 30                                                      |       | 5 |   |
| Net cash used in investing activities                                                        |       | (947                                                    | )          | (1,177 | ) |
|                                                                                         |       |                                                    |       |   |   |
| **Cash  Flows From Financing Activities:**                                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net borrowings (payments) on line-of-credit                                                  |       | (8,679                                                  | )          | 2,593 |   |
| Proceeds from stock options                                                                  |       | 85                                                      |       | 137 |   |
| Tax benefit of common stock options                                                          |       | 67                                                      |       | 14 |   |
| Payment on long-term debt                                                                    |       | —                                                  |       | (97 | ) |
| Debt issuance costs                                                                          |       | (124                                                    | )          | — |   |
| Net cash provided by (used in) financing activities                                          |       | (8,651                                                  | )          | 2,647 |   |
|                                                                                         |       |                                                    |       |   |   |
| **Increase  (Decrease) in Cash**                                                             |       | —                                                  |       | (1 | ) |
|                                                                                         |       |                                                    |       |   |   |
| Cash at  beginning of period                                                                 |       | 37                                                      |       | 31 |   |
|                                                                                         |       |                                                    |       |   |   |
| Cash at end of  period                                                                       |       | $                                                       | 37         |   | $ | 30 |   |
|                                                                                         |       |                                                    |       |   |   |
| *Supplemental  Disclosures:*                                                                 | * *   | * *                                                | * *   | * * | * * |
| Cash paid for  interest                                                                      |       | $                                                       | 301        |   | $ | 485 |   |
| Cash paid for  income taxes                                                                  |       | $                                                       | 7          |   | $ | 341 |   |
| *Noncash  Activity:*                                                                         |       |                                                    |       |   |   |
| Equipment acquisitions  financed with accounts payable                                       |       | $                                                       | 196        |   | $ | 259 |   |

 

See Notes to CondensedConsolidated Financial Statements

5

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**MWIVETERINARY SUPPLY, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(dollarsin thousands, except per share data)**

**(unaudited)**

## **NOTE1 — GENERAL**

**Basisof 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 to as “we,”“us,” and “our” throughout this Form 10-Q). All material intercompany balances have been eliminated.

In theopinion of our management, the accompanying unaudited condensed consolidatedfinancial statements include all adjustments necessary to present fairly, inall material respects, our results for the periods presented. These condensedconsolidated financial statements have been prepared by us pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and accompanying notesincluded in our 2006 Annual Report on Form 10-K filed with the SEC on November22, 2006.  The results of operations forthe three months ended December 31, 2006 are not necessarily indicative ofresults to be expected for the entire fiscal year.

Ourunaudited condensed consolidated balance sheet as of September 30, 2006 hasbeen derived from the audited consolidated balance sheet as of that date.

**Useof Estimates**

*The*accompanyingconsolidated 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 from theseestimates. Estimates are used when accounting for sales returns, allowance fordoubtful accounts, customer incentives, vendor rebates, inventories, goodwilland intangible assets, income taxes, impairment of long-lived assets,depreciation and amortization, employee benefits, unearned income andcontingencies. The estimates of fair value of assets and liabilities and thedisclosure of contingent assets and liabilities as of the balance sheet dateand reported amounts of revenue and expenses for the periods are based onassumptions that we believe to be reasonable.

**RevenueRecognition**

*We*sellproducts 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 and ship products, and theninvoice the customer for the order. We recognize revenue from “buy/sell”transactions as product sales when the product is delivered to the customer. Weaccept product returns from our customers. We estimate returns based on historicalexperience and recognize these estimated returns as a reduction of productsales. Product returns have not been significant to our financial statements.In an agency 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 arecompleted. Gross billings from agency contracts were $30,484 and $26,869 forthe three months ended December 31, 2006 and 2005, respectively, and generatedcommission revenue of $1,699 and $1,413, respectively.

**Costof Product Sales and Vendor Rebates**

*Cost***of product sales consist of ourinventory product cost, including shipping costs to and from our distributioncenters. Vendor rebates are recorded based on the terms of the contracts orprograms with each vendor. We primarily receive quarterly, trimester,semi-annual and annual performance-based rebates from third-party vendors basedupon attainment of certain sales and/or purchase goals. Sales rebates areclassified in the accompanying consolidated statements of income as a reductionto cost of product sales at the time the sales performance measures areachieved. Purchase rebates are measured against inventory purchases from thevendors and are classified as a reduction of inventory until the product issold. When 

6

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the inventory is sold and purchasemeasures are achieved, purchase rebates are recognized as a reduction to costof product sales.

**Reclassifications**

Certain reclassifications, none of whichaffected results of operations, have been made to the accompanying condensedconsolidated financial statements for prior periods to conform to current yearpresentation.

## **NOTE2 — EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS**

In May 2005, theFinancial Accounting Standards Board (the “FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 154, *AccountingChanges and Error Corrections*(“SFAS 154”)*.*SFAS 154replaces FASB Statement No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and replacesAccounting Principles Board (“APB”) Opinion No. 20, *Accounting Changes.*SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005 and was effective for us the fiscal year beginningOctober 1, 2006. The adoption of SFAS 154 did not have a materialeffect on our consolidated financial statements.

In July 2006, theFASB issued Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*, which clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with FASB Statement No. 109, *Accountingfor Income Taxes*. FIN 48 provides guidance on the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosures, andtransition. FIN 48 is effective for our fiscal year beginning October 1,2007. We are currently evaluating the expected impact, if any, that FIN 48 willhave on our consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value according to accounting principles generally accepted inthe United States, and expands disclosure requirements regarding fair valuemeasurements. This statement emphasizes that fair value should be determinedbased on assumptions market participants would use to price the asset orliability. SFAS 157 is effective for our fiscal year and interim periodbeginning October 1, 2008. We are currently evaluating the expectedimpact, if any, that SFAS 157 will have on our consolidated financialstatements.

In September 2006,the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 108 (“SAB 108”), which provides guidance on quantifying and evaluatingthe materiality of unrecorded misstatements. SAB 108 is effective for ourfiscal year beginning October 1, 2007. We are currently evaluating theexpected impact, if any, that SAB 108 will have on our consolidated financialstatements.

**NOTE 3**—**RECEIVABLES**
|                                  | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2006**               | ** ** |
| Trade                            |       | $                     | 78,353     |                   | $          | 89,541 |   |
| Vendor rebates  and programs     |       | 12,259                |       | 10,731                 |       |
| Related party                    |       | 188                   |       | 400                    |       |
|                             |       | 90,800                |       | 100,672                |       |
| Allowance for  doubtful accounts |       | (1,027                | )          | (1,154                 | )          |
|                             |       | $                     | 89,773     |                   | $          | 99,518 |   |

 

Productsales resulting from transactions with a single customer were 9% of totalproduct sales during each of the three months ended December 31, 2006 and 2005.Approximately 10% of our trade receivables resulted from transactions with thissingle customer as of December 31, 2006 and September 30, 2006.

Productsales resulting from transactions with Feeders’ Advantage LLC (“FeedersAdvantage”), a related party, were 6% and 7% during the three-months endedDecember 31, 2006 and 2005, respectively.

7

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**NOTE 4**—**PROPERTY AND EQUIPMENT**
|                                            | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2006**               | ** ** |
| Land                                       |       | $                     | 20         |                   | $          | 20 |   |
| Buildings and  leasehold improvements      |       | 1,925                 |       | 1,779                  |       |
| Machinery,  furniture and equipment        |       | 9,294                 |       | 9,138                  |       |
| Computer  equipment                        |       | 2,971                 |       | 2,899                  |       |
| Construction in  progress                  |       | 1,044                 |       | 377                    |       |
|                                       |       | 15,254                |       | 14,213                 |       |
| Accumulated  depreciation and amortization |       | (7,654                | )          | (7,160                 | )          |
|                                       |       | $                     | 7,600      |                   | $          | 7,053 |   |

Depreciationexpense for the three months ended December 31, 2006 and 2005 was $494 and$398, respectively.

**NOTE 5**—**INTANGIBLES**
|                           | ** ** | ** **           | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------|------------|----------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                | ** ** | **Useful Life** | ** ** | **2006**              | ** ** | **2006**               | ** ** |
| Amortizing:               |       |                 |       |                  |       |                   |       |
| Customer lists            |       | 9 - 10 years         |       | $                     | 2,410      |                   | $          | 2,410 |   |
| Covenants not to compete  |       | 5 years              |       | 256                   |       | 256                    |       |
| Other                     |       | 5 years              |       | 36                    |       | 36                     |       |
|                      |       |                 |       | 2,702                 |       | 2,702                  |       |
| Accumulated  amortization |       |                 |       | (450                  | )          | (373                   | )          |
|                      |       |                 |       | 2,252                 |       | 2,329                  |       |
| Non-Amortizing:           |       |                 |       |                  |       |                   |       |
| Trade names               |       |                 |       | 62                    |       | 52                     |       |
|                      |       |                 |       | $                     | 2,314      |                   | $          | 2,381 |   |

 

Amortizationexpense for the three months ended December 31, 2006 and 2005 was $77 and $47,respectively.  Estimated future annualamortization expense related to intangible assets as of December 31, 2006follows:
|                   | ** ** | **Amount** | ** ** |
|-------------------|------------|------------|------------|
| Remainder of 2007 |       | $          | 232        |   |
| 2008              |       | 309        |       |
| 2009              |       | 309        |       |
| 2010              |       | 286        |       |
| 2011              |       | 269        |       |
| Thereafter        |       | 847        |       |
|              |       | $          | 2,252      |   |

 

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

**Line-of-Credit**—On December 13, 2006, MWIVeterinary Supply Co., (our wholly-owned subsidiary) as borrower, entered into anunsecured credit agreement with us and Memorial Pet Care, Inc., as guarantors,and Bank of America, N.A. and Wells Fargo Bank, N.A., (collectively, the “lenders”)for the provision of a revolving credit facility (the “facility”).  The facility allows for borrowings in theaggregate of $70,000, with the right to increase the commitment of the lendersto $100,000.  The facility has a maturitydate of December 1, 2011 and a variable interest rate equal to the Daily LIBORFloating Rate or the LIBOR 1-month fixed rate (at our option) plus a marginranging from 0.7% to 1.25%.  The lendersalso receive an unused line fee and letter of credit fee equal to 0.125% of theunused amount of the facility. Our outstanding balance on the facility atDecember 31, 2006 was $1,880 and the interest rate for the facility was 5.99%as of that date.  This facility replacesthe five-year Credit Agreement dated June 18, 2002 between MWI VeterinarySupply Co. and Bank of America, N.A., which had an outstanding balance atSeptember 30, 2006 of $10,559.

Theline-of-credit contains certain financial covenants as well as otherrestrictive covenants. The facility allows for the issuance of up to $10,000 inletters of credit. The letters of credit typically act as a guarantee ofpayment to certain third-

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partiesin accordance with specified terms and conditions. We had twelve letters ofcredit totaling $880 at December 31, 2006 and eleven letters of credit totaling$780 at September 30, 2006. There were no outstanding borrowings on these lettersof credit at either December 31, 2006 or September 30, 2006.

**Long-Term Debt**—In January 2005, we issued apromissory note in the aggregate principal amount of $487 in partialconsideration for the purchase of substantially all the assets of Vetpo Distributors,Inc. The note bears interest at the prime rate (8.25% at December 31, 2006),payable quarterly. The principal of the note is payable in five equal annualinstallments, the first of which was due on January 1, 2006.  The balance on this promissory note was $389at December 31, 2006 and September 30, 2006.

**NOTE 7**—**STOCK OPTIONS**

We havetwo stock-based award plans, the 2002 Stock Plan and the Amended and Restated2005 Stock-Based Incentive Compensation Plan (the “2005 Plan”).  The 2005 Plan allows our Board of Directorsto grant common stock options, restricted stock, deferred units and otherstock-based awards to executives and other key employees.  These plans have been developed to provideadditional incentives by allowing equity ownership in our company and, as aresult, encouraging participants to contribute to our success.  At December 31, 2006, 533,101 options topurchase common stock were outstanding (363,877 options vested and exercisable)with a weighted average exercise price of $4.61 and expiring through September2015.  During the three months endedDecember 31, 2006, we granted 7,000 shares of restricted stock, which vestannually for up to 5 years.  At December31, 2006, 1,656,109 shares were available to be issued under our stock-basedaward plans.

EffectiveOctober 1, 2005, we adopted the provisions of SFAS No. 123-(Revised), *Share-Based Payment* (“SFAS 123-R”) forour share-based compensation plans. We previously accounted for these plansunder the recognition and measurement principals of APB No. 25, *Accounting for Stock Issued to Employees* (“APB No. 25”), asamended by SFAS No. 148, *Accounting for Stock BasedCompensation—Transition and Disclosure* (“SFAS 148”). Under APB No.25, no compensation expense was recorded in earnings for the stock-based awardsgranted under our stock-based award plans. The pro forma effects on net incomeand earnings per share for stock-based awards were instead disclosed in afootnote to the financial statements. Under SFAS 123-R, all share-based compensationis measured at the grant date, based on the fair value of the award, and isrecognized as an expense in earnings over the requisite service period.

Weadopted SFAS 123-R using the modified prospective method. Under this transitionmethod, compensation expense includes the expense for all share-based awardsgranted prior to, but not yet vested as of October 1, 2005, excluding thoseoptions initially valued using the minimum value method.  At October 1, 2005, all of our options topurchase common stock were either vested and exercisable or were initiallyvalued using the minimum value method. Therefore no compensation expense was recognized for these stock-basedawards in our fiscal year ended September 30, 2006.  We granted no common stock options during thethree months ended December 31, 2006. During the three months ended December 31, 2006, we recognized $20 ofcompensation expense related to restricted stock grants.

**NOTE 8**—**INCOME TAXES**

Oureffective tax rate for the three months ended December 31, 2006 and 2005 was37.4% and 39.5%, respectively.  Thedecrease in the effective rate in the three months ended December 31, 2006 ascompared to the same period in the prior fiscal year was primarily a result ofa decrease in our estimated state income tax rate due to the utilization ofstate tax credits.

## **NOTE9 — COMPUTATION OF EARNINGS PER SHARE***(In thousands, except per sharedata)*

|                                                                   | ** ** | **Three months ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Basic**                                               | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                                        |       | $                                                       | 4,604      |   | $ | 4,604 |   | $ | 4,439 |   | $ | 4,439 |   |
| Weighted average  common shares outstanding                       |       | 11,559                                                  |       | 11,559 |   | 10,578 |   | 10,578 |   |
| Effect of  diluted securities  Stock options and restricted stock |       |                                                    |       | 301 |   |   |   | 286 |   |
| Weighted average  shares outstanding                              |       |                                                    |       | 11,860 |   |   |   | 10,864 |   |
| Earnings per  share                                               |       | $                                                       | 0.40       |   | $ | 0.39 |   | $ | 0.42 |   | $ | 0.41 |   |
| Anti-dilutive shares  excluded from calculation                   |       |                                                    |       | — |   |   |   | 10 |   |

 

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**NOTE 10**—**RELATED PARTIES**

MWI VeterinarySupply Co., our wholly-owned subsidiary, holds a 50.0% membership interest inFeeders’ Advantage. MWI Veterinary Supply Co. charged Feeders’ Advantage forcertain operating and administrative services in the amounts of $149 and $153for the three months ended December 31, 2006 and 2005, respectively.  Sales of products to Feeders’ Advantage were$9,559 and $9,353 for the three months ended December 31, 2006 and 2005,respectively.

**NOTE 11**—**CONTINGENCIES AND COMMITMENTS**

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 December 31, 2006, wewere not a party to any material pending legal proceedings and were not awareof any claims that could have a material adverse effect on our financialposition, results of operations or cash flows.

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

Tothe Board of Directors and Stockholders of MWI Veterinary Supply, Inc.Meridian, Idaho

Wehave reviewed the accompanying condensed consolidated balance sheet of MWIVeterinary Supply, Inc. and subsidiaries (the “Company”) as of December 31,2006, and the related condensed consolidated statements of income and of cashflows for the three-month periods ended December 31, 2006 and 2005. Theseinterim financial statements are the responsibility of the Company’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.

We have previously audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheet of MWI Veterinary Supply, Inc. andsubsidiaries as of September 30, 2006, and the related consolidated statementsof income, comprehensive income, stockholders’ equity and cash flows for theyear then ended (not presented herein); and in our report dated November 21,2006, we expressed an unqualified opinion on those consolidated financialstatements. In our opinion, the information set forth in the accompanyingcondensed consolidated balance sheet as of September 30, 2006, is fairlystated, in all material respects, in relation to the consolidated balance sheetfrom which it has been derived.
| /s/ DELOITTE & TOUCHE  LLP |   |
|--------------------------------|--------|
| Boise, Idaho                   |   |
| January 30, 2007               |   |

 

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

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

**Overview**

Weare a leading distributor of animal health products to veterinarians across theUnited States.  We distribute more than10,000 products sourced from over 400 vendors to more than 15,000 veterinarypractices nationwide from twelve strategically located distribution centers.  Products we sell include pharmaceuticals,vaccines, parasiticides, diagnostics, capital equipment, supplies, veterinarypet food and nutritional products.  Wemarket these products to veterinarians in both the companion animal andproduction animal markets. Historically, approximately two-thirds of our total revenueshave been generated from sales to the companion animal market and one-thirdfrom sales to the production animal market. The increasing maturity of the production animal market results in lowermargins on product sales relative to the companion animal market.  While the average order size for companionanimal health products is often smaller than production animal health products,companion animal health products typically have higher margins.

*Common Stock Offerings*

On August 3, 2005, we completed our initial public offering in which wesold an aggregate of 4,983,334 shares (including the exercise of theunderwriters’ over-allotment option) of our common stock at a price to thepublic of $17 per share.  We received netproceeds of $77,159 after deducting the underwriting discounts and offeringexpenses.  We used the net proceeds toredeem all of our Series A preferred stock for approximately $39,789 and torepay approximately $37,370 of borrowings outstanding on the revolving creditfacility under our former credit agreement. In the fourth quarter of our fiscal year 2006, we issued 908,846 shares(including the shares issued upon the partial exercise of the underwriters’over-allotment option) of our common stock at a price to the public of $32.25per share.  We used the net proceeds of$27,341 received from this offering to pay down our borrowings on our formerrevolving credit facility.

*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, we pick, pack and ship products, and then invoice thecustomer for the order. We record sales from “buy/sell” transactions, whichaccount for the majority of our business, as revenue in conformity withaccounting principles generally accepted in the United States. In an agencyrelationship, we generally do not purchase and take inventory of products fromvendors. When we receive an order from a customer, we transmit the order to thevendor, who picks, packs and ships the order to our customer. In some cases,the vendor invoices and collects payment from the customer, while in othercases we invoice and collect payment from the customer on behalf of the vendor.We receive a commission payment for soliciting the order from the customer andfor providing other customer service activities. The aggregate revenue wereceive in agency transactions constitutes the “commissions” line item on ourstatement of income and is recorded in conformity with accounting principlesgenerally accepted in the United States. The vendor determines the method weuse to sell the 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, gross margin, gross margin percentage and operatingincome.

*Vendor Rebates*

Wetypically renegotiate vendor contracts annually.  These vendor contracts may include termsdefining rebates, commissions and exclusivity requirements. Vendor rebatesbased on sales are classified in our accompanying consolidated statements ofincome as a reduction to cost of product sales at the time the salesperformance measures are achieved. Purchase rebates are measured against inventory purchases from thevendors and are a reduction of inventory until the product is sold.  When the inventory is sold, purchase rebatesare recognized as a reduction to cost of product sales.  Many of our vendors’ rebate programs arebased on a calendar year.  Historically,the three months ended December 31 has been our most significant quarter forrecognition of rebates.  During thecalendar year 2006, certain of our vendors modified their rebate programs withus.  These rebate program modificationschanged the revenue growth targets from annual-weighted calendar year targetsto either quarterly or trimester growth targets.  These modifications resulted in rebatespreviously 

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expectedto be earned and recognized in our first 2007 fiscal quarter ended December 31,2006, to be recognized in our fiscal year 2006.

*Northland Veterinary Supply, Ltd. Acquisition*

OnMay 8, 2006, we acquired substantially all of the assets of NorthlandVeterinary Supply, Ltd. (“Northland”) for approximately $4,546, consisting of$3,551 in cash (including direct acquisition costs of approximately $116) and28,744 shares of unregistered restricted common stock valued at the time ofissuance at approximately $995.  Based inClear Lake, Wisconsin, Northland is a distributor of animal health products toveterinary practices and producers across the Midwestern portion of the UnitedStates.

Formore information on our business, see our Annual Report on Form 10-K filed withthe SEC on November 22, 2006.

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**Results of Operations**

The following table summarizes ourresults of operations for the three months ended December 31, 2006 and 2005, indollars and as a percentage of total revenues.
| ** **                                                     | ** ** | **Three Months Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
| Revenues:                                                      |       |                                                    |       |   |   |   |   |   |   |
| Product sales                                                  |       | $                                                       | 149,787    |   | 93.0 | % | $ | 127,048 |   | 92.2 | % |
| Product sales to related party                                 |       | 9,559                                                   |       | 5.9 | % | 9,355 |   | 6.8 | % |
| Commissions                                                    |       | 1,699                                                   |       | 1.1 | % | 1,413 |   | 1.0 | % |
| Total revenues                                                 |       | 161,045                                                 |       | 100 | % | 137,816 |   | 100.0 | % |
|                                                           |       |                                                    |       |   |   |   |   |   |   |
| Cost of product  sales                                         |       | 135,296                                                 |       | 84.0 | % | 115,064 |   | 83.5 | % |
| Gross profit                                                   |       | 25,749                                                  |       | 16.0 | % | 22,752 |   | 16.5 | % |
|                                                           |       |                                                    |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                  |       | 17,694                                                  |       | 11.0 | % | 14,553 |   | 10.6 | % |
| Depreciation and  amortization                                 |       | 569                                                     |       | 0.4 | % | 442 |   | .3 | % |
| Operating income                                               |       | 7,486                                                   |       | 4.7 | % | 7,757 |   | 5.6 | % |
|                                                           |       |                                                    |       |   |   |   |   |   |   |
| Other income  (expense):                                       |       |                                                    |       |   |   |   |   |   |   |
| Interest expense                                               |       | (269                                                    | )          | -0.2 | % | (555 | ) | -0.4 | % |
| Earnings of equity method investees                            |       | 45                                                      |       | — | % | 45 |   | — | % |
| Other                                                          |       | 90                                                      |       | 0.1 | % | 90 |   | 0.1 | % |
| Total other expense, net                                       |       | (134                                                    | )          | -0.1 | % | (420 | ) | -0.3 | % |
|                                                           |       |                                                    |       |   |   |   |   |   |   |
| Income before  taxes                                           |       | 7,352                                                   |       | 4.6 | % | 7,337 |   | 5.3 | % |
| Income tax  expense                                            |       | (2,748                                                  | )          | -1.7 | % | (2,898 | ) | -2.1 | % |
| Net income                                                     |       | $                                                       | 4,604      |   | 2.9 | % | $ | 4,439 |   | 3.2 | % |
|                                                           |       |                                                    |       |   |   |   |   |   |   |
| Earnings per  common share:                                    |       |                                                    |       |   |   |   |   |   |   |
| Basic                                                          |       | $                                                       | 0.40       |   |   |   | $ | 0.42 |   |   |   |
| Diluted                                                        |       | $                                                       | 0.39       |   |   |   | $ | 0.41 |   |   |   |
|                                                           |       |                                                    |       |   |   |   |   |   |   |
| Shares used in  earnings per share calculation (in thousands): |       |                                                    |       |   |   |   |   |   |   |
| Basic                                                          |       | 11,559                                                  |       |   |   | 10,578 |   |   |   |
| Diluted                                                        |       | 11,860                                                  |       |   |   | 10,864 |   |   |   |
|                                                           |       |                                                    |       |   |   |   |   |   |   |
| Other Data:                                                    |       |                                                    |       |   |   |   |   |   |   |
| Product sales from Internet as a percentage of sales           |       | 23                                                      | %          |   |   | 23 | % |   |   |
| Field sales representatives (at end of period)                 |       | 155                                                     |       |   |   | 132 |   |   |   |
| Telesales representatives (at end of period)                   |       | 110                                                     |       |   |   | 95 |   |   |   |
| Fill rate (1)                                                  |       | 98                                                      | %          |   |   | 98 | % |   |   |

 

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

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**Three Months Ended December 31, 2006 Compared to Three MonthsEnded December 31, 2005**

*Total Revenues*. Total revenues increased 16.9% to $161,045 for the three months endedDecember 31, 2006 from $137,816 for the three months ended December 31,2005.  This increase was attributable toan increase in product sales volumes of a wide variety of products to both newand existing customers.  Revenuesattributable to new customers represented approximately 84% of the growth intotal revenues during the three months ended December 31, 2006. Included in thenew customer growth were approximately $2,700 of revenues attributable to newcustomers acquired as a result of the acquisition of Northland that wascompleted on May 8, 2006. Revenues attributable to existing customersrepresented approximately 16% of the growth in total revenues during the threemonths ended December 31, 2006.  For thepurpose of calculating growth rates of new and existing customer revenue, wehave defined a new customer as a customer that did not purchase product from usin the corresponding fiscal quarter of the prior year, with the remainingcustomer base being considered an existing customer.  Also contributing to revenue growth was theincrease in commissions on our agency sales of 20.2% to $1,699 for the threemonths ended December 31, 2006 from $1,413 for the same period of the priorfiscal year.

*Gross Profit*. Gross profit increased by 13.2% to $25,749 for the three months endedDecember 31, 2006 from $22,752 for the three months ended December 31,2005.  This increase in gross profit wasa result of increased total revenues as discussed above as compared to thethree months ended December 31, 2005. Gross profit as a percentage of total revenues decreased approximately0.5% to 16.0% for the three months ended December 31, 2006 from 16.5% for thesame period in the prior year.  Thisdecrease was due to decreased vendor rebates as a percentage of totalrevenues.  Vendor rebates havehistorically been highest during our first fiscal quarter ended December 31,since certain significant vendor rebate programs were designed to includeannual targets to be achieved based on the calendar year.  Vendor modifications to rebate programsduring the calendar year 2006 from annual-weighted calendar year growth targetsto either quarterly or trimester growth targets resulted in a shift of rebatedollars that historically would have been earned in our first quarter of ourfiscal year 2007 ended December 31, 2006 to be earned in our fiscal year2006.  Included in vendor rebates for thefiscal year 2006 were approximately $2,500 ($1,500 after tax) due to this shiftin the timing of rebates.  Actual rebatedollars increased $296 for the three months ended December 31, 2006 as comparedto the same period of the prior fiscal year.

*Selling, General and Administrative (“SG&A”)*.  SG&A increased 21.6% to $17,694 for thethree months ended December 31, 2006 from $14,553 for the three months endedDecember 31, 2005.  This dollar increasewas primarily due to increased compensation costs as a result of additionalheadcount of 134 team members, including 38 new field sales and telesalesrepresentatives.  Employee benefits andworkers’ compensation costs increased as a result of the growth in headcount,as well as higher health insurance costs due to a growth in the volume andmagnitude of individual claims.  Alsocontributing to the growth in SG&A were increased location costs due to newfacilities and sales growth, and higher credit card fees as a result ofcustomer usage.

*Depreciation and Amortization. *Depreciation and amortization expenseincreased 28.3% to $571 for the three months ended December 31, 2006 from $445for the three months ended December 31, 2005. This increase was primarily a result of a distribution center equipmentupgrade at our Denver, Colorado facility in December 2005, the equipmentacquired in the Northland asset acquisition and expansion, and the newdistribution center in Orlando, Florida that opened in June 2006.

*Other Expenses*. Other expenses decreased 68.1% to $134 for the three months ended December31, 2006 from $420 for the three months ended December 31, 2005. This decreasein other expenses was due to a reduction in interest expense of $286 ascompared to the same period in the prior year, primarily as a result of thelower average loan balance on the facility. We used the proceeds from the sale of common stock in our follow-onoffering in the fourth quarter of our fiscal year 2006 to pay down the loanbalance.

*Income Tax Expense*.  Our effective tax rate for the three monthsended December 31, 2006 and 2005 was 37.4% and 39.5%, respectively.   The decrease in the effective rate in thethree months ended December 31, 2006 as compared to the same period in theprior fiscal year was primarily a result of a decrease in our estimated stateincome tax rate due to the utilization of state tax credits.

**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 

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accompanyingcondensed consolidated financial statements are prepared using the samecritical accounting policies discussed in our Annual Report on Form 10-K filedwith the SEC on November 22, 2006.

**Liquidity and Capital Resources**

Our principal sources ofliquidity are cash flow generated from operations and borrowings on therevolving credit facility under the credit agreement. We use capital primarilyto fund day-to-day operations and to maintain sufficient inventory levels inorder to promptly fulfill customer orders and to expand our operations andsales growth.  We believe our capitalresources will be sufficient to meet our anticipated cash needs for at leastthe next twelve months.

MWI SupplyCo., (our wholly-owned subsidiary) has a line-of-credit under a revolvingcredit facility with two lenders.  Thefacility allows for borrowings in the aggregate of $70,000, with the right toincrease the commitment of the lenders to $100,000.  The facility has a maturity date of December1, 2011 and a variable interest rate equal to the Daily LIBOR Floating Rate orthe LIBOR 1-month fixed rate (at our option) plus a margin ranging from 0.7% to1.25%.  The lenders also receive anunused line fee and letter of credit fee equal to 0.125% of the unused amountof the facility. Our outstanding balance on the facility at December 31, 2006was $1,880 and the interest rate on the facility was 5.99% as of thisdate.  The line-of-credit containscertain financial covenants as well as other restrictive covenants.

Thefacility allows for the issuance of up to $10,000 in letters of credit. Theletters of credit typically act as a guarantee of payment to certain thirdparties in accordance with specified terms and conditions. We had twelveletters of credit totaling $880 at December 31, 2006 and eleven letters ofcredit totaling $780 at September 30, 2006. There were no outstandingborrowings on these letters of credit at either December 31, 2006 or September30, 2006.

*Operating Activities*.  For the three months ended December 31, 2006,cash provided by operations was $9,598 and was primarily attributable to netincome of $4,604, a decrease in receivables of $9,744 from the prior year-endand an increase in accounts payable of $6,844, the combined effects of whichwere partially offset by an increase in inventories of $13,546.  The increase in inventories is directly tiedto inventory planning and the timing of manufacturer price increases.  The decrease in receivables is the result ofcollection of customer accounts that were offered extended payment terms. Theincrease in accounts payable was a result of timing of inventory purchases.

For thethree months ended December 31, 2005, cash used in operations was $1,471 and wasprimarily attributable to a decrease in accounts payable of $5,078 and anincrease in inventories of $3,171.  Thedecrease in accounts payable was primarily due to timing of inventory purchasesand associated payments.

*Investing Activities.*  For the three months ended December 31, 2006,net cash used in investing activities was $947 and was primarily due to thepurchase of property and equipment related to the relocation of our existingdistribution center to a larger distribution center in Atlanta, Georgia.

For thethree months ended December 31, 2005, net cash used in investing activities was$1,177 and was primarily due to capital expenditures related to relocating ourexisting distribution center to a new larger distribution center in Denver,Colorado.

*Financing Activities.*  Forthe three months ended December 31, 2006, net cash used in financing activitieswas $8,651, and was primarily attributable to payments on our former revolvingcredit facility.  Our new revolvingcredit facility is used to finance our working capital requirements andfluctuates based on timing of payables and collection of receivables.

For the three months ended December 31, 2005, netcash provided in financing activities was $2,647 and was primarily attributableto borrowings made on our former revolving credit facility.

**Contractual Obligations andGuarantees**

For information on our contractualobligations and guarantees, see our Annual Report on Form 10-K filed onNovember 22, 2006 with the SEC. During the three months ended December 31, 2006we entered into the following leasing arrangements:

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·                  InNovember 2006, we leased approximately 16,000 square feet of additionaldistribution center space located in Denver, Colorado with an incrementalaverage annual lease of $72 per year and expiring in 2013.

·                  Alsoin November 2006, we renewed one lease agreement and entered into a secondlease agreement for a combined 19,500 square foot distribution center locatedin Glendale, Arizona.  The lease expenseaverages $115 per year and the leases expire in 2009.

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

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

Theinterest payable on the facility is based on variable interest rates and istherefore affected by changes in market interest rates. If the interest rate onthe variable rate indebtedness rose 60 basis points (a 10.0% change from theinterest rate as of December 31, 2006), assuming no change in the outstandingbalance on the facility ($1,880 as of December 31, 2006), the annualized incomebefore taxes and cash flows from operating activities would decline byapproximately $11. If the interest rate on the variable rate indebtednessdecreased 60 basis points (a 10.0% change from the interest rate as of December31, 2006), assuming no change in the outstanding balance on the facility, theannualized income before taxes and cash flows from operating activities wouldincrease by approximately $11.

**Item4.  Controls and Procedures**

Managementof the Company, including the Chief Executive Officer and the Chief FinancialOfficer of the Company, have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act of 1934) as of December 31, 2006.  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, are effective to provide reasonable assurance that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified by the SEC’s rules and forms.

There were nochanges 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.

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**PART II. OTHER INFORMATION**

**Cautionary Statement for Purposesof “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of1995**

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

*Forward-looking statements 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:*

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

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

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

·                  *seasonality;*

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

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

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

·                  *competition.*

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

## **Item1.  Legal Proceedings**

## We are notcurrently a party to any material pending legal proceedings and are not awareof any claims that could have a materially adverse effect on our financialposition, results of operations or cash flows.

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## **Item1A.  Risk Factors.**

**There have been no materialchanges from our risk factors as previously reported in our Annual Report onForm 10-K for the year ended September 30, 2006*.***

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

## None.

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

None.

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

None.

## **Item5.  Other Information**

None.

**Item 6.  Exhibits**

| 10.1   |   | Agreement for Logistics  Services effective as of December 1, 2006 by and between MWI Veterinary  Supply Co. and Medical Management International, dba Banfield, The Pet  Hospital †                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                               |
| 10.2   |   | Agreement for Product Purchases effective as of  December 1, 2006 by and between MWI Veterinary Supply Co. and Medical  Management International, dba Banfield, The Pet Hospital †                                            |
|   |   |                                                                                                                                                                                                                               |
| 10.3   |   | 2007 – 2008 Merial Independent Sales Agent Agreement  effective as of December 1, 2006 by and between Merial Limited and MWI  Veterinary Supply Co.                                                                           |
|   |   |                                                                                                                                                                                                                               |
| 10.4   |   | Credit Agreement dated December 13, 2006 among MWI  Veterinary Supply Co., as borrower, MWI Veterinary Supply, Inc. and Memorial  Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank,  N.A., as lenders |
|   |   |                                                                                                                                                                                                                               |
| 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 confidential treatment request submitted to the SEC. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|

 

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SIGNATURE

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
|                         |     | MWI Veterinary  Supply, Inc.                                                     |     |
|-------------------------|----------|----------------------------------------------------------------------------------|----------|
|                    |     | (Registrant)                                                                     |     |
|                    |     |                                                                             |     |
|                    |     |                                                                             |     |
| Date: February  5, 2007 |     | /s/ Mary Patricia B. Thompson                                                    |     |
|                    |     | Mary Patricia B. Thompson                                                        |     |
|                    | * * | *Senior  Vice President of Finance and  Administration, Chief Financial Officer* | * * |

 

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