MWI Veterinary Supply, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - MWI Veterinary Supply, Inc.	Financial_Report.xls
EX-15 - EXHIBIT 15 - MWI Veterinary Supply, Inc.	exhibit15.htm
EX-32 - EXHIBIT 32 - MWI Veterinary Supply, Inc.	exhibit32.htm
EX-31.1 - EXHIBIT 31.1 - MWI Veterinary Supply, Inc.	exhibit31_1.htm
EX-31.2 - EXHIBIT 31.2 - MWI Veterinary Supply, Inc.	exhibit31_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2011

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

For the transition period from to

Commission File Number: 000-51468

MWI VETERINARY SUPPLY, INC.

(Exact name of registrant as specified in its Charter)

Delaware		02-0620757
(State of Incorporation)		(I.R.S. Employer Identification Number)

3041 W. Pasadena Dr.
Boise, ID		83705
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 27, 2012 was 12,719,862.

MWI VETERINARY SUPPLY, INC.

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income for the three months ended December 31, 2011 and 2010	3

	Condensed Consolidated Balance Sheets as of December 31, 2011 and September 30, 2011	4

	Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2011 and 2010	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	21

Item 4.	Controls and Procedures	21

PART II.	OTHER INFORMATION

	Cautionary Statement	21

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Removed and Reserved	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

		PART I. FINANCIAL INFORMATION

		Item 1. Financial Statements

		MWI VETERINARY SUPPLY, INC.
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		Dollars and shares in thousands, except per share data
		(unaudited)

			Three months ended December 31,
			2011		2010
Revenues:
	Product sales		$	442,597	$	347,737
	Product sales to related party			15,558		14,723
	Commissions			3,746		3,714
		Total revenues		461,901		366,174
Cost of product sales				399,387		316,102
Gross profit				62,514		50,072

Selling, general and administrative expenses				38,907		31,047
Depreciation and amortization				2,192		1,489
Operating income				21,415		17,536

Other income (expense):
	Interest expense			(183)		(182)
	Earnings of equity method investees			77		73
	Other			188		135
		Total other income (expense), net		82		26

Income before taxes				21,497		17,562
Income tax expense				(8,301)		(6,734)
Net income			$	13,196	$	10,828

Earnings per common share:
	Basic		$	1.05	$	0.87
	Diluted		$	1.05	$	0.87

Weighted average common shares outstanding:
	Basic			12,581		12,415
	Diluted			12,605		12,483


See Notes to Condensed Consolidated Financial Statements.

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

			December 31,		September 30,
			2011		2011
Assets

Current Assets:
	Cash and cash equivalents		$	551	$	606
	Receivables, net			237,880		215,861
	Inventories			235,167		170,065
	Prepaid expenses and other current assets			6,133		10,079
	Deferred income taxes			1,700		1,672
		Total current assets		481,431		398,283

Property and equipment, net				34,838		25,209
Goodwill				54,792		49,041
Intangibles, net				45,236		24,894
Other assets, net				7,149		6,792
Total assets			$	623,446	$	504,219

Liabilities And Stockholders’ Equity

Current Liabilities:
	Credit facilities		$	51,563	$	2,907
	Accounts payable			230,139		182,594
	Accrued expenses and other current liabilities			18,339		16,385
	Current portion of capital lease obligations			898		909
		Total current liabilities		300,939		202,795

Deferred income taxes				6,442		5,989

Long-term capital lease obligations				351		354

Other long-term liabilities				2,529		2,271

Commitments and contingencies (see Note 14)

Stockholders’ Equity
	Common stock $0.01 par value, 40,000 authorized; 12,720 and
		12,618 shares issued and outstanding, respectively		127		126
	Additional paid in capital			141,562		133,759
	Retained earnings			172,684		159,488
	Accumulated other comprehensive income			(1,188)		(563)
		Total stockholders’ equity		313,185		292,810
Total liabilities and stockholders’ equity			$	623,446	$	504,219

See Notes to Condensed Consolidated Financial Statements.

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

					Three months ended December 31,
					2011		2010
Cash Flows From Operating Activities:
	Net income				$	13,196	$	10,828
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				2,196		1,492
		Amortization of debt issuance costs				12		17
		Stock-based compensation				376		21
		Deferred income taxes				460		265
		Earnings of equity method investees				(77)		(73)
		Loss on disposal of property and equipment				23		-
		Excess tax benefit of exercise of common stock options				(119)		(1,389)
		Other				(41)		-
		Changes in operating assets and liabilities (net of effects of business acquisitions):
			Receivables			308		4,069
			Inventories			(37,182)		(3,384)
			Prepaid expenses and other current assets			4,053		3,767
			Accounts payable			22,800		(24,022)
			Accrued expenses and other current liabilities			1,272		2,512
				Net cash provided by/(used in)operating activities		7,277		(5,897)

Cash Flows From Investing Activities:
		Business acquisitions, net of cash acquired				(53,720)		-
		Purchases of property and equipment				(1,823)		(7,022)
		Other investments				(444)		60
				Net cash used in investing activities		(55,987)		(6,962)

Cash Flows From Financing Activities:
		Borrowings on credit facilities				123,213		86,329
		Payments on credit facilities				(74,498)		(74,141)
		Proceeds from issuance of common stock				139		101
		Proceeds from exercise of stock options				7		41
		Excess tax benefit of exercise of common stock options				119		1,389
		Debt issuance costs				(111)		-
		Payment on capital lease obligations				(142)		(912)
				Net cash provided by financing activities		48,727		12,807

Effect of Exchange Rate on Cash and Cash Equivalents						(72)		(6)

Decrease in Cash and Cash Equivalents						(55)		(58)

Cash and Cash Equivalents at Beginning of Period						606		911

Cash and Cash Equivalents at End of Period					$	551	$	853

See Notes to Condensed Consolidated Financial Statements.

MWI VETERINARY SUPPLY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dollars and sterling pounds in thousands, except share and per share data

(unaudited)

NOTE 1 — GENERAL

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of MWI Veterinary Supply, Inc. and its wholly-owned subsidiaries (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q). All intercompany balances have been eliminated.

In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly, in all material respects, our results for the periods presented. These condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K filed with the SEC on November 28, 2011. The results of operations for the three months ended months ended December 31, 2011 are not necessarily indicative of results to be expected for the entire fiscal year.

Our unaudited condensed consolidated balance sheet as of September 30, 2011 has been derived from the audited consolidated balance sheet as of that date.

Use of Estimates

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

Revenue Recognition

We sell products we source from vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from the vendor. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We recognize revenue from “buy/sell” transactions as product sales when the product is delivered to the customer. We accept product returns from our customers. We estimate returns based on historical experience and recognize these estimated returns as a reduction of product sales. Product returns have historically not been significant to our financial statements. We record revenues net of sales tax. In an agency relationship, we generally do not purchase and take inventory of products from vendors. We receive an order from a customer, then transmit the order to the vendor, who picks, packs and ships the order to the customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. Commissions are recognized when the services upon which the commissions are based are complete. Gross billings from agency contracts were $68,031 and $70,565 for the three months ended December 31, 2011 and 2010, respectively, and generated commission revenue of $3,746 and $3,714, respectively.

Customer incentives are accrued based on the terms of the contracts with each customer. These incentive programs provide that the customer receive an incentive based on their product purchases or attainment of performance goals. Incentives are estimated based on the specific terms in each agreement, historical experience and product growth rates. Incentives are recognized as a reduction to product sales.

Cost of Product Sales and Vendor Rebates

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

Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our estimates in the future will continue to be reasonable as our rebates are based on specific vendor program goals and are principally recorded upon achievement of sales or purchase performance measures. Vendors may change or eliminate rebate programs from year to year.

NOTE 2 — EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between generally accepted accounting principles in the United States and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. The guidance is effective for our fiscal year beginning October 1, 2012. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In June 2011, the FASB issued guidance on the presentation of comprehensive income in an entity's financial statements. The guidance requires that comprehensive income be presented either in one continuous statement or in two separate but consecutive statements presenting the components of net income and its total, the components of other comprehensive income and its total, and total comprehensive income. The guidance also requires that reclassification adjustments from other comprehensive income to net income be presented in both the components of net income and the components of other comprehensive income. The guidance is effective for our fiscal year beginning October 1, 2012. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

NOTE 3 — BUSINESS ACQUISITIONS

On March 21, 2011, MWI Veterinary Supply Co. (“MWI Co.”) purchased substantially all of the assets of Nelson Laboratories Limited Partnership (“Nelson”) for $7,000 in cash. Nelson was a distributor of animal health products to over 1,100 veterinary practices, primarily in the Midwestern United States. This acquisition allows us to better serve our customers in this region of the United States. An intangible asset representing customer relationships acquired in the acquisition has an estimated useful life of 10 years. The amount recorded in goodwill is expected to be deductible for tax purposes over 15 years.

On October 31, 2011, MWI Co. purchased substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”) for $60,880, including $53,400 in cash and 94,359 shares of common stock valued at $7,158, which is the fair value as of the date of acquisition and an estimated working capital adjustment of $322. The purchase price remains subject to a post-closing working capital and debt adjustment. Micro was a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies, and other animal health products. Micro also was a leading innovator of proprietary, computerized management systems for the production animal market. The intangible assets acquired in the acquisition include customer relationships, covenant not to compete, technology and trade name. The useful life of the amortizing intangible assets ranges from 5 years to 17 years. Trade name is a non-amortizing intangible asset. The amount recorded in goodwill is expected to be deductible for tax purposes over 15 years.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition, which may be adjusted during the allocation period as defined in Accounting Standards Codification (“ASC”) 280. These purchase price allocations are based on a combination of valuations and analyses.


	2012		2011
Cash	$	2	$	-
Receivables		22,680		4,041
Inventories		28,203		3,594
Other current assets		104		-
Property and equipment		9,102		1,900
Goodwill		5,856		1,823
Intangibles		20,910		140
Investments		199		-
Total assets acquired		87,056		11,498

Accounts payable		24,976		4,498
Accrued expenses and other liabilities		1,200		-
Total liabilities assumed		26,176		4,498

Net assets acquired	$	60,880	$	7,000

The following table presents information for Micro that is included in our consolidated statements of income from the acquisition date of October 31, 2011 through the end of the quarter ended December 31, 2011:


	Micro's operations included in MWI's results
Revenues		$	46,161
Net Income		$	1,223

The following table presents supplemental pro forma information as if the acquisition of Micro had occurred on October 1, 2011 for the three months ended December 31, 2011 and on October 1, 2010 for the three months ended December 31, 2010 (unaudited):


	Unaudited Pro Forma Consolidated Results
	Three months ended December 31,
			2011		2010
Revenues		$	483,831	$	426,417
Net Income		$	13,290	$	12,090

The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition on October 1, 2011 or 2010. Additionally, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.

NOTE 4 — RECEIVABLES


	December 31,		September 30,
	2011		2011
Trade	$	217,132	$	203,038
Vendor rebates and programs		23,370		15,404
		240,502		218,442
Allowance for doubtful accounts		(2,622)		(2,581)
	$	237,880	$	215,861

Product sales resulting from transactions with Banfield, The Pet Hospital (“Banfield”) were approximately 6% of total product sales during the three months ended December 31, 2011 and 2010, respectively. Approximately 7% and 8% of our trade receivables resulted from transactions with Banfield as of December 31, 2011 and September 30, 2011, respectively.

NOTE 5 — PROPERTY AND EQUIPMENT


	December 31,		September 30,
	2011		2011
Land	$	1,754	$	1,723
Building and leasehold improvements		14,071		13,427
Machinery, furniture and equipment		31,296		20,979
Computer equipment		6,082		5,864
Construction in progress		1,480		2,203
		54,683		44,196
Accumulated depreciation		(19,845)		(18,987)
	$	34,838	$	25,209

Depreciation expense was $1,458 and $1,085 for the three months ended December 31, 2011 and 2010, respectively.

NOTE 6 — GOODWILL AND INTANGIBLES

The changes in the carrying value of goodwill are as follows:


Goodwill as of September 30, 2011		$	49,041
	Acquisition activity		5,856
	Foreign currency adjustments		(105)
Goodwill as of December 31, 2011		$	54,792

Balances of intangibles are as follows:


		December 31,		September 30,
	Useful Lives	2011		2011
Amortizing:
Customer relationships	9-20 years	$	26,978	$	24,981
Covenants not to compete	1-5 years		1,096		808
Technology	11 years		11,930		-
Other	2-7 years		1,056		455
			41,060		26,244
Accumulated amortization			(5,827)		(5,109)
			35,233		21,135
Non-Amortizing:
Trade names and patents			10,003		3,759
		$	45,236	$	24,894

Amortization expense was $738 and $407 for the three months ended December 31, 2011 and 2010, respectively. Estimated future annual amortization expense related to intangible assets as of December 31, 2011 is as follows:


	Amount
Remainder of 2012	$	2,226
2013		3,018
2014		2,845
2015		2,569
2016		2,472
Thereafter		22,103
	$	35,233

The above projection of amortization expense includes preliminary estimates of intangible assets and lives associated with the acquisition of Micro. These amounts may be adjusted during the allocation period as defined in ASC 805.

NOTE 7 — DEBT

The following table presents the outstanding debt and capital lease obligations as of December 31, 2011 and September 30, 2011:


		December 31,		September 30,
			2011		2011
Revolving credit facility, 1.10% interest as of December 31, 2011		$	45,400	$	-
Sterling revolving credit facility, 1.76% interest as of December 31, 2011			6,163		2,907
Capital lease obligations (1)			1,249		1,263
Total debt and capital lease obligations			52,812		4,170
	Less: Long-term capital lease obligations		(351)		(354)
Total debt included in current liabilities		$	52,461	$	3,816

(1) The capital lease obligations have varying maturity dates.

Revolving Credit Facility — On November 1, 2011, MWI Co. as borrower, entered into a Third Amendment to Credit Agreement (the “Third Amendment”) with 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 (collectively, the “Lenders”), amending the Credit Agreement dated December 13, 2006, and as amended from time to time, by and among Supply Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the “Credit Agreement”). The Third Amendment increased the aggregate revolving commitment of the Lenders under the Credit Agreement from $100,000 to $150,000 and extended the maturity date of the Credit Agreement from March 1, 2013 to November 1, 2016. Under the Third Amendment, the margin on variable interest rate borrowings now ranges from 0.95% to 1.50%. The margin previously ranged from 1.50% to 2.25% under the Second Amendment. The Third Amendment also reduced the commitment fee from a range of 0.2% to 0.35% to a range of 0.15% to 0.25% depending on the funded debt to EBITDA ratio. The Credit Agreement contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA ratio. We were in compliance with all of the covenants as of December 31, 2011 and September 30, 2011.

Sterling revolving credit facility— On November 5, 2010, Centaur Services Limited (“Centaur”) entered into a £12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”). The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable one month, three month or six month interest period. Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%. The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000. As of December 31, 2011 and September 30, 2011, Centaur was in compliance with the covenant.

NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS

Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and disclosures. This hierarchy prioritizes inputs to valuation techniques based on observable and unobservable data. The guidance categorizes these inputs used in measuring fair value into three levels which include the following:

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

Level 2 – inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and

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

As of December 31, 2011 and September 30, 2011, financial instruments include cash and cash equivalents, receivables and accounts payable, and the fair values approximate book values due to their short maturities.

In November 2011, we amended our revolving credit facility in the United States and in November 2010, we amended our sterling revolving credit facility in the United Kingdom. Because these amendments were done relatively recently and include interest rates based on current market conditions, we believe that the estimated fair value of our debt was materially the same as our carrying value.

NOTE 9 — COMMON STOCK AND STOCK-BASED AWARDS

2002 Stock Plan

We have a 2002 Stock Plan (the “2002 Plan”) to provide our directors, executives and other key employees with additional incentives by allowing them to acquire an ownership interest in us and, as a result, encouraging them to contribute to our success. As of December 31, 2011 and September 30, 2011, we had 64,032 and 67,032 shares, respectively, of our common stock available for issuance under the 2002 Plan. The options granted under the 2002 Plan are nonqualified stock options that have an exercise price per share equal to fair market value of the common stock at the time of grant. The term of each option is determined by our board of directors or by a designated committee of the board. The term of any option may not exceed ten years from the date of grant. As of December 31, 2011, 3,592 options to purchase common stock were outstanding with a weighted average exercise price of $0.18 per share and expiring through June 2012.

2005 Stock Plan

We have a 2005 Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”), under which we may offer restricted and unrestricted shares of our common stock and grant options to purchase shares of our common stock to selected employees and non-employee directors. The purpose of the 2005 Plan is to promote our long-term financial success by attracting, retaining and rewarding eligible participants. As of December 31, 2011 and September 30, 2011, we had 929,707 and 932,438 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of December 31, 2011, 30,361 options to purchase common stock were outstanding with a weighted average exercise price of $17.85 per share and expiring through September 2015.

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

We did not grant common stock options during each of the three months ended December 31, 2011 and 2010. During the three months ended December 31, 2011 and 2010, we issued 3,500 and 300 shares of restricted stock under the 2005 Plan. During the three months ended December 31, 2011 and 2010, we recognized $432 and $247 of compensation expense related to stock grants, respectively.

We also have an employee stock purchase plan (“ESPP”) that allows substantially all employees to purchase shares of our common stock at 95% of the fair market value on the date of purchase. The purchase date is the last trading date of the purchase periods, which begin in March, June, September and December. Employees accumulate amounts through payroll deductions during the purchase period of between 1% and 10% but no more than $20 annually. An employee is allowed to purchase a maximum of 200 shares per purchase period. During the three months ended December 31, 2011 and 2010, we issued 2,113 and 1,734 shares, respectively, of our common stock under the ESPP.

NOTE 10 — INCOME TAXES

Our effective tax rate for each of the three months ended December 31, 2011 and 2010 was 38.6% and 38.3%, respectively. The increase in the effective tax rate is primarily attributable to greater domestic pre-tax income.

As of December 31, 2011, we had $23 of unrecognized tax benefits, of which $15 would impact our effective rate if recognized. Our policy for classifying interest and penalties associated with unrecognized tax benefits is to include such items in income tax expense. The amount of interest and penalties recognized during the three months ended December 31, 2011 and 2010 was not material.

With few exceptions, we are no longer subject to income tax examination for years before 2007 in the U.S. and significant state and local jurisdictions. We are no longer subject to income tax examination for years before 2009 in significant foreign jurisdictions.

NOTE 11 — COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data)


		Three months ended December 31,
		2011				2010
		Basic		Diluted		Basic		Diluted
Net income		$	13,196	$	13,196	$	10,828	$	10,828

Weighted average common shares outstanding			12,581		12,581		12,415		12,415
Effect of diluted securities
	Stock options and restricted stock				24				68

Weighted average diluted shares outstanding					12,605				12,483
Earnings per share		$	1.05	$	1.05	$	0.87	$	0.87

Anti-dilutive shares excluded from calculation					-				-

NOTE 12 — RELATED PARTIES

MWI Co. holds a 50.0% membership interest in Feeders’ Advantage LLC (“Feeders’ Advantage”). MWI Co. charged Feeders’ Advantage for certain operating and administrative services in the amounts of $263 and $241 for the three months ended December 31, 2011 and 2010, respectively. Sales of products to Feeders’ Advantage were $15,558 and $14,723, which represented 3% and 4% of total product sales for each of the three months ended December 31, 2011 and 2010, respectively.

MWI Co. provides Feeders’ Advantage with a line-of-credit to finance its day-to-day operations. This line-of-credit bears interest at the prime rate. The interest due on the line-of-credit is calculated and charged to Feeders’ Advantage on the last day of each month. Conversely, to the extent MWI Co. has a payable balance due to Feeders’ Advantage, the payable balance accrues interest in favor of Feeders’ Advantage at the average federal funds rates in effect for that month. MWI Co. had a payable balance to Feeders’ Advantage of $1,141 as of December 31, 2011 and a receivable balance from Feeders’ Advantage of $756 as of September 30, 2011.

NOTE 13 — STATEMENTS OF CASH FLOWS – SUPPLEMENTAL AND NON-CASH DISCLOSURES


	Three months ended December 31,
	2011		2010
Supplemental Disclosures
Cash paid for interest	$	142	$	120
Cash paid for income taxes		822		1,380
Non-cash Activities
Issuance of restricted common stock for asset acquisition		7,158		-
Capital lease asset additions and related obligations		140		-
Equipment acquisitions financed with accounts payable		235		92

NOTE 14 — COMMITMENTS AND CONTINGENCIES

From time to time, in the normal course of business, we may become a party to legal proceedings that may have an adverse effect on our financial position, results of operations and cash flows. At December 31, 2011, we were not a party to any material pending legal proceedings and were not aware of any claims that could have a material adverse effect on our financial position, results of operations or cash flows.

NOTE 15 — OTHER COMPREHENSIVE INCOME

The components of comprehensive income were as follows:


			Three months ended December 31,
			2011		2010
Net income			$	13,196	$	10,828
Other comprehensive income (loss):
	Foreign currency translation			(625)		(1,048)
		Total comprehensive income	$	12,571	$	9,780

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

MWI Veterinary Supply, Inc.

Boise, Idaho

We have reviewed the accompanying condensed consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries (the "Corporation") as of December 31, 2011, and the related condensed consolidated statements of income and of cash flows for the three-month periods ended December 31, 2011 and 2010. These interim financial statements are the responsibility of the Corporation’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries as of September 30, 2011, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated November 28, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Boise, Idaho

February 2, 2012

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

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

Overview

We are a leading distributor of animal health products to veterinarians in the United States and the United Kingdom. We sell our products to veterinarians in both the companion and production animal markets. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions. On October 31, 2011, we acquired substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”), which was a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies, and other animal health products. Micro was also a leading innovator of proprietary, computerized management systems for the production animal market. On March 21, 2011, we acquired substantially all of the assets of Nelson Laboratories Limited Partnership (“Nelson”), which was a distributor of animal health products to veterinarians in the midwestern United States. We operate under a single reporting segment.

Historically, we estimate that approximately two-thirds of our total revenues have been generated from sales to the companion animal market and one-third from sales to the production animal market. While we expect that the majority of our business will continue to be generated from the companion animal market, we expect that the product mix will shift to an increasing amount of our revenues being generated from sales to the production animal market as a result of the Micro acquisition. The state of the overall economy in both the United States and United Kingdom and consumer spending have impacted both the companion animal and production animal markets, with tightening credit markets, volatile commodity prices in milk, grain, corn and feeder cattle, and changes in weather patterns (e.g. droughts or seasons of higher precipitation) also affecting demand in the production animal market. Both the companion animal and production animal markets have been integral to our financial results and we intend to continue supporting both markets.

Industry

We believe that the growth in the companion animal market in both the United States and United Kingdom has slowed as a result of a decrease in consumer spending. Historically, growth in the companion animal market has been due to the increasing number of households with companion animals, increased expenditures on animal health and preventative care, an aging pet population, advancements in pharmaceuticals and diagnostic testing and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. While the average order size for companion animal health products is often smaller than production animal health products, companion animal health products typically have higher margins. We intend to continue to penetrate this market through internal growth initiatives and selective acquisitions. We believe that some of our customers in this market have experienced liquidity issues as a result of the tightening credit markets.

Product sales in the production animal market in both the United States and United Kingdom are impacted by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze) and changes in the general economy. Milk price declines in the dairy market have a significant impact on dairy farmers. This creates cash-flow challenges for these farmers and in turn, could impact the time it takes for us to collect our outstanding accounts receivable from these customers as well as affect the overall collectability of these accounts. However, we still believe that it is important to our business to service this market and we intend to continue to support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.

Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by the marketing programs or price increase announcements of vendors and distributors, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made.

Sales

We sell products that we source from our vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from our vendors. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We record sales from “buy/sell” transactions, which account for the vast majority of our business, as revenues in conformity with generally accepted accounting principles in the United States. In an agency relationship, we generally do not purchase and take inventory of products from our vendors. When we receive an order from our customer, we transmit the order to our vendor, who picks, packs and ships the order to our customer. In some cases, our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer on behalf of our vendor. We receive a commission payment for soliciting the order from our customer and for providing other customer service activities. The aggregate revenues we receive in agency transactions constitute the “commissions” line item on our consolidated statements of income and are recorded in conformity with accounting principles generally accepted in the United States. Our vendors determine the method we use to sell our products. Historically, vendors have occasionally switched between the “buy/sell” and agency models for particular products in response to market conditions related to that particular product. A switch between models can impact our revenues and our operating income. We cannot know in advance when a vendor will switch between the “buy/sell” and agency models or what impact, if any, such a change may have. A switch can occur even with vendors with whom we have written agreements, because most of our agreements with vendors have relatively short terms and are terminable with or without cause on short notice, normally 30 to 90 days. The impact of any individual change from a “buy/sell” to an agency model depends on the costs and expenses associated with a particular product, and can have either a positive or a negative effect on our profitability.

We typically renegotiate vendor contracts annually. These vendor contracts may include terms defining margins, rebates, commissions, exclusivity requirements and the manner in which we go to market. For example, vendors could require us to distribute their products on an exclusive basis, which could cause us to forego distributing competing products which may also be profitable. Conversely, competitors could obtain exclusive rights to market particular products, which we would be unable to market. If we lose the right to distribute products under such exclusive agreements, we may lose access to certain products and lose a competitive advantage. Exclusivity agreements could allow potential competitors to sell products that we cannot offer and erode our market share. In addition, vendors have the ability to expand the distributors that they use which could have a material adverse effect on our business.

Some of our current and future vendors may decide to compete with us in the future by pursuing or increasing their efforts in direct marketing and sales of their products. These vendors could sell their products at lower prices and maintain a higher gross margin on their product sales than we can. In this event, veterinarians or animal owners may elect to purchase animal health products directly from these vendors. As an example of this type of event, we were a sales agent for a pet food line for most of fiscal year 2011 that we will not represent in fiscal year 2012 because that manufacturer chose to sell their products direct and not through sales agents.

Many of our vendors’ rebate programs are based on a calendar year. Historically, the three months ended December 31 has been our most significant quarter for recognition of rebates. This trend has slowed some in recent years due to certain changes in vendor contracts but it still remains our largest quarter for vendor rebates. Vendor rebates based on sales are classified in our accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales.

Vendor Consolidation

In the United States, our top ten vendors supplied products that accounted for approximately 72% and 71% of our revenues for the three months ended December 31, 2011 and 2010, respectively, and 71% of our revenues for the fiscal year ended September 30, 2011. Pfizer supplied products that accounted for approximately 24% and 26% of our revenues during the three months ended December 31, 2011 and 2010, respectively, and 24% of our revenues for our fiscal year ended September 30, 2011. Of the Pfizer supplied products, production animal products under a livestock agreement accounted for approximately 14% of our revenues during each of the three months ended December 31, 2011 and 2010, respectively, and approximately 13% of our revenues for our fiscal year ended September 30, 2011. Merck (formerly known as Intervet/Schering-Plough) supplied products that accounted for approximately 14% and 11% of our revenues during the three months ended December 31, 2011 and 2010, respectively, and 11% of our revenues for our fiscal year ended September 30, 2011. No other vendor accounts for more than 10% of our revenues in the United States. Merial, a subsidiary of Sanofi-Aventis, supplies the majority of their products to us under an agency relationship. Commission revenue generated from Merial products accounted for approximately 33% and 27% of total commission revenues during the three months ended December 31, 2011 and 2010, respectively, and 47% of total commission revenues for our fiscal year ended September 30, 2011.

For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 28, 2011.

Results of Operations

The following table summarizes our results of operations for the three months ended December 31, 2011 and 2010, in dollars and as a percentage of total revenues.

			Three months ended December 31,
			2011		%		2010		%
Revenues:
	Product sales		$	442,597	95.8	%	$	347,737	95.0	%
	Product sales to related party			15,558	3.4	%		14,723	4.0	%
	Commissions			3,745	0.8	%		3,714	1.0	%
		Total revenues		461,901	100.0	%		366,174	100.0	%

Cost of product sales				399,387	86.5	%		316,102	86.3	%
Gross profit				62,514	13.5	%		50,072	13.7	%

Selling, general and administrative expenses				38,907	8.4	%		31,047	8.5	%
Depreciation and amortization				2,192	0.5	%		1,489	0.4	%
Operating income				21,415	4.6	%		17,536	4.8	%

Other income (expense):
	Interest expense			(183)	-	%		(182)	-	%
	Earnings of equity method investees			77	-	%		73	-	%
	Other			188	-	%		135	-	%
		Total other income (expense), net		82	-	%		26	-	%

Income before taxes				21,497	4.6	%		17,562	4.8	%
Income tax expense				(8,301)	(1.8)	%		(6,734)	(1.8)	%
Net income			$	13,196	2.8	%	$	10,828	3.0	%

Earnings per common share:
	Basic		$	1.05			$	0.87
	Diluted		$	1.05			$	0.87

Weighted average common shares outstanding (in thousands):
	Basic			12,581				12,415
	Diluted			12,605				12,483

Three Months Ended December 31, 2011 Compared to Three Months Ended December 31, 2010

Total Revenues. Total revenues increased 26.1% to $461,901 for the three months ended December 31, 2011, from $366,174 for the three months ended December 31, 2010. Excluding the acquisition of the assets of Micro, revenue growth in the United States was 14.1% for the quarter ended December 31, 2011, compared to the same period in the prior fiscal year. Revenues from Micro, which was acquired on October 31, 2011, were $46,161 for the quarter ended December 31, 2011. Revenue growth in the United Kingdom was 11.0% for the quarter ended December 31, 2011, compared to the same period in the prior fiscal year, consisting of 11.7% organic growth offset by a decline of 0.7% related to foreign currency exchange. Excluding the revenues from Micro, revenues in the United States attributable to existing customers represented approximately 56% of the growth in revenues and revenues attributable to new customers represented approximately 44% of the growth in revenues during the three months ended December 31, 2011. For the purpose of calculating growth rates of new and existing customer revenue, we have defined a new customer as a customer that did not purchase product from us in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered existing customers. Revenues from new customers for each fiscal quarter are summed to arrive at the estimated year-to-date revenue for new customers.

Product sales to related party increased by 5.7% to $15,558 for the three months ended December 31, 2011, from $14,723 for the three months ended December 31, 2010. Commissions were $3,746 for the three months ended December 31, 2011, consistent with $3,714 for the three months ended December 31, 2010. Commissions were negatively impacted by the loss of a pet food line that we represented for most of fiscal year 2011 that we will not represent in fiscal year 2012, partially offset by growth in other agency products that we represent.

Gross Profit. Gross profit increased by 24.8% to $62,514 for the three months ended December 31, 2011, from $50,072 for the three months ended December 31, 2010. The change in gross profit is primarily a result of increased total revenues as discussed above. Gross profit as a percentage of total revenues was 13.5% and 13.7% for the three months ended December 31, 2011 and 2010, respectively. Vendor rebates for the three months ended December 31, 2011 increased by approximately $535 compared to the three months ended December 31, 2010.

Selling, General and Administrative (“SG&A”). SG&A expenses increased 25.3% to $38,907 for the three months ended December 31, 2011, from $31,047 for the three months ended December 31, 2010. The increase in SG&A expenses was primarily due to the addition of Micro and compensation costs from increased headcount to support the revenue growth. Included in the increase in SG&A expenses for the quarter ended December 31, 2011 are direct acquisition-related and integration expenses of $235 related to the Micro acquisition. SG&A expenses as a percentage of total revenues were 8.4% for the three months ended December 31, 2011, compared to 8.5% for the three months ended December 31, 2010.

Depreciation and Amortization. Depreciation and amortization increased 47.2% to $2,192 for the three months ended December 31, 2011, from $1,489 for the three months ended December 31, 2010. The increase was due to depreciation for fixed assets acquired from Micro as well as the fixed assets added since December 2010, including the move to a new distribution center in Visalia, California and Harrisburg, Pennsylvania, the purchase of a building for our corporate offices in Boise, Idaho, and various information technology projects. Amortization expense increased primarily due to the addition of intangibles acquired from Micro.

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K filed with the SEC on November 28, 2011.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows generated from operations and borrowings on our credit facilities. We use capital primarily to fund day-to-day operations and to maintain sufficient inventory levels in order to promptly fulfill customer orders and to expand our operations and sales growth. We believe our capital resources, including our ability to borrow funds from our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next twelve months.

We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk. If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. Any inability of current and/or potential customers to pay us for our products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition. Volatility in commodity prices, such as milk, corn, grain and feeder cattle, and deteriorating economic conditions can have a significant impact on the financial results of our customers. We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.

On November 1, 2011, MWI Co. as borrower, entered into a Third Amendment to Credit Agreement (the “Third Amendment”) with 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 (collectively, the “Lenders”), amending the Credit Agreement dated December 13, 2006, and as amended from time to time, by and among Supply Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the “Credit Agreement”). The Third Amendment increased the aggregate revolving commitment of the Lenders under the Credit Agreement from $100 million to $150 million and extended the maturity date of the Credit Agreement from March 1, 2013 to November 1, 2016. Under the Third Amendment, the margin on variable interest rate borrowings now ranges from 0.95% to 1.50%. The margin previously ranged from 1.50% to 2.25% under the Second Amendment. The Third Amendment also reduced the commitment fee from a range of 0.2% to 0.35% to a range of 0.15% to 0.25% depending on the funded debt to EBITDA ratio. The Credit Agreement contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA ratio. We were in compliance with all of the covenants as of December 31, 2011 and September 30, 2011. Our outstanding balance on the revolving credit facility at December 31, 2011 and September 30, 2011 was $45,400 and $0, respectively, and the interest rate was 1.10% as of December 31, 2011.

On November 5, 2010, Centaur entered into a £12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”). The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable one month, three month or six month interest period. Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%. The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000 which is to be calculated at end of each fiscal year. Our outstanding balance on the revolving credit facility at December 31, 2011 was £3,988, or $6,163 using the current exchange rate as of December 31, 2011, and the interest rate was 1.76% as of December 31, 2011.

Operating Activities. For the three months ended December 31, 2011, cash provided by operations was $7,277 and was primarily attributable to net income of $13,196 offset by changes in working capital. Inventory increased $37,182 and accounts payable increased $22,800 as we purchased inventory ahead of vendor price increases and to accommodate growth in revenue.

For the three months ended December 31, 2010, cash used in operations was $5,897 and was primarily attributable to net income of $10,828 offset by changes in working capital. Accounts payable decreased $24,022 as strategic inventory purchases were made during the quarter ended September 30, 2010 to support our organic growth of that quarter, and payments for those purchases were made during the quarter ended December 31, 2010. Receivables decreased $4,069 as receivables with extended payment terms from the quarter ended September 30, 2010 were collected during the quarter ended December 31, 2010. Inventories increased $3,384 to support the continued organic growth of 28.6% during the quarter ended December 31, 2010.

Investing Activities. For the three months ended December 31, 2011, net cash used in investing activities was $55,987. We paid $53,720 in cash for the acquisition of the assets of Micro. Additionally, we paid for capital expenditures of $1,823 which primarily related to equipment purchase for our move into a new distribution center in Harrisburg, Pennsylvania and information technology purchases.

For the three months ended December 31, 2010, net cash used in investing activities was $6,962 and was primarily due to capital expenditures of $7,022 which primarily related to an office building purchased in Boise, Idaho for our headquarters as well as a new distribution center in Visalia, California to accommodate the growth needs in that region.

Financing Activities. For the three months ended December 31, 2011, net cash provided by financing activities was $48,727, which was primarily due to net borrowings of $48,715 on our credit facilities. Our revolving credit facilities are used to fund strategic acquisitions, make capital purchases and meet our working capital requirements.

For the three months ended December 31, 2010, net cash provided by financing activities was $12,807, which was primarily due to net borrowings of $12,188 on our credit facilities. This was coupled with the tax benefit from stock option exercises of $1,389.

Contractual Obligations and Guarantees

For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 28, 2011 with the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks primarily from changes in interest rates, in particular, the Daily LIBOR Floating Rate, and foreign currency translation risk. We do not engage in financial transactions for trading or speculative purposes. We do not hedge the translation of foreign currency profits into U.S. dollars. We continually evaluate our foreign currency exchange rate risk and the different options available for managing such risk.

We are exposed to foreign currency risk due to our U.K. subsidiary Centaur. A hypothetical 10% change in the value of the U.S. dollar in relation to the British Pound, which is the Company’s most significant foreign currency exposure, would have changed net sales for the three months ended December 31, 2011 by approximately $6,900. This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impact of the currency exchange movements on cost of sales and operating expenses.

The interest payable on the facility is based on variable interest rates and is affected by changes in market interest rates. The outstanding balance on the revolving credit facility in the United States as of December 31, 2011 was $45,400. A change of 10% from the interest rate as of December 31, 2011, which was approximately 1.10% (Daily LIBOR Floating Rate plus a margin of 0.95%), would have changed interest by $12 for the three months ended December 31, 2011.

Item 4. Controls and Procedures

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of December 31, 2011. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

On October 31, 2011, we acquired substantially all of the assets of Micro. In connection with integrating Micro, we are evaluating our internal control over financial reporting and, where necessary, will implement changes as the integration proceeds. This process may result in additions or changes to our internal control over financial reporting. Except for the acquisition, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal controls.

PART II. OTHER INFORMATION

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the amount and timing of interest expense, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of our performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

·	the impact of vendor consolidation on our business;

·	changes in or availability of vendor contracts or rebate programs;

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

·	vendor rebates based upon attaining certain growth goals;

·	changes in the way vendors introduce/deliver products to market;

·	exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors;

·	risks associated with our international operations;

·	financial risks associated with acquisitions;

·	the impact of general economic trends on our business;

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

·	extended shortage or backorder of a significant product by one of our vendors;

·	seasonality;

·	the timing and effectiveness of marketing programs or price changes offered by our vendors;

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

·	our intellectual property rights may be inadequate to protect our business;

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

·	risks from potential increases in variable interest rates;

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

·	unforeseen litigation;

·	a disruption caused by adverse weather or other natural conditions or disasters;

·	inability to ship products to the customer as a result of technological or shipping disruptions; and

·	competition.

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

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

Item 1. Legal Proceedings

In December, 2011, MWI received an allegation from a supplier to its Securos division that two employees of that division, Harold and Darroll Wotton, had engaged in misconduct. As a result of these allegations, MWI engaged outside counsel to conduct an internal investigation of the matter.

As part of counsel’s investigation, on January 4, 2012 Harold and Darroll Wotton submitted to in depth interviews by MWI’s counsel regarding these allegations. During those interviews, after being confronted with documentary evidence that MWI had obtained during the course of its investigation, each of Harold and Darroll Wotton admitted that they had violated the non-competition provisions of their employment agreements and the Asset Purchase Agreements pursuant to which MWI purchased the business by owning a significant interest in an entity, Globe Source, that sold to competitors of MWI certain products that were also products sold by Securos. Harold and Darroll Wotton also admitted that a company they formed and controlled, Stealth Medical, was receiving from an existing supplier of Securos a payment for every bone screw sold by that supplier to Securos. In addition, Harold and Darroll Wotton admitted to receiving a payment from another supplier to Securos, although they claimed this payment was for consulting services that Harold Wotton personally rendered to that supplier. MWI believes that the rendering of such consulting services would have been in violation of Mr. Wotton’s employment agreement. Finally, Harold and Darroll Wotton further admitted in substance that they did not disclose to MWI their ownership interest in Globe Source and that they engaged in related party transactions with Stealth Medical.

As a result of the findings of counsel’s internal investigation, on January 23, 2012, MWI terminated the employment of Harold and Darroll Wotton for cause. In an effort to settle the matter without litigation, MWI also made a demand on Harold and Darroll Wotton for damages, and sent to them a form of complaint that MWI would file in the event a settlement could not be reached. On January 30, 2012, while continuing to communicate with MWI about a possible settlement, Harold and Darroll Wotton brought suit against MWI and John Francis, the Vice President of MWI’s Specialty Resources Group, in the United States District Court for the District of Massachusetts, alleging against MWI and Mr. Francis fraud in the inducement when MWI purchased the Securos business from the Wottons in 2007, breach of contract, breach of duty of good faith and fair dealing, misrepresentation, wrongful termination, unjust enrichment, defamation and unfair and deceptive business practices. In particular, notwithstanding the documentation gathered by MWI during its investigation and the admissions made by the Wottons during their interviews, the complaint alleges that MWI’s termination of their employment was pretextual and that MWI did not have a good faith basis for terminating the employment of either Harold or Darroll Wotton. The complaint seeks damages in excess of $12 million plus pre-judgment interest of 12% per annum. MWI believes that the complaint is wholly without merit and intends to vigorously defend against the action. MWI also believes that the likelihood of MWI incurring material losses in connection with this matter is remote, and therefore has not accrued any amount relating to this matter in the Company’s financial statements.

On January 31, 2012, MWI brought suit against Harold and Darroll Wotton in the District Court of the Fourth Judicial District of the State of Idaho against Harold and Darroll Wotton alleging breach of the Asset Purchase Agreements pursuant to which MWI purchased the Securos business, breach of the respective employment agreements of Harold and Darroll Wotton, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, tortious interference with contract, intentional interference with prospective economic advantage, civil conspiracy, conversion and usurping corporate opportunities. MWI’s complaint seeks an injunction to enforce the non-competition covenants contained in the Asset Purchase Agreements and employment agreements as well as unspecified money damages. Because the nature of litigation is inherently uncertain, MWI cannot predict the outcome of these matters at this time.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

On October 31, 2011, in connection with our acquisition of substantially all of the assets of Micro, we issued 94,359 shares of our common stock to MBT, LP as partial consideration for the acquired assets. The issuance of the securities was deemed to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving any public offering.

Issuer Purchases of Equity Securities

The table below provides information concerning our repurchase of shares of our common stock during the three months ended December 31, 2011.

Issuer Purchases of Equity Securities

					Total Number of	Maximum Number (or
	Total				Shares Purchased	Approximate Dollar
	Number		Average		as Part of Publicly	Value) of Shares that May
	of Shares		Price Paid		Announced Plans	Yet Be Purchased Under
Period	Purchased		per Share		or Programs	the Plans or Programs
October 1 to October 31, 2011	936	(1)	$	69.64	—	—
November 1 to November 30, 2011	—			—	—	—
December 1 to December 31, 2011	—			—	—	—
Total	936		$	69.64	—	—


(1) These shares were withheld upon the vesting of employee stock grants in connection with payment of required withholding taxes.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Removed and Reserved

None.

Item 5. Other Information

None.

Item 6. Exhibits

2.1		Asset Purchase Agreement dated September 20, 2011 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and Micro Beef Technologies, Ltd, incorporated herein by reference to Exhibit 2.2 of the Company’s Annual Report on Form 10-K, filed November 28, 2011

10.1		Third Amendment to Credit Agreement dated November 1, 2011 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co., Memorial Pet Care, Inc., Bank of America, N.A. and Wells Fargo Bank, N.A., incorporated herein by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K, filed November 28, 2011

10.2		Non-competition and Confidential Information Agreement dated September 20, 2011, by and between MWI Veterinary Supply Co. and William C. Pratt, incorporated herein by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K, filed November 28, 2011

10.3		Non-competition and Confidential Information Agreement dated September 20, 2011, by and between MWI Veterinary Supply Co. and Mark Shaw, incorporated herein by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K, filed November 28, 2011

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

101		Financials in XBRL format

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		MWI Veterinary Supply, Inc.
		(Registrant)


Date: February 2, 2012		/s/ Mary Patricia B. Thompson
		Mary Patricia B. Thompson
		Senior Vice President of Finance and Administration, Chief Financial Officer

Attached files

MWI Veterinary Supply, Inc. Reports

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