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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, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from                      to                      
 
Commission File Number:  000-51468



MWI VETERINARY SUPPLY, INC.
(Exact name of registrant as specified in its Charter)



Delaware
 
02-0620757
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
     
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 31, 2013 was 12,793,057.
 


 
 

 
 
 
INDEX
 

PART I.
   
       
Item 1.
   
   
 
       
   
 
       
   
 
       
   
 
       
   
 
       
   
 
       
Item 2.
 
 
       
Item 3.
 
 
       
Item 4.
 
 
       
PART II.
   
       
   
 
       
Item 1.
 
 
       
Item 1A.
 
 
       
Item 2.
 
 
       
Item 3.
 
 
       
Item 4.
 
 
       
Item 5.
 
 
       
Item 6.   Exhibits  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,
 
 
 
2012
 
2011
Revenues:
 
 
 
 
 
 
Product sales
$
 549,487
 
$
 442,597
 
Product sales to related party
 
 19,006
 
 
 15,558
 
Commissions
 
 4,355
 
 
 3,746
 
 
Total revenues
 
 572,848
 
 
 461,901
Cost of product sales
 
 495,919
 
 
 399,387
Gross profit
 
 76,929
 
 
 62,514
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 47,460
 
 
 38,907
Depreciation and amortization
 
 2,392
 
 
 2,192
Operating income
 
 27,077
 
 
 21,415
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
Interest expense
 
 (203)
 
 
 (183)
 
Earnings of equity method investees
 
 93
 
 
 77
 
Other
 
 204
 
 
 188
 
 
Total other income (expense), net
 
 94
 
 
 82
 
 
 
 
 
 
 
 
Income before taxes
 
 27,171
 
 
 21,497
Income tax expense
 
 (10,420)
 
 
 (8,301)
Net income
$
 16,751
 
$
 13,196
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Basic
$
 1.32
 
$
 1.05
 
Diluted
$
 1.32
 
$
 1.05
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
Basic
 
 12,665
 
 
 12,581
 
Diluted
 
 12,695
 
 
 12,605
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Dollars in thousands (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31,
 
 
 
2012
 
2011
 
 
 
 
 
 
Net income
$
 16,751
 
$
 13,196
Other comprehensive income (loss)
 
 
 
 
 
 
Foreign currency translation
 
 (18)
 
 
 (625)
 
 
Total comprehensive income
$
 16,733
 
$
 12,571
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars and shares in thousands, except per share data
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
September 30,
 
 
 
2012
 
2012
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
$
 587
 
$
 514
 
Receivables, net
 
 292,715
 
 
 288,922
 
Inventories
 
 272,533
 
 
 251,375
 
Prepaid expenses and other current assets
 
 6,892
 
 
 10,094
 
Deferred income taxes
 
 2,013
 
 
 1,580
 
 
Total current assets
 
 574,740
 
 
 552,485
 
 
 
 
 
 
 
 
Property and equipment, net
 
 37,180
 
 
 35,784
Goodwill
 
 69,935
 
 
 61,841
Intangibles, net
 
 43,984
 
 
 38,706
Other assets, net
 
 7,706
 
 
 7,567
Total assets
$
 733,545
 
$
 696,383
 
 
 
 
 
 
 
 
Liabilities And Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Credit facilities
$
 52,584
 
$
 48,080
 
Accounts payable
 
 266,740
 
 
 258,741
 
Accrued expenses and other current liabilities
 
 26,367
 
 
 19,952
 
Current portion of capital lease obligations
 
 264
 
 
 337
 
 
Total current liabilities
 
 345,955
 
 
 327,110
 
 
 
 
 
 
 
 
Deferred income taxes
 
 7,826
 
 
 7,180
 
 
 
 
 
 
 
 
Long-term capital lease obligations
 
 70
 
 
 104
 
 
 
 
 
 
 
 
Other long-term liabilities
 
 2,636
 
 
 2,687
 
 
 
 
 
 
 
 
Commitments and contingencies (see Note 14)
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
Common stock $0.01 par value, 40,000 authorized; 12,793 and
 
 
 
 
 
 
 
12,792 shares issued and outstanding, respectively
 
 128
 
 
 128
 
Additional paid in capital
 
 145,690
 
 
 144,667
 
Retained earnings
 
 229,716
 
 
 212,965
 
Accumulated other comprehensive income
 
 1,524
 
 
 1,542
 
 
Total stockholders’ equity
 
 377,058
 
 
 359,302
Total liabilities and stockholders’ equity
$
 733,545
 
$
 696,383
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31,
 
 
 
 
 
2012
 
2011
Cash Flows From Operating Activities:
 
 
 
 
 
 
Net income
$
 16,751
 
$
 13,196
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
 
 2,398
 
 
 2,196
 
 
Amortization of debt issuance costs
 
 10
 
 
 12
 
 
Stock-based compensation
 
 678
 
 
 376
 
 
Deferred income taxes
 
 215
 
 
 460
 
 
Earnings of equity method investees
 
 (93)
 
 
 (77)
 
 
Loss on disposal of property and equipment
 
 8
 
 
 23
 
 
Excess tax benefit of exercise of common stock options
 
 (137)
 
 
 (119)
 
 
Other
 
 12
 
 
 (41)
 
 
Changes in operating assets and liabilities (net of effects of business acquisitions):
 
 
 
 
 
 
 
 
Receivables
 
 (339)
 
 
 308
 
 
 
Inventories
 
 (19,213)
 
 
 (37,182)
 
 
 
Prepaid expenses and other current assets
 
 3,269
 
 
 4,053
 
 
 
Accounts payable
 
 5,591
 
 
 22,800
 
 
 
Accrued expenses and other current liabilities
 
 6,419
 
 
 1,272
 
 
 
 
Net cash provided by operating activities
 
 15,569
 
 
 7,277
 
 
 
 
 
 
 
 
 
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
Business acquisitions, net of cash acquired
 
 (17,006)
 
 
 (53,720)
 
 
Purchases of property and equipment
 
 (3,189)
 
 
 (1,823)
 
 
Proceeds from sales of property and equipment
 
 72
 
 
 - 
 
 
Other investments
 
 (26)
 
 
 (444)
 
 
 
 
Net cash used in investing activities
 
 (20,149)
 
 
 (55,987)
 
 
 
 
 
 
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
Borrowings on credit facilities
 
 140,972
 
 
 123,213
 
 
Payments on credit facilities
 
 (136,514)
 
 
 (74,498)
 
 
Proceeds from issuance of common stock
 
 159
 
 
 139
 
 
Proceeds from exercise of stock options
 
 48
 
 
 7
 
 
Excess tax benefit of exercise of common stock options
 
 137
 
 
 119
 
 
Debt issuance costs
 
 - 
 
 
 (111)
 
 
Payment on capital lease obligations
 
 (107)
 
 
 (142)
 
 
 
 
Net cash provided by financing activities
 
 4,695
 
 
 48,727
 
 
 
 
 
 
 
 
 
 
Effect of Exchange Rate on Cash and Cash Equivalents
 
 (42)
 
 
 (72)
 
 
 
 
 
 
 
 
 
 
Increase/(Decrease) in Cash and Cash Equivalents
 
 73
 
 
 (55)
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents at Beginning of Period
 
 514
 
 
 606
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents at End of Period
$
 587
 
$
 551
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 
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 2012 Annual Report on Form 10-K filed with the SEC on November 27, 2012.  The results of operations for the three months ended months ended December 31, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.
 
Our unaudited condensed consolidated balance sheet as of September 30, 2012 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 $67,661 and $68,031 for the three months ended December 31, 2012 and 2011, respectively, and generated commission revenue of $4,355 and $3,746, 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.
 
Concentrations of Risk
 
Our financial instruments that are exposed to concentrations of credit risk consist primarily of our receivables. Our customers are geographically dispersed throughout the United States and United Kingdom. In the United Kingdom, we rely on a smaller number of relatively larger customers than does our business in the United States. We routinely assess the financial strength of our customers and review their credit history before extending credit. In addition, we establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
 

NOTE 2 — EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
There were no new accounting standards issued during the quarter ended December 31, 2012 that would have a material impact on our consolidated financial statements.
 

NOTE 3 BUSINESS ACQUISITIONS
 
On December 31, 2012, MWI Veterinary Supply Co. (“MWI Co.”) purchased substantially all of the assets of Prescription Containers Inc. (“PCI Animal Health”) for $17,006.  The purchase price remains subject to a post-closing working capital adjustment.  PCI Animal Health was a distributor of companion animal health products to veterinary practices, primarily in the Northeastern United States.  The intangible asset acquired in the acquisition is for customer relationships and has a 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 $60,878, including $53,400 in cash and 94,359 shares of common stock valued at $7,158, which is the fair value of the common stock as of the date of acquisition and a working capital adjustment of $320. The $53,400 paid in cash as consideration of Micro was funded with borrowings under our Credit Agreement (as defined in Note 7) as then in effect. Micro is 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 is a leading innovator of proprietary, computerized management systems for the production animal market. The intangible assets acquired in the acquisition include technology, customer relationships, trade name and covenant not to compete. 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 deductible for tax purposes over 15 years.
 
The fair values assigned to the tangible and intangible assets acquired and liabilities assumed are based on management's estimates and assumptions as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.  Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
 
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”) 805.  These purchase price allocations are based on a combination of valuations and analyses.
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
Cash
 
$
 - 
 
$
 1
 
Receivables
 
 
 3,436
 
 
 22,374
 
Inventories
 
 
 1,929
 
 
 27,701
 
Other current assets
 
 
 - 
 
 
 105
 
Property and equipment
 
 
 - 
 
 
 8,882
 
Goodwill
 
 
 8,101
 
 
 12,473
 
Intangibles
 
 
 5,970
 
 
 15,760
 
Investments
 
 
 - 
 
 
 199
 
Total assets acquired
 
 
 19,436
 
 
 87,495
 
 
 
 
 
 
 
 
 
Accounts payable
 
 
 2,430
 
 
 25,026
 
Accrued expenses and other liabilities
 
 
 - 
 
 
 1,591
 
Total liabilities assumed
 
 
 2,430
 
 
 26,617
 
 
 
 
 
 
 
 
 
Net assets acquired
 
$
 17,006
 
$
 60,878
 
 
 
 
 
 
 
 

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:
 

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

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.  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,
 
 
 
2012
 
2012
 
 
Trade
$
 265,912
 
$
 271,199
 
 
Vendor rebates and programs
 
 29,879
 
 
 20,469
 
 
 
 
 295,791
 
 
 291,668
 
 
Allowance for doubtful accounts
 
 (3,076)
 
 
 (2,746)
 
 
 
$
 292,715
 
$
 288,922
 
 
 
 
 
 
 
 
 



NOTE 5 PROPERTY AND EQUIPMENT
 

 
 
 
 
 
 
 
 
 
 
December 31,
 
September 30,
 
 
 
2012
 
2012
 
 
Land
$
 1,932
 
$
 1,952
 
 
Building and leasehold improvements
 
 14,687
 
 
 14,420
 
 
Machinery, furniture and equipment
 
 35,715
 
 
 33,075
 
 
Computer equipment
 
 8,778
 
 
 8,276
 
 
Construction in progress
 
 1,269
 
 
 1,773
 
 
 
 
 62,381
 
 
 59,496
 
 
Accumulated depreciation
 
 (25,201)
 
 
 (23,712)
 
 
 
$
 37,180
 
$
 35,784
 
 
 
 
 
 
 
 
 

Depreciation expense was $1,717 and $1,458 for the three months ended December 31, 2012 and 2011, respectively.
 

NOTE 6 GOODWILL AND INTANGIBLES
 
The changes in the carrying value of goodwill are as follows:
 

 
 
 
 
 
 
 
 
 
 
Goodwill as of September 30, 2012
 
 
 
$
 61,841
 
 
 
Acquisition activity
 
 
 
 
 8,101
 
 
 
Foreign currency adjustments
 
 
 
 
 (7)
 
 
Goodwill as of December 31, 2012
 
 
 
$
 69,935
 
 
 
 
 
 
 
 
 
 

Balances of intangibles are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
September 30,
 
 
 
 
Useful Lives
 
2012
 
2012
 
 
Amortizing:
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
9-20 years
 
$
 37,004
 
$
 31,045
 
 
Covenants not to compete
 
1-5 years
 
 
 710
 
 
 710
 
 
Technology
 
11 years
 
 
 5,830
 
 
 5,830
 
 
Other
 
2-7 years
 
 
 1,084
 
 
 1,084
 
 
 
 
 
 
 
 44,628
 
 
 38,669
 
 
Accumulated amortization
 
 
 
 
 (8,320)
 
 
 (7,640)
 
 
 
 
 
 
 
 36,308
 
 
 31,029
 
 
Non-Amortizing:
 
 
 
 
 
 
 
 
 
 
Trade names and patents
 
 
 
 
 7,676
 
 
 7,677
 
 
 
 
 
 
$
 43,984
 
$
 38,706
 
 
 
 
 
 
 
 
 
 
 
 

Amortization expense was $681 and $738 for the three months ended December 31, 2012 and 2011, respectively.  Estimated future annual amortization expense related to intangible assets as of December 31, 2012 is as follows:
 

 
 
 
 
 
 
 
Amount
 
 
Remainder of 2013
$
 2,477
 
 
2014
 
 3,172
 
 
2015
 
 2,892
 
 
2016
 
 2,789
 
 
2017
 
 2,715
 
 
Thereafter
 
 22,263
 
 
 
$
 36,308
 
 
 
 
 
 

The above projection of amortization expense includes preliminary estimates of intangible assets and lives associated with the acquisition of PCI Animal Health.  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, 2012 and September 30, 2012:
 

 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
September 30,
 
 
 
 
 
2012
 
 
2012
 
 
Revolving credit facility, 1.12% interest as of December 31, 2012
$
 37,200
 
$
 39,500
 
 
Sterling revolving credit facility, 1.55% interest as of December 31, 2012
 
 15,384
 
 
 8,580
 
 
Capital lease obligations (1)
 
 334
 
 
 441
 
 
Total debt and capital lease obligations
 
 52,918
 
 
 48,521
 
 
 
Less: Long-term capital lease obligations
 
 (70)
 
 
 (104)
 
 
Total debt included in current liabilities
$
 52,848
 
$
 48,417
 
 
 
 
 
 
 
 
 
 
 
(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 MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the  “Credit Agreement”).  As discussed in Note 3 – Business Acquisitions, MWI Co.’s purchase of the assets of Micro was completed on October 31, 2011, using borrowing capacity that existed prior to the effectiveness of the Third Amendment.  The Third Amendment allows for an aggregate revolving commitment of the Lenders under the Credit Agreement of $150,000 and a maturity date of November 1, 2016.  Under the Third Amendment, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Third Amendment ranges from 0.15% to 0.25% depending on the funded debt to EBITDA ratio.  The variable interest rate is equal to the Daily LIBOR Floating Rate or the LIBOR 1-month, 2-month, 3-month or 6-month fixed rate (at MWI Co.’s option) plus the margin.  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, 2012 and September 30, 2012.
 
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 1- month, 2-month or 3-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, 2012 and September 30, 2012, 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, 2012 and September 30, 2012, financial instruments include cash and cash equivalents, receivables and accounts payable, and the fair values approximate book values due to their short maturities.
 
Our revolving credit facilities in the United States and in the United Kingdom were amended in the recent past and are based on market conditions such as LIBOR.  Because these credit facilities 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
 
We have a 2005 Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”), under which we may offer 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, 2012 and September 30, 2012, we had 866,393 and 865,917 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of December 31, 2012, 19,521 options to purchase common stock were outstanding with a weighted average exercise price of $17.61 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, 2012 and 2011.  During the three months ended December 31, 2012 and 2011, we issued 2,850 and 3,500 shares of restricted stock under the 2005 Plan.  During the three months ended December 31, 2012 and 2011, we recognized $727 and $432 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, 2012 and 2011, we issued 1,499 and 2,113 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, 2012 and 2011 was 38.3% and 38.6%, respectively.  The decrease was primarily due to a lower international enacted tax rate in the U.K and lower estimated state taxes.
 
With few exceptions, we are no longer subject to income tax examination for years before 2008 in the U.S. and significant state and local jurisdictions.  We are no longer subject to income tax examination for years before 2010 in significant foreign jurisdictions.
 

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31,
 
 
 
2012
 
2011
 
 
 
Basic
 
Diluted
 
Basic
 
Diluted
 
Net income
$
 16,751
 
$
 16,751
 
$
 13,196
 
$
 13,196
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 12,665
 
 
 12,665
 
 
 12,581
 
 
 12,581
 
Effect of diluted securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and restricted stock
 
 
 
 
 30
 
 
 
 
 
 24
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average diluted shares outstanding
 
 
 
 
 12,695
 
 
 
 
 
 12,605
 
Earnings per share
$
 1.32
 
$
 1.32
 
$
 1.05
 
$
 1.05
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 $296 and $263 for the three months ended December 31, 2012 and 2011, respectively. Sales of products to Feeders’ Advantage were $19,006 and $15,558, which represented 3% of total product sales for each of the three months ended December 31, 2012 and 2011.
 
MWI Co. allows Feeders’ Advantage to use its cash management system to finance its day-to-day operations. At any given time, the outstanding position used in the cash management system may be a receivable or payable depending on the cash activity.  A receivable balance bears interest at the prime rate. The interest due on the outstanding receivable 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 $1,354 as of December 31, 2012 and a receivable balance from Feeders’ Advantage of $62 as of September 30, 2012.
 
 
NOTE 13 STATEMENTS OF CASH FLOWS – SUPPLEMENTAL AND NON-CASH DISCLOSURES
 

 
 
 
 
 
 
 
 
 
 
Three months ended December 31,
 
 
 
2012
 
2011
 
 
Supplemental Disclosures
 
 
 
 
 
 
 
Cash paid for interest
$
 173
 
$
 142
 
 
Cash paid for income taxes
 
 697
 
 
 822
 
 
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
 
 203
 
 
 235
 
 
 
 
 
 
 
 
 

NOTE 14 COMMITMENTS AND CONTINGENCIES
 
We are a party to legal proceedings arising out of the ordinary course of our business.  In the legal action involving Viyo International NV (“VIYO”) discussed in our 10-K filed with the SEC on November 27, 2012 (the “Form 10-K”), we reserved $975 during the quarter ended December 31, 2012 as an estimate of the probable loss based on our ongoing settlement discussions with VIYO.  In the matter regarding the lawsuit with Harold and Darroll Wotton also discussed in the Form 10-K, we continue to believe that the likelihood of MWI incurring material losses in connection with this matter is remote, and therefore have not accrued any amount related to this matter.  We believe that any other pending matter will also not have a material adverse effect on our financial condition or results of operations.
 
 
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, 2012, and the related condensed consolidated statements of income, comprehensive income, and of cash flows for the three-month periods ended December 31, 2012 and 2011. 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, 2012, 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 27, 2012, 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, 2012 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 4, 2013
 
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 December 31, 2012, we acquired substantially all of the assets of Prescription Containers Inc, which was a distributor of companion animal health products primarily in the Northeastern United States.  On October 31, 2011, we acquired substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”), which is 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 is also a leading innovator of proprietary, computerized management systems for the production animal market.
 
As a result of the acquisition of Micro, we estimate that in the United States approximately 57% of our total revenues have been generated from sales to the companion animal market and 43% from sales to the production animal market during fiscal year 2012.  Including the gross billings from agency commissions which are excluded from our total revenues in order to comply with generally accepted accounting principles, we estimate that in the United States approximately 63% of our total revenues have been generated from sales to the companion animal market and 37% from sales to the production animal market during fiscal year 2012.  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 in the United Kingdom during fiscal year 2012. 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 companion animal market in both the United States and United Kingdom has slowed as a result of a decrease in consumer spending but showed signs of a recovery in 2012.  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 consequently the number of days an animal is on feed during a finishing phase) or a change in the general economy, which can shift the number of animals treated, the timing of when animals are treated, to what extent they are treated and which products they are treated with.  This could also create cash-flow challenges for these customers and in turn, could impact the time it takes for us to collect our outstanding accounts receivable from these customers as well as affect the overall collectability of these accounts.  However, we still believe that it is important to our business to service this market and we intend to continue to support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.
 
We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk.  If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. In the United Kingdom, we rely on a smaller number of relatively larger customers than does our business in the United States.  These customers in the aggregate account for 18.1% of our consolidated accounts receivable balance as of December 31, 2012 and one significant customer accounts for 7.6% of our consolidated accounts receivable balance as of December 31, 2012.  We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.   
 
Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by the marketing programs or price increase announcements of vendors and distributors, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made.
 
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 did 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.  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 73% and 72% of our revenues for the three months ended December 31, 2012 and 2011, respectively, and 71% of our revenues for the fiscal year ended September 30, 2012.  Pfizer supplied products that accounted for approximately 21% and 24% of our revenues during the three months ended December 31, 2012 and 2011, respectively, and 20% of our revenues for our fiscal year ended September 30, 2012.  Of the Pfizer supplied products, production animal products under a livestock agreement accounted for approximately 12% and 14% of our revenues for the three months ended December 31, 2012 and 2011, respectively, and approximately 11% of our revenues for our fiscal year ended September 30, 2012.  Merck supplied products that accounted for approximately 15% and 14% of our revenues during the three months ended December 31, 2012 and 2011, respectively, and 15% of our revenues for our fiscal year ended September 30, 2012.  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 53% and 33% of total commission revenues during the three months ended December 31, 2012 and 2011, respectively, and 52% of total commission revenues for our fiscal year ended September 30, 2012.
 
For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 27, 2012.
 

Results of Operations
 
The following table summarizes our results of operations for the three months ended December 31, 2012 and 2011, in dollars and as a percentage of total revenues.
 

 
 
 
Three months ended December 31,
 
 
 
 
2012
 
%
 
2011
 
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
$
 549,487
 
95.9
%
 
$
 442,597
 
95.8
%
 
Product sales to related party
 
 19,006
 
3.3
%
 
 
 15,558
 
3.4
%
 
Commissions
 
 4,355
 
0.8
%
 
 
 3,746
 
0.8
%
 
 
Total revenues
 
 572,848
 
100.0
%
 
 
 461,901
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of product sales
 
 495,919
 
86.6
%
 
 
 399,387
 
86.5
%
Gross profit
 
 76,929
 
13.4
%
 
 
 62,514
 
13.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 47,460
 
8.3
%
 
 
 38,907
 
8.4
%
Depreciation and amortization
 
 2,392
 
0.4
%
 
 
 2,192
 
0.5
%
Operating income
 
 27,077
 
4.7
%
 
 
 21,415
 
4.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 (203)
 
-
%
 
 
 (183)
 
-
%
 
Earnings of equity method investees
 
 93
 
-
%
 
 
 77
 
-
%
 
Other
 
 204
 
-
%
 
 
 188
 
-
%
 
 
Total other income (expense), net
 
 94
 
-
%
 
 
 82
 
-
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
 27,171
 
4.7
%
 
 
 21,497
 
4.6
%
Income tax expense
 
 (10,420)
 
(1.8)
%
 
 
 (8,301)
 
(1.8)
%
Net income
$
 16,751
 
2.9
%
 
$
 13,196
 
2.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
 1.32
 
 
 
 
$
 1.05
 
 
 
 
Diluted
$
 1.32
 
 
 
 
$
 1.05
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 12,665
 
 
 
 
 
 12,581
 
 
 
 
Diluted
 
 12,695
 
 
 
 
 
 12,605
 
 
 

Three Months Ended December 31, 2012 Compared to Three Months Ended December 31, 2011
 
Total Revenues.  Total revenues increased 24.0% to $572,848 for the three months ended December 31, 2012, from $461,901 for the three months ended December 31, 2011.  Excluding the acquisition of the assets of Micro, organic revenue growth in the United States was 16.6% for the quarter ended December 31, 2012, compared to the same period in the prior fiscal year.  Revenues from the acquisition of Micro, which was acquired on October 31, 2011, were $28,686 during the month of October 2012.  Revenue growth in the United Kingdom was 24.2% for the quarter ended December 31, 2012, compared to the same period in the prior fiscal year, consisting of 21.7% organic growth and an increase of 2.5% related to foreign currency exchange. Excluding the additional revenues from Micro, revenues in the United States attributable to existing customers represented approximately 60% of the growth in revenues and revenues attributable to new customers represented approximately 40% of the growth in revenues during the three months ended December 31, 2012.  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 22.2% to $19,006 for the three months ended December 31, 2012, from $15,558 for the three months ended December 31, 2011 due to higher placements of lighter weight cattle into feedlots.  Commissions increased 16.3% to $4,355 for the three months ended December 31, 2012, from $3,746 for the three months ended December 31, 2011. Commissions increased primarily due to an incentive received during the quarter ended December 31, 2012 that was not earned during the quarter ended December 31, 2011, partially offset by a decrease in gross billings from agency contracts due to a manufacturer’s products not being available.
 
Gross Profit.  Gross profit increased by 23.1% to $76,929 for the three months ended December 31, 2012, from $62,514 for the three months ended December 31, 2011.  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 13.4% and 13.5% for the three months ended December 31, 2012 and 2011, respectively.  This decrease was due to a lower product margin, partially offset by an improvement in freight as a percentage of total revenues.  Vendor rebates for the three months ended December 31, 2012 increased by approximately $2,910 compared to the three months ended December 31, 2011 primarily due to the growth in revenues and timing of manufacturer programs.
 
Selling, General and Administrative (“SG&A”).  SG&A expenses increased 22.0% to $47,460 for the three months ended December 31, 2012, from $38,907 for the three months ended December 31, 2011.  The increase in SG&A expenses was primarily due to an increase in compensation and benefit costs and Micro expenses for the month of October 2012, as well as the reserve of $975 for the VIYO legal matter as described in Note 14 of the condensed consolidated financial statements.  SG&A expenses as a percentage of total revenues were 8.3% for the three months ended December 31, 2012, compared to 8.4% for the three months ended December 31, 2011.
 
Depreciation and Amortization. Depreciation and amortization increased 9.1% to $2,392 for the three months ended December 31, 2012, from $2,192 for the three months ended December 31, 2011.  The increase was primarily due to depreciation and amortization for assets acquired from Micro.
 
Income Tax Expense. Our effective tax rate for each of the three months ended December 31, 2012 and 2011 was 38.3% and 38.6%, respectively.  The decrease was primarily due to a lower international enacted tax rate in the U.K and lower estimated state taxes.
 
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 27, 2012.
 
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. In the United Kingdom, we rely on a smaller number of relatively larger customers than does our business in the United States.  These customers in the aggregate account for 18.1% of our consolidated accounts receivable balance as of December 31, 2012 and one significant customer accounts for 7.6% of our consolidated accounts receivable balance as of December 31, 2012.   We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.
 
Capital Resources. On November 1, 2011, MWI Co. as borrower, entered into a Third Amendment to Credit Agreement (the “Third Amendment”, or “revolving credit facility”) 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 MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the  “Credit Agreement”).  The Third Amendment allows for an aggregate revolving commitment of the Lenders under the Credit Agreement of $150,000 and a maturity date of November 1, 2016.  Under the Third Amendment, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Third Amendment ranges from 0.15% to 0.25% depending on the funded debt to EBITDA ratio.  The variable interest rate is equal to the Daily LIBOR Floating Rate or the LIBOR 1-month, 2-month, 3-month or 6-month fixed rate (at MWI Co.’s option) plus the margin.  The facility contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA calculation.  We were in compliance with all of the covenants as of December 31, 2012 and September 30, 2012.  Our outstanding balance on the revolving credit facility at December 31, 2012 was $37,200, and the interest rate was 1.12% as of December 31, 2012.
 
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 1-month, 2-month or 3-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, 2012 and September 30, 2012, Centaur was in compliance with the covenant. Our outstanding balance on the sterling revolving credit facility at December 31, 2012 was £9,524, or $15,384 using the exchange rate on December 31, 2012.  The interest rate for the sterling revolving credit facility was 1.55% as of December 31, 2012.
 
Operating Activities.  For the three months ended December 31, 2012, cash provided by operations was $15,569 and was primarily attributable to net income of $16,751 partially offset by changes in working capital.
 
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.
 
Investing Activities.  For the three months ended December 31, 2012, net cash used in investing activities was $20,149.  We paid $17,006 in cash for the acquisition of substantially all of the assets of PCI Animal Health. Additionally, we paid for capital expenditures of $3,189 which primarily related to equipment purchased for our move into a new distribution center in Shakopee, Minnesota and technology and equipment purchases.
 
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 purchased for our move into a new distribution center in Harrisburg, Pennsylvania and information technology purchases.
 
Financing Activities.  For the three months ended December 31, 2012, net cash provided by financing activities was $4,695, which was primarily due to net borrowings of $4,458 on our credit facilities.  Our revolving credit facilities are used to fund strategic acquisitions, capital expenditures and meet our working capital requirements.
 
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.  
 
Contractual Obligations and Guarantees
 
For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 27, 2012 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, 2012 by approximately $8,600. 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 our revolving credit facilities 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, 2012 was $37,200.  The outstanding balance on the revolving credit facility in the United Kingdom as of December 31, 2012 was $15,384.  If there had been a combined balance on the revolving credit facility of $170,000, which is the approximate maximum available amount on the facilities based on the foreign currency rates as of  December 31, 2012, a change of 10% from the interest rates as of December 31, 2012 would have changed interest by $49 for the three months ended December 31, 2012.
 

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, 2012.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
 
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

 
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;
 
·  
exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors or margin reductions if we become a non-exclusive distributor;
 
·  
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;
 
·  
a disruption caused by adverse weather (i.e. drought) or other natural conditions or disasters;
 
·  
possible changes in the use of feed additives (antibiotics, growth promotants) used in the production animal markets due to trade restrictions, consumer concern and/or government regulations;
 
·  
any inability of our customers to pay us for our products and services due to their deteriorating financial condition or otherwise;
 
·  
seasonality;
 
·  
unforeseen litigation;
 
·  
risks associated with our international operations;
 
·  
financial risks associated with acquisitions and investments;
 
·  
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;
 
·  
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;
 
·  
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
 
We are a party to legal proceedings arising out of the ordinary course of our business.  In the legal action involving Viyo International NV (“VIYO”) discussed in our 10-K filed with the SEC on November 27, 2012 (the “Form 10-K”), we reserved $975 during the quarter ended December 31, 2012 as an estimate of the probable loss based on our ongoing settlement discussions with VIYO.  In the matter regarding the lawsuit with Harold and Darroll Wotton also discussed in the Form 10-K, we continue to believe that the likelihood of MWI incurring material losses in connection with this matter is remote, and therefore have not accrued any amount related to this matter.  We believe that any other pending matter will also not have a material adverse effect on our financial condition or results of operations.
 

Item 1A.  Risk Factors
 
Other than with respect to the risk factor set forth below, 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, 2012.
 
Our business in the United Kingdom relies on a smaller number of relatively large customers than our business in the United States, and any default in payment by one or more of these significant customers there could adversely impact our results of operations and financial condition.
 
Our wholly owned subsidiary, Centaur Services Ltd., a distributor of animal health products to veterinarians in the United Kingdom, relies on a smaller number of relatively large customers than does our business in the United States.  Centaur’s customers in the aggregate account for 18.1% of our consolidated accounts receivable balance as of December 31, 2012 and one significant customer of Centaur in particular accounts for 7.6% of our consolidated accounts receivable balance as of December 31, 2012.   Like all of our customers, we continually assess these customers ability to pay us and adjust our allowance for doubtful accounts as necessary.  However if any of the significant customers of Centaur were to become insolvent or otherwise are unable or unwilling to make timely payments to us for any reason, our business in the United Kingdom will be harmed, and our results of operations and financial condition will be adversely affected.
 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
Recent Sales of Unregistered Securities
 
None.
 
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, 2012.
 

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, 2012
 
 267
 (1)
$
 107.88
 
 
November 1 to November 30, 2012
 
 182
 (1)
 
 107.77
 
 
December 1 to December 31, 2012
 
 16
 (1)
 
 112.37
 
 
Total
 
 465
 
$
107.99
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.  Mine Safety Disclosures
 
None.
 
Item 5.  Other Information
 
None.
 
Item 6.  Exhibits
 
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 4, 2013
    /s/ Mary Patricia B. Thompson  
   
Mary Patricia B. Thompson
 
   
Senior Vice President of Finance and Administration, Chief Financial Officer
 

 
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