MWI Veterinary Supply (MWIV) 10-Q 2013 Q2 Quarterly report

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 March 31, 2013

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)

[Missing Graphic Reference]

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 April 26, 2013 was 12,800,821.

MWI VETERINARY SUPPLY, INC.

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income for the three and six months ended March 31, 2013 and 2012
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended  March 31, 2013 and 2012
	Condensed Consolidated Balance Sheets as of March 31, 2013 and September 30, 2012
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2013 and 2012
	Notes to Condensed Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
	Cautionary Statement
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Removed and Reserved
Item 5.	Other Information
Item 6.	Exhibits

		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 March 31,				Six months ended March 31,
			2013		2012		2013		2012
Revenues:
	Product sales		$	541,205	$	488,187	$	1,090,692	$	930,784
	Product sales to related party			16,799		14,585		35,805		30,143
	Commissions			5,110		4,398		9,465		8,144
		Total revenues		563,114		507,170		1,135,962		969,071
Cost of product sales				488,435		440,552		984,354		839,939
Gross profit				74,679		66,618		151,608		129,132
Selling, general and administrative expenses				47,928		42,933		95,388		81,840
Depreciation and amortization				2,513		2,274		4,905		4,466
Operating income				24,238		21,411		51,315		42,826
Other income (expense):
	Interest expense			(223)		(252)		(426)		(435)
	Earnings of equity method investees			85		79		178		156
	Other			209		186		413		374
		Total other income (expense), net		71		13		165		95
Income before taxes				24,309		21,424		51,480		42,921
Income tax expense				(9,209)		(8,246)		(19,629)		(16,547)
Net income			$	15,100	$	13,178	$	31,851	$	26,374
Earnings per common share:
	Basic		$	1.19	$	1.04	$	2.51	$	2.09
	Diluted		$	1.19	$	1.04	$	2.51	$	2.09
Weighted average common shares outstanding:
	Basic			12,674		12,619		12,669		12,600
	Diluted			12,709		12,648		12,702		12,626
See Notes to Condensed Consolidated Financial Statements.

3

		MWI VETERINARY SUPPLY, INC.
		CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		Dollars in thousands (unaudited)
			Three months ended March 31,				Six months ended March 31,
			2013		2012		2013		2012
Net income			$	15,100	$	13,178	$	31,851	$	26,374
Other comprehensive income (loss)
	Foreign currency translation			(3,498)		1,802		(3,516)		1,177
		Total comprehensive income	$	11,602	$	14,980	$	28,335	$	27,551
See Notes to Condensed Consolidated Financial Statements

4

MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars and shares in thousands, except per share data
(unaudited)
			March 31,		September 30,
			2013		2012
Assets
Current Assets:
	Cash and cash equivalents		$	452	$	514
	Receivables, net			303,555		288,922
	Inventories			268,678		251,375
	Prepaid expenses and other current assets			6,828		10,094
	Deferred income taxes			2,586		1,580
		Total current assets		582,099		552,485
Property and equipment, net				37,348		35,784
Goodwill				70,474		61,841
Intangibles, net				41,185		38,706
Other assets, net				7,837		7,567
Total assets			$	738,943	$	696,383
Liabilities And Stockholders’ Equity
Current Liabilities:
	Credit facilities		$	63,954	$	48,080
	Accounts payable			256,035		258,741
	Accrued expenses and other current liabilities			18,048		19,952
	Current portion of capital lease obligations			196		337
		Total current liabilities		338,233		327,110
Deferred income taxes				7,932		7,180
Long-term capital lease obligations				39		104
Other long-term liabilities				2,308		2,687
Commitments and contingencies (see Note 14)
Stockholders’ Equity
	Common stock $0.01 par value, 40,000 authorized; 12,801 and
		12,792 shares issued and outstanding, respectively		128		128
	Additional paid in capital			147,461		144,667
	Retained earnings			244,816		212,965
	Accumulated other comprehensive income			(1,974)		1,542
		Total stockholders’ equity		390,431		359,302
Total liabilities and stockholders’ equity			$	738,943	$	696,383
See Notes to Condensed Consolidated Financial Statements.

5

MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands (unaudited)
					Six months ended March 31,
					2013		2012
Cash Flows From Operating Activities:
	Net income				$	31,851	$	26,374
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				4,916		4,475
		Amortization of debt issuance costs				19		22
		Stock-based compensation				2,087		772
		Deferred income taxes				(83)		155
		Earnings of equity method investees				(178)		(156)
		Loss on disposal of property and equipment				55		31
		Excess tax benefit of exercise of common stock options				(267)		(359)
		Other				(167)		(40)
		Changes in operating assets and liabilities (net of effects of business acquisitions):
			Receivables			(14,196)		(28,321)
			Inventories			(17,021)		(40,073)
			Prepaid expenses and other current assets			3,159		3,479
			Accounts payable			(2,952)		26,622
			Accrued expenses and other current liabilities			(1,452)		2,656
				Net cash provided by (used in) operating activities		5,771		(4,363)
Cash Flows From Investing Activities:
		Business acquisitions, net of cash acquired				(17,006)		(53,720)
		Purchases of property and equipment				(5,316)		(3,282)
		Proceeds from sales of property and equipment				72		96
		Other investments				(235)		(498)
				Net cash used in investing activities		(22,485)		(57,404)
Cash Flows From Financing Activities:
		Borrowings on credit facilities				357,280		255,980
		Payments on credit facilities				(340,860)		(194,562)
		Proceeds from issuance of common stock				309		254
		Proceeds from exercise of stock options				94		91
		Excess tax benefit of exercise of common stock options				267		359
		Debt issuance costs				-		(111)
		Payment on capital lease obligations				(187)		(390)
				Net cash provided by financing activities		16,903		61,621
Effect of Exchange Rate on Cash and Cash Equivalents						(251)		52
Decrease in Cash and Cash Equivalents						(62)		(94)
Cash and Cash Equivalents at Beginning of Period						514		606
Cash and Cash Equivalents at End of Period					$	452	$	512
See Notes to Condensed Consolidated Financial Statements.

6

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 2012 Annual Report on Form 10-K filed with the SEC on November 27, 2012.  The results of operations for the three and six months ended March 31, 2013 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 $93,649 and $87,962 for the three months ended March 31, 2013 and 2012, respectively, and generated commission revenue of $5,110 and $4,398, respectively.  Gross billings from agency contracts were $161,311 and $155,993 for the six months ended March 31, 2013 and 2012, respectively, and generated commission revenue of $9,465 and $8,144, 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.

7

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

In January 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which includes bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement.  This guidance is effective for our fiscal year beginning October 1, 2013.  We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU No 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which provides additional disclosure requirements for items reclassified out of AOCI.  This guidance is effective for our fiscal year beginning October 1, 2013.  We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity, which requires the entity to release the cumulative translation adjustment related to a foreign investment when the sale or transfer of the investment represents the substantially complete liquidation of the investment, upon loss of control in the investment, or upon a step up acquisition in the investment.  This guidance is effective for our fiscal year beginning October 1, 2014.  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 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.

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. We adjusted those valuations during the three months ended March 31, 2013 as a result of further review of these estimates and assumptions. The fair value assigned to the purchased intangible related to customer relationships decreased by $1,190 with a corresponding adjustment to the carrying value of goodwill. The related impact on amortization recognized from that date is insignificant to the consolidated statements of income.  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.

8

On October 31, 2011, MWI Co. purchased substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”) for an aggregate amount of $60,878, consisting of $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 at closing 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 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		3,548		22,374
Inventories		1,911		27,701
Other current assets		-		105
Property and equipment		-		8,882
Goodwill		9,225		12,473
Intangibles		4,780		15,760
Investments		-		199
Total assets acquired		19,464		87,495
Accounts payable		2,458		25,026
Accrued expenses and other liabilities		-		1,591
Total liabilities assumed		2,458		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 six months ended March 31, 2012:

	Unaudited Pro Forma Consolidated Results
	Six months ended March 31, 2012
Revenues		$	991,001
Net Income		$	26,468

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.

9

NOTE 4 — RECEIVABLES

	March 31,		September 30,
	2013		2012
Trade	$	279,057	$	271,199
Vendor rebates and programs		27,128		20,469
		306,185		291,668
Allowance for doubtful accounts		(2,630)		(2,746)
	$	303,555	$	288,922

NOTE 5 — PROPERTY AND EQUIPMENT

	March 31,		September 30,
	2013		2012
Land	$	1,906	$	1,952
Building and leasehold improvements		14,592		14,420
Machinery, furniture and equipment		36,095		33,075
Computer equipment		8,742		8,276
Construction in progress		2,269		1,773
		63,604		59,496
Accumulated depreciation		(26,256)		(23,712)
	$	37,348	$	35,784

Depreciation expense was $1,732 and $1,582 for the three months ended March 31, 2013 and 2012, respectively.  Depreciation expense was $3,449 and $3,040 for the six months ended March 31, 2013 and 2012, respectively.

10

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		9,225
	Foreign currency adjustments		(592)
Goodwill as of March 31, 2013		$	70,474

Balances of intangibles are as follows:

		March 31,		September 30,
	Useful Lives	2013		2012
Amortizing:
Customer relationships	9-20 years	$	34,841	$	31,045
Covenants not to compete	1-5 years		450		710
Technology	11 years		5,830		5,830
Other	2-7 years		1,090		1,084
			42,211		38,669
Accumulated amortization			(8,616)		(7,640)
			33,595		31,029
Non-Amortizing:
Trade names and patents			7,590		7,677
		$	41,185	$	38,706

Amortization expense was $786 and $697 for the three months ended March 31, 2013 and 2012, respectively.  Amortization expense was $1,467 and $1,435 for the six months ended March 31, 2013 and 2012, respectively.  Estimated future annual amortization expense related to intangible assets as of March 31, 2013 is as follows:

	Amount
Remainder of 2013	$	1,586
2014		3,043
2015		2,741
2016		2,619
2017		2,547
Thereafter		21,059
	$	33,595

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.

11

NOTE 7 — DEBT

The following table presents the outstanding debt and capital lease obligations as of March 31, 2013 and September 30, 2012:

		March 31,		September 30,
			2013		2012
Revolving credit facility, 1.11% interest as of March 31, 2013		$	50,100	$	39,500
Sterling revolving credit facility, 1.45% interest as of March 31, 2013			13,854		8,580
Capital lease obligations (1)			235		441
Total debt and capital lease obligations			64,189		48,521
	Less: Long-term capital lease obligations		(39)		(104)
Total debt included in current liabilities		$	64,150	$	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 under the revolving credit facility as of March 31, 2013 and September 30, 2012.

Sterling revolving credit facility— On March 15, 2013, Centaur Services Limited (“Centaur”) entered into a First Amendment (the “Amendment”) to the unsecured revolving line of credit facility (the “sterling revolving credit facility”) dated November 5, 2010 with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”). The Amendment increases the maximum loan amount of the Sterling Revolving Credit Facility to £20,000, an increase of £7,500, and extends the term of the facility to November 1, 2016. Interest is based on LIBOR for the applicable interest period plus an applicable margin of .95% to 1.50% and the commitment fee ranges from .15% to .25%, depending on our funded debt to EBITDA ratio. The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £5,000.  As of March 31, 2013 and September 30, 2012, Centaur was in compliance with this covenant.

Also on March 15, 2013, Centaur also entered into an uncommitted overdraft facility (the “Overdraft Facility”) with Wells Fargo.  The Overdraft Facility allows Centaur to borrow an additional £10,000 to fund short term normal trading cycle fluctuations.  The Overdraft Facility will expire on November 1, 2016.  Interest on the borrowing under the Overdraft Facility is the same as the terms under the Amendment.

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;

12

·   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 March 31, 2013 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 March 31, 2013 and September 30, 2012, we had 860,237 and  865,917 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of March 31, 2013, 16,854 options to purchase common stock were outstanding with a weighted average exercise price of $17.55 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 six months ended March 31, 2013 and 2012.  During the six months ended March 31, 2013 and 2012, we issued 3,100 and 5,750 shares of restricted stock under the 2005 Plan.  We also granted 6,000 and 0 shares of unrestricted stock to non-employee directors during the six months ended March 31, 2013 and 2012, respectively.  During the three months ended March 31, 2013 and 2012, we recognized $1,465 and $427 of compensation expense related to stock grants, respectively.  During the six months ended March 31, 2013 and 2012, we recognized $2,192 and $868 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 six months ended March 31, 2013 and 2012, we issued 2,750 and 3,520 shares, respectively, of our common stock under the ESPP.

NOTE 10 — INCOME TAXES

Our effective tax rate for the three months ended March 31, 2013 and 2012 was 37.9% and 38.5%, respectively.  Our effective tax rate for the six months ended March 31, 2013 and 2012 was 38.1% and 38.6%, respectively.  The decrease was primarily due to a lower international enacted tax rate in the U.K.

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.

13

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

		Three months ended March 31,
		2013				2012
		Basic		Diluted		Basic		Diluted
Net income		$	15,100	$	15,100	$	13,178	$	13,178
Weighted average common shares outstanding			12,674		12,674		12,619		12,619
Effect of diluted securities
	Stock options and restricted stock				35				29
Weighted average diluted shares outstanding					12,709				12,648
Earnings per share		$	1.19	$	1.19	$	1.04	$	1.04
Anti-dilutive shares excluded from calculation					-				-
		Six months ended March 31,
		2013				2012
		Basic		Diluted		Basic		Diluted
Net income		$	31,851	$	31,851	$	26,374	$	26,374
Weighted average common shares outstanding			12,669		12,669		12,600		12,600
Effect of diluted securities
	Stock options and restricted stock				33				26
Weighted average diluted shares outstanding					12,702				12,626
Earnings per share		$	2.51	$	2.51	$	2.09	$	2.09
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 $260 and $233 for the three months ended March 31, 2013 and 2012, respectively. MWI Co. charged Feeders’ Advantage for certain operating and administrative services in the amounts of $557 and $497 for the six months ended March 31, 2013 and 2012, respectively. Sales of products to Feeders’ Advantage were $16,799 and $14,585, which represented 3% of total product sales for each of the three months ended March 31, 2013 and 2012.  Sales of products to Feeders’ Advantage were $35,805 and $30,143, which represented 3% of total product sales for each of the six months ended March 31, 2013 and 2012.

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 $1,490 as of March 31, 2013 and a receivable balance from Feeders’ Advantage of $62 as of September 30, 2012.

14

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

	Six months ended March 31,
	2013		2012
Supplemental Disclosures
Cash paid for interest	$	382	$	368
Cash paid for income taxes		16,829		14,110
Non-cash Activities
Issuance of restricted common stock for asset acquisition		-		7,158
Capital lease asset additions and related obligations		-		140
Property and equipment acquisitions financed with accounts payable		391		201

NOTE 14 — COMMITMENTS AND CONTINGENCIES

We are a party to legal proceedings arising out of the ordinary course of our business.  On March 11, 2013, MWI entered into a Settlement Agreement with VIYO International NV (“VIYO”) pursuant to which VIYO agreed to dismiss its lawsuit pending against MWI before the Commercial Court in Antwerp, Belgium.  As part of the settlement, MWI agreed to make payments to VIYO of $975 and to continue as a non-exclusive distributor of the VIYO product in the United States.  The Settlement Agreement provides for no admission of wrongdoing by either party and a full mutual release of all claims relating to the matter.  The $975 was expensed during the quarter ended December 31, 2012.

On March 20, 2013, MWI entered into a Settlement Agreement with Harold and Darroll Wotton (the “Defendants”) pursuant to which the parties agreed to settle their outstanding lawsuit that was pending in the United States District Court for the District of Idaho.  Pursuant to the Settlement Agreement, the Defendants agreed to make payments to MWI in the aggregate of $350 plus interest and agreed to a permanent injunction prohibiting the Defendants from selling veterinary orthopedic equipment in the United States, Canada, Germany and Dubai and products that are used to perform a lateral suture procedure such as that which can be performed using the Lateral Suture System sold by MWI’s Securos division in France, Italy, Spain and Belgium through February 23, 2014.  The Settlement Agreement provides for no admission of wrongdoing by either party and a full mutual release of all claims relating to the matter.

15

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 March 31, 2013, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended March 31, 2013 and 2012 and of cash flows for the six-month periods ended March 31, 2013 and 2012. 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

May 2, 2013

16

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 accounted for 15.7% and 18.1% of our consolidated accounts receivable balance as of March 31, 2013 and December 31, 2012, respectively, and one significant customer accounted for 5.7% and 7.6% of our consolidated accounts receivable balance as of March 31, 2013 and December 31, 2012, respectively.  We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.   

17

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.

18

Vendor Consolidation

In the United States, our top ten vendors supplied products that accounted for approximately 73% and 74% of our revenues for the six months ended March 31, 2013 and 2012, respectively, and 71% of our revenues for the fiscal year ended September 30, 2012.  Zoetis supplied products that accounted for approximately 21% and 23% of our revenues during the six months ended March 31, 2013 and 2012, respectively, and 20% of our revenues for our fiscal year ended September 30, 2012.  Of the Zoetis supplied products, production animal products under a livestock agreement accounted for approximately 13% and 14% of our revenues for the six months ended March 31, 2013 and 2012, 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 six months ended March 31, 2013 and 2012, 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 55% and 47% of total commission revenues during the six months ended March 31, 2013 and 2012, 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.

19

Results of Operations

The following table summarizes our results of operations for the three and six months ended March 31, 2013 and 2012, in dollars and as a percentage of total revenues.

				Three months ended March 31,								Six months ended March 31,
				2013		%		2012		%		2013		%		2012		%
Revenues:
	Product sales			$	541,205	96.1	%	$	488,187	96.2	%	$	1,090,692	96.0	%	$	930,784	96.0	%
	Product sales to related party				16,799	3.0	%		14,585	2.9	%		35,805	3.2	%		30,143	3.1	%
	Commissions				5,110	0.9	%		4,398	0.9	%		9,465	0.8	%		8,144	0.9	%
			Total revenues		563,114	100.0	%		507,170	100.0	%		1,135,962	100.0	%		969,071	100.0	%
Cost of product sales					488,435	86.7	%		440,552	86.9	%		984,354	86.7	%		839,939	86.7	%
Gross profit					74,679	13.3	%		66,618	13.1	%		151,608	13.3	%		129,132	13.3	%
SG&A expenses					47,928	8.5	%		42,933	8.5	%		95,388	8.4	%		81,840	8.4	%
Depreciation and amortization					2,513	0.5	%		2,274	0.4	%		4,905	0.4	%		4,466	0.5	%
Operating income					24,238	4.3	%		21,411	4.2	%		51,315	4.5	%		42,826	4.4	%
Other income (expense):
	Interest expense				(223)	-	%		(252)	-	%		(426)	-	%		(435)	-	%
	Earnings of equity method
		investees			85	-	%		79	-	%		178	-	%		156	-	%
	Other				209	-	%		186	-	%		413	-	%		374	-	%
		Total other income (expense)			71	-	%		13	-	%		165	-	%		95	-	%
Income before taxes					24,309	4.3	%		21,424	4.2	%		51,480	4.5	%		42,921	4.4	%
Income tax expense					(9,209)	(1.6)	%		(8,246)	(1.6)	%		(19,629)	(1.7)	%		(16,547)	(1.7)	%
Net income				$	15,100	2.7	%	$	13,178	2.6	%	$	31,851	2.8	%	$	26,374	2.7	%
Earnings per common share:
	Basic			$	1.19			$	1.04			$	2.51			$	2.09
	Diluted			$	1.19			$	1.04			$	2.51			$	2.09
Weighted average common shares outstanding (in thousands):
	Basic				12,674				12,619				12,669				12,600
	Diluted				12,709				12,648				12,702				12,626

20

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Total Revenues.  Total revenues increased 11.0% to $563,114 for the three months ended March 31, 2013, from $507,170 for the three months ended March 31, 2012.  Revenue growth in the United States was 10.7% for the three months ended March 31, 2013, compared to the same period in the prior fiscal year.  Revenue growth in the United Kingdom was 13.2% for the three months ended March 31, 2013, compared to the same period in the prior fiscal year, consisting of 14.4% organic growth reduced by 1.2% related to foreign currency translation.Revenues in the United States attributable to existing customers represented approximately 45% of the growth in revenues and revenues attributable to new customers represented approximately 55% of the growth in revenues during the three months ended March 31, 2013.  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 15.2% to $16,799 for the three months ended March 31, 2013, from $14,585 for the three months ended March 31, 2012 partially due to higher placements of lighter weight cattle into feedlots.  Commissions increased 16.2% to $5,110 for the three months ended March 31, 2013, from $4,398 for the three months ended March 31, 2012. Commissions increased due to an incentive recognized during the three months ended March 31, 2013 that was not recognized during the three months ended March 31, 2012 and an increase in gross billings from agency contracts.

Gross Profit.  Gross profit increased by 12.1% to $74,679 for the three months ended March 31, 2013, from $66,618 for the three months ended March 31, 2012.  The change in gross profit is primarily a result of increased total revenues as discussed above.  Gross profit as a percentage of total revenues improved to 13.3% for the three months ended March 31, 2013 from 13.1% for the three months ended March 31, 2012.  This increase was due to an improvement in vendor rebates as a percentage of total revenues.  Vendor rebates for the three months ended March 31, 2013 increased by approximately $991 compared to the three months ended March 31, 2012 primarily due to the growth in revenues and timing of manufacturer programs.

Selling, General and Administrative (“SG&A”).  SG&A expenses increased 11.6% to $47,928 for the three months ended March 31, 2013, from $42,933 for the three months ended March 31, 2012.  The increase in SG&A expenses was primarily due to an increase in compensation and benefit costs.  SG&A expenses as a percentage of total revenues were 8.5% for each of the three months ended March 31, 2013 and 2012.

Depreciation and Amortization. Depreciation and amortization increased 10.5% to $2,513 for the three months ended March 31, 2013, from $2,274 for the three months ended March 31, 2012.  The increase was primarily due to depreciation and amortization for assets acquired from PCI Animal Health and Micro.

Income Tax Expense. Our effective tax rate for the three months ended March 31, 2013 and 2012 was 37.9% and 38.5%, respectively.  The decrease was primarily due to a lower international enacted tax rate in the U.K.

Six Months Ended March 31, 2013 Compared to Six Months Ended March 31, 2012

Total Revenues.  Total revenues increased 17.2% to $1,135,962 for the six months ended March 31, 2013, from $969,071 for the six months ended March 31, 2012.  Excluding the revenues resulting from the acquisition of the assets of Micro during the month of October 2012, revenue growth in the United States was 13.5% for the six months ended March 31, 2013, compared to the same period in the prior fiscal year.  We acquired the assets of Micro on October 31, 2011, and therefore did not own Micro for one month of the comparable six month period in the prior year.  Revenues resulting from the acquisition of Micro were $28,686 during the month of October 2012.  Revenue growth in the United Kingdom was 18.7% for the six months ended March 31, 2013, compared to the same period in the prior fiscal year, consisting of 18.0% organic growth and 0.7% related to foreign currency translation.Excluding the revenues resulting from the acquisition of the assets of Micro during the month of October 2012, revenues in the United States attributable to existing customers represented approximately 54% of the growth in revenues, and revenues attributable to new customers represented approximately 46% of the growth in revenues during the six months ended March 31, 2013.

Product sales to related party increased by 18.8% to $35,805 for the six months ended March 31, 2013, from $30,143 for the six months ended March 31, 2012.  Commissions increased 16.2% to $9,465 for the six months ended March 31, 2013, from $8,144 for the six months ended March 31, 2012. Commissions increased primarily due to an incentive recognized during the six months ended March 31, 2013 that was not recognized during the six months ended March 31, 2012.

Gross Profit.  Gross profit increased by 17.4% to $151,608 for the six months ended March 31, 2013, from $129,132 for the six months ended March 31, 2012.  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 13.3% for each of the six months ended March 31, 2013 and 2012.  Gross profit as a percentage of total revenues was impacted by lower product margins offset by an improvement in freight and vendor rebates as a percentage of total revenues.  Vendor rebates for the six months ended March 31, 2013 increased by approximately $3,900 compared to the six months ended March 31, 2012.

21

Selling, General and Administrative (“SG&A”).  SG&A expenses increased 16.6% to $95,388 for the six months ended March 31, 2013, from $81,840 for the six months ended March 31, 2012.  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.  SG&A expenses as a percentage of total revenues were 8.4% for each of the six months ended March 31, 2013 and 2012.

Depreciation and Amortization. Depreciation and amortization increased 9.8% to $4,905 for the six months ended March 31, 2013, from $4,466 for the six months ended March 31, 2012.  The increase was primarily related to the acquisition of Micro.

Income Tax Expense. Our effective tax rate for the six months ended March 31, 2013 and 2012 was 38.1% and 38.6%, respectively.  The decrease was primarily due to a lower international enacted tax rate in the U.K.

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 accounted for 15.7% and 18.1% of our consolidated accounts receivable balance as of March 31, 2013 and December 31, 2012, respectively, and one significant customer accounted for 5.7% and 7.6% of our consolidated accounts receivable balance as of March 31, 2013 and December 31, 2012, respectively.  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 March 31, 2013 and September 30, 2012.  Our outstanding balance on the revolving credit facility at March 31, 2013 was $50,100, and the interest rate was 1.11% as of March 31, 2013.

On March 15, 2013, Centaur Services Limited (“Centaur”) entered into a First Amendment (the “Amendment”) to the unsecured revolving line of credit facility (the “sterling revolving credit facility”) dated November 5, 2010 with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”). The Amendment increases the maximum loan amount of the Sterling Revolving Credit Facility to £20,000, an increase of £7,500, and extends the term of the facility to November 1, 2016.  Interest is based on LIBOR for the applicable interest period plus an applicable margin of .95% to 1.50% and the commitment fee ranges from .15% to .25%, depending on our funded debt to EBITDA ratio. The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £5,000.  As of March 31, 2013 and September 30, 2012, Centaur was in compliance with the covenant.  Our outstanding balance on the sterling revolving credit facility at March 31, 2013 was £9,121 or $13,854, and the interest rate was 1.45% as of March 31, 2013.

22

Also on March 15, 2013, Centaur entered into an uncommitted overdraft facility (the “Overdraft Facility”) with Wells Fargo.  The Overdraft Facility allows Centaur to borrow an additional £10,000 to fund short term normal trading cycle fluctuations.  The Overdraft Facility will expire on November 1, 2016.  Interest on the borrowing under the Overdraft Facility is the same as the terms under the Amendment.

Operating Activities.  For the six months ended March 31, 2013, cash provided by operations was $5,771 and was primarily attributable to net income of $31,851 partially offset by changes in working capital to accommodate revenue growth and strategic inventory purchases ahead of vendor price increases which were paid for in the quarter.

For the six months ended March 31, 2012, cash used in operations was $4,363 and was primarily attributable to net income of $26,374 offset by changes in working capital which was used to accommodate the growth in revenues and strategic inventory purchases.

Investing Activities.  For the six months ended March 31, 2013, net cash used in investing activities was $22,485.  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 $5,316 which primarily related to equipment purchased for our move into a new distribution center in Shakopee, Minnesota and technology and equipment purchases.

For the six months ended March 31, 2012, net cash used in investing activities was $57,404. We paid $53,720 in cash for the acquisition of the assets of Micro. Additionally, we paid for capital expenditures of $3,282 primarily related to information technology and our new distribution center in Harrisburg, Pennsylvania.

Financing Activities.  For the six months ended March 31, 2013, net cash provided by financing activities was $16,903, which was primarily due to net borrowings of $16,420 on our credit facilities.  Our revolving credit facilities are used to fund strategic acquisitions, capital expenditures and meet our working capital requirements.

For the six months ended March 31, 2012, net cash provided by financing activities was $61,621, which was primarily due to net borrowings of $61,418 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 March 31, 2013 by approximately $7,800. 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 March 31, 2013 was $50,100.  The outstanding balance on the revolving credit facility in the United Kingdom as of March 31, 2013 was $13,854.  If there had been a combined balance on the revolving credit facility of $180,000, which is the approximate maximum available amount on the facilities based on the foreign currency rates as of March 31, 2013, a change of 10% from the interest rates as of March 31, 2013 would have changed interest by $53 for the three months ended March 31, 2013.

23

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 March 31, 2013.  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;

24

·   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.  On March 11, 2013, MWI entered into a Settlement Agreement with VIYO International NV (“VIYO”) pursuant to which VIYO agreed to dismiss its lawsuit pending against MWI before the Commercial Court in Antwerp, Belgium.  As part of the settlement, MWI agreed to make payments to VIYO of $975 and to continue as a non-exclusive distributor of the VIYO product in the United States.  The Settlement Agreement provides for no admission of wrongdoing by either party and a full mutual release of all claims relating to the matter.

On March 20, 2013, MWI entered into a Settlement Agreement with Harold and Darroll Wotton (the “Defendants”) pursuant to which the parties agreed to settle their outstanding lawsuit that was pending in the United States District Court for the District of Idaho.  Pursuant to the Settlement Agreement, the Defendants agreed to make payments to MWI in the aggregate of $350 plus interest and agreed to a permanent injunction prohibiting the Defendants from selling veterinary orthopedic equipment in the United States, Canada, Germany and Dubai and products that are used to perform a lateral suture procedure such as that which can be performed using the Lateral Suture System sold by MWI’s Securos division in France, Italy, Spain and Belgium through February 23, 2014.  The Settlement Agreement provides for no admission of wrongdoing by either party and a full mutual release of all claims relating to the matter.

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, as modified by the risk factors disclosed in the “Risk Factors” section of the Company’s Quarterly Report on Form 10-Q for the three months ended December 31, 2012.

25

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 March 31, 2013.

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
January 1 to January 31, 2013	160	(1)	$	112.31	—	—
February 1 to February 28, 2013	305	(1)		118.99	—	—
March 1 to March 31, 2013	—			—	—	—
Total	465		$	116.69	—	—
(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

10.1	First Amendment to the Sterling Revolving Credit Facility between Centaur Services Limited and Wells Fargo, N.A., London Branch dated March 15, 2013, incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed March 20, 2013
10.2	Overdraft Facility between Centaur Services Limited and Wells Fargo, N.A., London Branch dated March 15, 2013, incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed March 20, 2013
10.3	Amended and Restated Continuing Guaranty of MWI Veterinary Supply Co. dated March 15, 2013, incorporated herein by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed March 20, 2013
10.4	Fourth Amendment to Credit Agreement 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. dated March 15, 2013, incorporated herein by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed March 20, 2013
10.5	MWI Veterinary Supply, Inc. Annual Incentive Bonus Plan
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

26

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: May 2, 2013	/s/ Mary Patricia B. Thompson
	Mary Patricia B. Thompson
	Senior Vice President of Finance and Administration, Chief Financial Officer

27