MWI Veterinary Supply (MWIV) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

OR

☐ 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 ☒ No ☐

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 ☒  No ☐

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	☒	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☐

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

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as ofApril 25, 2014 was 12,860,355.

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, 2014 and 2013	3
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2014 and 2013	4
	Condensed Consolidated Balance Sheets as of March 31, 2014 and September 30, 2013	5
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements	7
	Report of Independent Registered Public Accounting Firm	16
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II.	OTHER INFORMATION
	Cautionary Statement	25
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27

MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Dollars and shares in thousands, except per share amounts
(unaudited)
	Three Months Ended March 31,					Six Months Ended March 31,
	2014		2013			2014		2013
Revenues:
Product sales	$	698,594	$	541,205		$	1,361,335	$	1,090,692
Product sales to related party		16,787		16,799			37,487		35,805
Commissions		5,891		5,110			9,709		9,465
Total revenues		721,272		563,114			1,408,531		1,135,962
Cost of product sales		630,212		488,435			1,228,383		984,354
Gross profit		91,060		74,679	-	-	180,148		151,608
Selling, general and administrative expenses		60,723		47,928			116,796		95,388
Depreciation and amortization		2,906		2,513			5,715		4,905
Operating income		27,431		24,238			57,637		51,315
Other income (expense):
Interest expense		(356)		(223)			(595)		(426)
Earnings of equity method investees		82		85			186		178
Other		155		209			352		413
Total other income (expense), net		(119)		71			(57)		165
Income before taxes		27,312		24,309			57,580		51,480
Income tax expense		(10,536)		(9,209)			(22,365)		(19,629)
Net income	$	16,776	$	15,100		$	35,215	$	31,851
Earnings per common share:
Basic	$	1.32	$	1.19		$	2.77	$	2.51
Diluted	$	1.32	$	1.19		$	2.76	$	2.51
Weighted average common shares outstanding:
Basic		12,712		12,674			12,709		12,669
Diluted		12,748		12,709			12,745		12,702
See notes to condensed consolidated financial statements

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MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in thousands (unaudited)
	Three Months Ended March 31,				Six Months Ended March 31,
	2014		2013		2014		2013
Net income	$	16,776	$	15,100	$	35,215	$	31,851
Other comprehensive income (loss)
Foreign currency translation		640		(3,498)		2,026		(3,516)
Total comprehensive income	$	17,416	$	11,602	$	37,241	$	28,335
See notes to condensed consolidated financial statements

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MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars and shares in thousands, except per share amounts
(unaudited)
	March 31,		September 30,
	2014		2013
Assets
Current Assets:
Cash and cash equivalents	$	2,362	$	953
Receivables, net		387,034		307,445
Inventories		414,896		326,093
Prepaid expenses and other current assets		4,296		6,004
Deferred income taxes		3,461		2,327
Total current assets		812,049		642,822
Property and equipment, net		47,148		39,183
Goodwill		72,546		71,150
Intangibles, net		43,188		40,490
Other assets, net		9,943		8,910
Total assets	$	984,874	$	802,555
Liabilities and Stockholders’ Equity
Current Liabilities:
Credit facilities	$	112,533	$	18,801
Accounts payable		373,889		324,057
Accrued expenses and other current liabilities		19,644		21,816
Current portion of capital lease obligations		48		103
Total current liabilities		506,114		364,777
Deferred income taxes		9,690		9,321
Long-term portion of capital lease obligations		3		16
Other long-term liabilities		2,069		2,122
Commitments and contingencies
Stockholders’ Equity
Common stock $0.01 par value, 40,000 authorized; 12,861 and
12,848 shares issued and outstanding, respectively		129		128
Additional paid in capital		151,897		148,459
Retained earnings		311,028		275,814
Accumulated other comprehensive income		3,944		1,918
Total stockholders’ equity		466,998		426,319
Total liabilities and stockholders’ equity	$	984,874	$	802,555
See notes to condensed consolidated financial statements

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MWI VETERINARY SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
	Six Months Ended March 31,
	2014		2013
Cash Flows From Operating Activities:
Net income	$	35,215	$	31,851
Adjustments to reconcile net income to net cash (used in)/provided by operating
activities:
Depreciation and amortization		5,725		4,916
Amortization of debt issuance costs		19		19
Stock-based compensation		2,938		2,087
Deferred income taxes		(839)		(83)
Earnings of equity method investees		(186)		(178)
Distribution from equity method investee		337		-
Excess tax benefit of exercise of common stock options
and restricted stock vesting		(170)		(267)
(Gain)/loss on disposal of property and equipment		(27)		55
Other		(16)		(167)
Changes in operating assets and liabilities (net of effects of business acquisitions):
Receivables		(873)		(14,196)
Inventories		(22,819)		(17,021)
Prepaid expenses and other current assets		1,863		3,159
Accounts payable		(25,123)		(2,952)
Accrued expenses		(3,896)		(1,452)
Net cash (used in)/provided by operating activities		(7,852)		5,771
Cash Flows From Investing Activities:
Business acquisitions, net of cash acquired in fiscal year 2014 of $1,387		(78,128)		(17,006)
Purchases of property and equipment		(7,097)		(5,316)
Proceeds from sales of property and equipment		123		72
Other		(55)		(235)
Net cash used in investing activities		(85,157)		(22,485)
Cash Flows From Financing Activities:
Borrowings on credit facilities		387,816		357,280
Payments on credit facilities		(294,135)		(340,860)
Proceeds from issuance of common stock		390		309
Proceeds from exercise of common stock options		44		94
Excess tax benefit of exercise of common stock options
and restricted stock vesting		170		267
Tax withholdings on net settlements of share-based awards		(84)		-
Payment on long-term debt and capital lease obligations		(70)		(187)
Net cash provided by financing activities		94,131		16,903
Effect of exchange rate on Cash and Cash Equivalents		287		(251)
Net Increase/(Decrease) in Cashand Cash Equivalents		1,409		(62)
Cash and Cash Equivalents at Beginning of Period		953		514
Cash and Cash Equivalents at End of Period	$	2,362	$	452
See notes to condensed consolidated financial statements

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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. (“MWI” or the “Company”) 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 2013 Annual Report on Form 10-K filed with the SEC on November 27, 2013.  The results of operations for the three and six months ended March 31, 2014 are not necessarily indicative of results to be expected for the entire fiscal year.

Our unaudited condensed consolidated balance sheet as of September 30, 2013 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, allowance for doubtful accounts, customer incentives, vendor rebates, inventories, goodwill and intangible assets, income taxes, 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 $94,050 and $93,649 for the three months ended March 31, 2014 and 2013, respectively, and generated commission revenue of $5,891 and $5,110, respectively. Gross billings from agency contracts were $161,564 and $161,311 for the six months ended March 31, 2014 and 2013, respectively, and generated commission revenue of $9,709 and $9,465, 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.

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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, our business relies on a smaller number of relatively larger customers than does our business in the United States.  Our customers in the United Kingdom accounted for an aggregate of 11.7% and 14.5% of our consolidated accounts receivable balance as of March 31, 2014 and September 30, 2013, respectively, and one significant customer accounted for 1.7% and 2.6% of our consolidated accounts receivable balance as of March 31, 2014 and September 30, 2013, respectively. 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.  The adoption of this guidance did not 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 accumulated other comprehensive income.  This guidance is effective for our fiscal year beginning October 1, 2013.  The adoption of this guidance did not 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 $17,107, after giving effect to post-closing adjustments.  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 an estimated 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.

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On November 1, 2013, MWI Co. purchased substantially all of the assets of IVESCO Holdings, LLC (“IVESCO”) for a net purchase price of $79,515, after giving effect to post-closing adjustments.  The cash purchase price was funded with borrowings by the Company under its existing Credit Agreement (as defined herein). IVESCO engaged in the distribution and sale of animal health and related products and services, logistics and technical support relating to such distribution and sale of animal health and related products. The intangible assets acquired in the acquisition include trade name and customer relationships.  The intangible asset representing customer relationships acquired in the acquisition has an estimated useful life of 9 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.

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.

	IVESCO		PCI Animal Health
Cash	$	1,387	$	-
Receivables		77,255		3,585
Inventories		65,033		1,928
Other current assets		335		-
Property and equipment		4,931		-
Other assets		1,086		-
Goodwill		1,092		9,327
Intangibles		3,850		4,780
Total assets acquired		154,969		19,620
Accounts payable		73,875		2,513
Accrued expenses		1,579		-
Total liabilities assumed		75,454		2,513
Net assets acquired	$	79,515	$	17,107

The following table presents information for IVESCO that is included in our consolidated statements of income from the acquisition date of November 1, 2013 through the end of the quarter ended March 31, 2014. Subsequent to March 31, 2014, determination of such information will be impracticable due to the integration of the acquired operations.  This information for PCI Animal Health is not presented as it is impracticable due to the integration of the acquired operations.

		IVESCO’s operations included in MWI’s results
		Three months ended March 31, 2014		Six months ended March 31, 2014
Revenues	$	120,233	$	195,334
Net Income	$	427	$	858

The following table presents supplemental pro forma information as if the acquisition of substantially all of the assets of IVESCO had occurred on October 1, 2012 for the six months ended March 31, 2014 and 2013 (pro forma information is not presented for PCI Animal Health as it is not material):

	Unaudited Pro Forma Consolidated Results
	Six Months Ended March 31,
	2014		2013
Revenues	$	1,458,523	$	1,385,848
Net Income	$	35,216	$	34,369
Earnings per common share - diluted	$	2.76	$	2.71

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Results for the six months ended March 31, 2014 include approximately $1,557 of integration and acquisition related expenses incurred in connection with the acquisition of substantially all of the assets of IVESCO on November 1, 2013. 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, 2012.  Additionally, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.

NOTE 4 — RECEIVABLES

	March 31,		September 30,
	2014		2013
Trade	$	344,248	$	282,923
Vendor rebates and programs		46,641		26,983
		390,889		309,906
Allowance for doubtful accounts		(3,855)		(2,461)
	$	387,034	$	307,445

NOTE 5 — PROPERTY AND EQUIPMENT

	March 31,		September 30,
	2014		2013
Land	$	2,509	$	1,932
Building and leasehold improvements		19,456		14,914
Machinery, furniture and equipment		42,023		38,032
Computer equipment		12,805		9,868
Construction in progress		3,830		4,328
		80,623		69,074
Accumulated depreciation		(33,475)		(29,891)
	$	47,148	$	39,183

Depreciation expense was $2,080 and $1,732 for the three months ended March 31, 2014 and 2013, respectively. Depreciation expense was $4,054 and $3,449 for the six months ended March 31, 2014 and 2013, respectively.

NOTE 6 — GOODWILL AND INTANGIBLES

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

Goodwill as of September 30, 2013	$	71,150
Acquisition activity		1,092
Foreign currency translation		304
Goodwill as of March 31, 2014	$	72,546

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Balances of intangibles are as follows:

	Estimated
	Useful Lives	March 31, 2014
Amortizing:		Cost		Accumulated Amortization		Net
Customer relationships	9 - 20 years	$	37,752	$	(9,714)	$	28,038
Covenants not to compete	1 - 5 years		373		(136)		237
Technology	11 years		5,830		(1,281)		4,549
Other	2 - 7 years		1,197		(953)		244
			45,152		(12,084)		33,068
Non-Amortizing:
Trade names and patents			10,120		-		10,120
		$	55,272	$	(12,084)	$	43,188

	Estimated
	Useful Lives	September 30, 2013
Amortizing:		Cost		Accumulated Amortization		Net
Customer relationships	9 - 20 years	$	35,797	$	(8,393)	$	27,404
Covenants not to compete	1 - 5 years		450		(185)		265
Technology	11 years		5,830		(1,016)		4,814
Other	2 - 7 years		1,126		(794)		332
			43,203		(10,388)		32,815
Non-Amortizing:
Trade names and patents			7,675		-		7,675
		$	50,878	$	(10,388)	$	40,490

Amortization expense was $831 and $786 for the three months ended March 31, 2014 and 2013, respectively.  Amortization expense was $1,671 and $1,467 for the six months ended March 31, 2014 and 2013, respectively.

Estimated future annual amortization expense related to intangible assets as of March 31, 2014 is as follows:

	Amount
Remainder of 2014	$	1,654
2015		2,989
2016		2,862
2017		2,782
2018		2,765
Thereafter		20,016
	$	33,068

The above projection of amortization expense is based upon preliminary estimates of intangible assets and lives associated with the acquisition of substantially all of the assets of IVESCO.  These amounts may be adjusted during the allocation period as defined in ASC 805.

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NOTE 7 — DEBT

The following table presents the outstanding debt and capital lease obligations as of March 31, 2014 and September 30, 2013:

	March 31,		September 30,
	2014		2013
Revolving credit facility, 1.04% interest as of March 31, 2014	$	112,200	$	16,300
Sterling revolving credit facility, 1.41% interest as of March 31, 2014		333		2,501
Capital lease obligations (1)		51		119
Total debt and capital lease obligations		112,584		18,920
Less: Long-term capital lease obligations		(3)		(16)
Total debt and capital lease obligations included in current liabilities	$	112,581	$	18,904
(1) The capital lease obligations have varying maturity dates.

Revolving Credit Facility — On February 3, 2014, MWI Co. as borrower, entered into a Fifth Amendment to Credit Agreement (the “Fifth Amendment”), amending the Credit Agreement dated December 13, 2006, as amended (the “Credit Agreement”), by and among MWI Co., MWI, and Memorial Pet Care, Inc. (“Memorial”) and Bank of America, N.A. and Wells Fargo Bank, N.A. as lenders (collectively, the “Lenders”).  As amended by the Fifth Amendment, the Credit Agreement allows for an aggregate revolving commitment of the Lenders of $200,000 and a maturity date of November 1, 2016.  Under the Credit Agreement, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Credit Agreement 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 financial covenants as of March 31, 2014 and September 30, 2013. 

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.  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 0.95% to 1.50%, and the commitment fee ranges from 0.15% to 0.25%, depending on our funded debt to EBITDA ratio.  The facility contains a financial covenant requiring Centaur to maintain a minimum tangible net worth of £5,000.  As of March 31, 2014 and September 30, 2013, Centaur was in compliance with the covenant.

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.

MWI Co. guarantees the obligations of Centaur under the Sterling Revolving Credit Facility and the Overdraft Facility.

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

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· 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, 2014 and September 30, 2013, 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 (Level 1 inputs), we believe that the estimated fair value of our debt approximated 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, 2014 and September 30, 2013, we had 805,463 and 815,260 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of March 31, 2014,  13,583 options to purchase common stock were outstanding with a weighted average exercise price of $17.43 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 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, 2014 and 2013.  During the six months ended March 31, 2014 and 2013, we issued 5,300 and 3,100 shares, respectively, of restricted stock under the 2005 Plan. We also granted 4,505 and 6,000 shares of unrestricted stock to non-employee directors during the six months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014 and 2013, we recognized $1,833 and $1,465 of compensation expense related to stock grants, respectively. During the six months ended March 31, 2014 and 2013, we recognized $2,938 and $2,192 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, 2014 and 2013, we issued 2,388 and 2,750 shares, respectively, of our common stock under the ESPP. 

NOTE 10 — INCOME TAXES

Our effective tax rate for the three months ended March 31, 2014 and 2013 was 38.6% and 37.9%, respectively. Our effective tax rate for the six months ended March 31, 2014 and 2013 was 38.8 % and 38.1%, respectively.  The increase was primarily due to higher estimated state income taxes.

With few exceptions, we are no longer subject to income tax examination for years before 2009 in the U.S. and 2008 in significant state and local jurisdictions.  We are no longer subject to income tax examination for years before 2011 in significant foreign jurisdictions.

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

	Three Months Ended March 31,
	2014				2013
	Basic		Diluted		Basic		Diluted
Net income	$	16,776	$	16,776	$	15,100	$	15,100
Weighted average common shares outstanding		12,712		12,712		12,674		12,674
Effect of dilutive securities
Stock options and restricted stock				36				35
Weighted average diluted shares outstanding				12,748				12,709
Earnings per share	$	1.32	$	1.32	$	1.19	$	1.19
Anti-dilutive shares excluded from calculation				-				-

	Six Months Ended March 31,
	2014				2013
	Basic		Diluted		Basic		Diluted
Net income	$	35,215	$	35,215	$	31,851	$	31,851
Weighted average common shares outstanding		12,709		12,709		12,669		12,669
Effect of diluted securities
Stock options and restricted stock				36				33
Weighted average diluted shares outstanding				12,745				12,702
Earnings per share	$	2.77	$	2.76	$	2.51	$	2.51
Anti-dilutive shares excluded from calculation				-				-

NOTE 12 — ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income, comprised entirely of foreign currency translation adjustments, consisted of the following:

	Three Months Ended March 31,				Six Months Ended March 31,
	2014		2013		2014		2013
Balance, beginning of period	$	3,304	$	1,524	$	1,918	$	1,542
Foreign currency translation gain (loss) in
other comprehensive income		640		(3,498)		2,026		(3,516)
Balance, end of period	$	3,944	$	(1,974)	$	3,944	$	(1,974)

NOTE 13 — 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 $265 and $260 for the three months ended March 31, 2014 and 2013, respectively, and $591 and $557 for the six months ended March 31, 2014 and 2013, respectively. Sales of products to Feeders’ Advantage were $16,787 and $16,799, for each of the three months ended March

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31, 2014 and 2013, respectively, which represented 2% and 3% of total product sales for each of the three-month periods ended March 31, 2014 and 2013. Sales of products to Feeders’ Advantage were $37,487 and $35,805 for the six months ended March 31, 2014 and 2013, respectively, which represented 3% of total product sales for each of the six-month periods.

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 $2,392 and $777 as of March 31, 2014 and September 30, 2013, respectively.

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

	Six Months Ended March 31,
	2014		2013
Supplemental Disclosures
Cash paid for interest	$	554	$	382
Cash paid for income taxes		21,728		16,829
Non-cash Activities
Property and equipment acquisitions financed with accounts payable		164		391

NOTE 15 — COMMITMENTS AND CONTINGENCIES

From time to time, in the normal course of business, we may become a party to legal proceedings that may have an adverse effect on our financial position, results of operations and cash flows. At March 31, 2014, we were not a party to any material pending legal proceedings and were not aware of any claims that individually or in the aggregate could have a material adverse effect on our financial position, results of operations or cash flows.

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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 "Company") as of March 31, 2014, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended March 31, 2014 and 2013, and of cash flows for the six-month periods ended March 31, 2014 and 2013. These interim financial statements are the responsibility of the Company’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, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated November 27, 2013, 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, 2013 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 6, 2014

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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 in the United States and the United Kingdom. We sell our products in both the companion and production animal markets. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions, including the following transactions:    

· On November 1, 2013, we acquired substantially all of the assets of IVESCO, a value-added distributor of animal health and related products to veterinarians, food animal producers and dealers in the United States.

· In December 2012, we purchased substantially all of the assets of PCI Animal Health, a distributor of companion animal health products primarily in the Northeastern United States. 

· In October 2011, we acquired substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”), 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.  In addition, as a result of the Micro transaction, we now offer proprietary, computerized management systems for the production animal market.   

We estimate that in the United States approximately 59% of our total revenues have been generated from sales to the companion animal market and 41% from sales to the production animal market during fiscal year 2013.  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 64% of our total revenues have been generated from sales to the companion animal market and 36% from sales to the production animal market during fiscal year 2013.  As a result of the acquisition of substantially all of the assets of IVESCO, we estimate that in the United States approximately 51% of our total revenues have been generated from sales to the companion animal market and 49% from sales to the production animal market during the six months ended March 31, 2014.  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 55% of our total revenues have been generated from sales to the companion animal market and 45% from sales to the production animal market during the six months ended March 31, 2014. 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 2013. 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 such as milk, grains, livestock and poultry, 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 has shown signs of a recovery in 2012 and 2013.  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, grains, livestock and poultry, 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 with which products they are treated.  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

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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, our business relies on a smaller number of relatively larger customers than does our business in the United States.  Our customers in the United Kingdom accounted for an aggregate of 11.7% and 14.5% of our consolidated accounts receivable balance as of March 31, 2014 and September 30, 2013, respectively, and one significant customer accounted for 1.7%  and 2.6% of our consolidated accounts receivable balance as of March 31, 2014 and September 30, 2013, respectively. 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 condensed 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.

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

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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 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

Our ten largest vendors supplied products that accounted for approximately 65% and 73% of our revenues during the six months ended March 31, 2014 and 2013, respectively, and 70% of our revenues for the fiscal year ended September 30, 2013.  Zoetis supplied products that accounted for approximately 21% of our revenues during each of the six months ended March 31, 2014 and 2013, and 20% of our revenues for our fiscal year ended September 30, 2013.  Of the Zoetis supplied products, production animal products under a livestock agreement accounted for approximately 10% and 13% of our revenues for the six months ended March 31, 2014 and 2013, respectively, and approximately 10% of our revenues for our fiscal year ended September 30, 2013.  Elanco supplied products that accounted for approximately 10% and 9% of our revenues during the six months ended March 31, 2014 and 2013, respectively, and 10% of our revenues for our fiscal year ended September 30, 2013.  Merck supplied products that accounted for approximately 9% and 15% of our revenues during the six months ended March 31, 2014 and 2013, respectively, and 14% of our revenues for our fiscal year ended September 30, 2013.  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 43% and 55% of total commission revenues during the six months ended March 31, 2014 and 2013, respectively, and 50% of total commission revenues for our fiscal year ended September 30, 2013.

For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 27, 2013.

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Results of Operations

The following table summarizes our results of operations for the three and six months ended March 31, 2014 and 2013, in dollars and as a percentage of total revenues.

	Three Months Ended March 31,								Six Months Ended March 31,
	2014		%		2013		%		2014		%		2013		%
Revenues:
Product sales	$	698,594	96.9	%	$	541,205	96.1	%	$	1,361,335	96.6	%	$	1,090,692	96.0	%
Product sales to related party		16,787	2.3	%		16,799	3.0	%		37,487	2.7	%		35,805	3.2	%
Commissions		5,891	0.8	%		5,110	0.9	%		9,709	0.7	%		9,465	0.8	%
Total revenues		721,272	100.0	%		563,114	100.0	%		1,408,531	100.0	%		1,135,962	100.0	%
Cost of product sales		630,212	87.4	%		488,435	86.7	%		1,228,383	87.2	%		984,354	86.7	%
Gross profit		91,060	12.6	%		74,679	13.3	%		180,148	12.8	%		151,608	13.3	%
SG&A expenses		60,723	8.4	%		47,928	8.5	%		116,796	8.3	%		95,388	8.4	%
Depreciation and amortization		2,906	0.4	%		2,513	0.5	%		5,715	0.4	%		4,905	0.4	%
Operating income		27,431	3.8	%		24,238	4.3	%		57,637	4.1	%		51,315	4.5	%
Other income (expense):
Interest expense		(356)	-	%		(223)	-	%		(595)	-	%		(426)	-	%
Earnings of equity method  investees		82	-	%		85	-	%		186	-	%		178	-	%
Other		155	-	%		209	-	%		352	-	%		413	-	%
Total other income (expense)		(119)	-	%		71	-	%		(57)	-	%		165	-	%
Income before taxes		27,312	3.8	%		24,309	4.3	%		57,580	4.1	%		51,480	4.5	%
Income tax expense		(10,536)	(1.5)	%		(9,209)	(1.6)	%		(22,365)	(1.6)	%		(19,629)	(1.7)	%
Net income	$	16,776	2.3	%	$	15,100	2.7	%	$	35,215	2.5	%	$	31,851	2.8	%
Earnings per common share:
Basic	$	1.32			$	1.19			$	2.77			$	2.51
Diluted	$	1.32			$	1.19			$	2.76			$	2.51
Weighted average common shares outstanding (in thousands):
Basic		12,712				12,674				12,709				12,669
Diluted		12,748				12,709				12,745				12,702

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Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Total Revenues.  Total revenues increased 28.1% to $721,272 for the three months ended March 31, 2014, from $563,114 for the three months ended March 31, 2013.  This strong revenue growth was achieved in spite of 17 days during the quarter when at least one distribution center was closed due to severe weather, compared to 4 days in the same period in the prior fiscal year.  Revenues from the IVESCO business were $120,233 during the quarter ended March 31, 2014. Excluding the impact of IVESCO revenues, revenue growth in the United States was 8.0% for the three months ended March 31, 2014, compared to the same period in the prior fiscal year.  Revenue growth was impacted by severe weather conditions experienced during the quarter ended March 31, 2014. Revenues in the United Kingdom decreased 0.8% from the same period in the prior fiscal year, as a result of a 6.8% organic decrease offset in part by a 6.0% increase related to foreign currency translation.

Revenue growth in the United States benefited from increased sales of diagnostic lines, which represented approximately 1.2% of the growth.  Growth in flea, tick and heartworm products represented 0.4% of the revenue growth in the United States for the three months ended March 31, 2014, after being impacted by the launch of a new product sold under an agency relationship.

Product sales to a  related party decreased slightly to $16,787 for the three months ended March 31, 2014, from $16,799 for the three months ended March 31, 2013. Commissions increased 15.3% to $5,891 for the three months ended March 31, 2014, from $5,110 for the three months ended March 31, 2013.  Gross agency billings increased to $94,050 from $93,649 for the three months ended March 31, 2014 and 2013, respectively.  The increase in commissions was due primarily to an incentive earned during the current quarter that was not available in the same quarter in the prior year.

Gross Profit.  Gross profit increased by 21.9% to $91,060 for the three months ended March 31, 2014, from $74,679 for the three months ended March 31, 2013.  The change in gross profit is primarily a result of increased total revenues as discussed above.  Gross profit as a percentage of total revenues decreased to 12.6% for the three months ended March 31, 2014 from 13.3% for the three months ended March 31, 2013.  Product margin as a percentage of total revenues decreased partially due to the addition of the IVESCO business in November 2013. The product margin on the IVESCO business is lower than our overall product margin.  This serves to reduce the overall product margin of the consolidated company when compared to our results for the same period in the prior fiscal year.    In addition, there were pricing pressures during the three months ended March 31, 2014 as market participants strove to achieve sales goals.  Vendor rebates for the three months ended March 31, 2014 increased by approximately $3,923 compared to the three months ended March 31, 2013 primarily due to the growth in revenues and timing of manufacturer programs.

Selling, General and Administrative (“SG&A”).  SG&A expenses increased 26.7% to $60,723 for the three months ended March 31, 2014, from $47,928 for the three months ended March 31, 2013.  The increase in SG&A expenses was primarily due to the addition of the IVESCO business in November 2013.  SG&A expenses as a percentage of total revenues were 8.4% for the three months ended March 31, 2014 compared to 8.5% for the three months ended March 31, 2013. We incurred $740 of integration and acquisition related costs during the quarter in connection with the acquisition of substantially all of the assets of IVESCO on November 1, 2013.             

Depreciation and Amortization.  Depreciation and amortization increased 15.6% to $2,906 for the three months ended March 31, 2014, from $2,513 for the three months ended March 31, 2013.  The increase was primarily due to technology and equipment investments, as well as the assets acquired from IVESCO. 

Income Tax Expense.  Our effective tax rate for the three months ended March 31, 2014 and 2013 was 38.6% and 37.9%, respectively.  The increase was primarily due to higher estimated state income taxes.

Six Months Ended March 31, 2014 Compared to Six Months Ended March 31, 2013

Total Revenues.  Total revenues increased 24.0% to $1,408,531 for the six months ended March 31, 2014, from $1,135,962 for the six months ended March 31, 2013.  Excluding the revenues resulting from the acquisition of substantially all of the assets of IVESCO, revenue growth in the United States was 8.8% for the six months ended March 31, 2014, compared to the same period in the prior fiscal year.  Revenue growth was impacted by severe weather conditions experienced during the quarter ended March 31, 2014.  Revenues in the United Kingdom decreased 4.7% from the same period in the prior fiscal year, consisting of a 7.9% organic decrease, offset in part by a 3.2% increase related to foreign currency translation.

Product sales to a related party increased by 4.7% to $37,487 for the six months ended March 31, 2014, from $35,805 for the six months ended March 31, 2013.  Commissions increased 2.6% to $9,709 for the six months ended March 31, 2014, from $9,465 for the six months ended March 31, 2013.  Gross agency billings increased to $161,564 from $161,311 for the six months ended March 31, 2014 and 2013, respectively. 

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Gross Profit.  Gross profit increased by 18.8% to $180,148 for the six months ended March 31, 2014, from $151,608 for the six months ended March 31, 2013.  The change in gross profit is primarily a result of increased total revenues as discussed above.  Gross profit as a percentage of total revenues decreased to 12.8% for the six months ended March 31, 2014 from 13.3% for the six months ended March 31, 2013.  Product margin as a percentage of total revenues decreased partially due to the addition of the IVESCO business during the quarter ended December 31, 2013. The product margin on the IVESCO business is lower than our overall product margin.  This serves to reduce the overall product margin of the consolidated company when compared to our results for the same period in the prior fiscal year.  In addition, there were pricing pressures as market participants strove to achieve sales goals.  Vendor rebates for the six months ended March 31, 2014 increased by approximately $6,484 compared to the six months ended March 31, 2013 primarily due to the growth in revenues and timing of manufacturer programs.

Selling, General and Administrative (“SG&A”).  SG&A expenses increased 22.4% to $116,796 for the six months ended March 31, 2014, from $95,388 for the six months ended March 31, 2013.  The increase in SG&A expenses was primarily due to the addition of the IVESCO business during the quarter ended December 31, 2013.  SG&A expenses as a percentage of total revenues were 8.3% for the six months ended March 31, 2014 compared to 8.4% for the six months ended March 31, 2013.  We incurred $1,557 of integration and acquisition related costs during the six months ended March 31, 2014 in connection with the acquisition of substantially all of the assets of IVESCO on November 1, 2013.                        

Depreciation and Amortization. Depreciation and amortization increased 16.5% to $5,715 for the six months ended March 31, 2014, from $4,905 for the six months ended March 31, 2013.  The increase was primarily due to technology and equipment investments, as well as the assets acquired from IVESCO. 

Income Tax Expense.  Our effective tax rate for the six months ended March 31, 2014 and 2013 was 38.8% and 38.1%, respectively.  The increase was primarily due to higher estimated state income 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, 2013.

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, grains, livestock and poultry, 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.  Our customers in the United Kingdom accounted for an aggregate of 11.7% and 14.5% of our consolidated accounts receivable balance as of March 31, 2014 and September 30, 2013, respectively, and one significant customer accounted for 1.7%  and 2.6% of our consolidated accounts receivable balance as of March 31, 2014 and September 30, 2013, respectively. We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.

We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no provision for U.S. income taxes has been made with respect to any such amounts.  As of March 31, 2014, the amount of cash and cash equivalents associated with indefinitely reinvested foreign earnings was approximately $2,258.  We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. In the event that these funds are repatriated, such amounts would be subject to income tax liabilities in the United States.  We believe that there are no material implications or restrictions upon our liquidity based on the insignificance of the amounts currently held by our foreign subsidiaries.

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Capital Resources. On February 3, 2014, MWI Co., as borrower, entered into the Fifth Amendment,  amending the Credit Agreement by and among MWI Co., MWI, Memorial and the Lenders.  As amended by the Fifth Amendment, the Credit Agreement allows for an aggregate revolving commitment of the Lenders of $200,000 and a maturity date of November 1, 2016.  Under the Credit Agreement, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Credit Agreement 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 financial covenants as of March 31, 2014 and September 30, 2013.  Our outstanding balance on the Credit Agreement at March 31, 2014 was $112,200, and the interest rate was 1.04% as of March 31, 2014. 

On March 15, 2013, Centaur entered into the Amendment to the Sterling Revolving Credit Facility dated November 5, 2010 with Wells Fargo Bank, N.A. London Branch.  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 0.95% to 1.50%, and the commitment fee ranges from 0.15% to 0.25%, depending on our funded debt to EBITDA ratio.  The facility contains a financial covenant requiring Centaur to maintain a minimum tangible net worth of £5,000.  As of March 31, 2014 and September 30, 2013, Centaur was in compliance with the covenant. The outstanding balance on the Sterling Revolving Credit Facility at March 31, 2014 was £200, or $333 using the exchange rate on March 31, 2014.  The interest rate for the Sterling Revolving Credit Facility was 1.41% as of March 31, 2014.

Also on March 15, 2013, Centaur entered into 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.

MWI Co. guarantees the obligations of Centaur under the Sterling Revolving Credit Facility and the Overdraft Facility.

Operating Activities.  For the six months ended March 31, 2014, cash used by operations was $7,852 and was primarily attributable to a decrease in accounts payable of $25,123 and an increase in inventories of $22,819, offset in part by net income of $35,215.  The decrease in accounts payable and increase in inventory was primarily due to the timing of payments for strategic inventory purchases.  The increase in net income is a result of the factors discussed above in “Results of Operations.”

Investing Activities.  For the six months ended March 31, 2014, net cash used in investing activities was $85,157.  We acquired substantially all of the assets of IVESCO for $78,128, net of $1,387 of cash acquired. Additionally, we paid for capital expenditures of $7,097 which related primarily to technology and equipment purchases. 

Financing Activities.  For the six months ended March 31, 2014, net cash provided by financing activities was $94,131, which was primarily due to net borrowings of $93,681 on our revolving credit facilities.  Our revolving credit facilities are used to fund strategic acquisitions, capital expenditures and meet our working capital requirements.   

Contractual Obligations and Guarantees

For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 27, 2013 with the SEC.

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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, 2014 by approximately $7,700. 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, 2014 was $112,200.  The outstanding balance on the revolving credit facilities in the United Kingdom as of March 31, 2014 was $333.  If there had been a combined balance on the revolving credit facilities of $250,000, which is the approximate maximum available amount on the facilities based on the foreign currency rates as of March 31, 2014, a change of 10% from the interest rates as of March 31, 2014 would have changed interest by $277 for the three months ended March 31, 2014.

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, 2014.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

On November 1, 2013, we acquired substantially all of the assets of IVESCO. In connection with integrating IVESCO, we are evaluating our internal control over financial reporting, and, where necessary, will implement changes as the integration proceeds.  This process may result in additions or changes to our internal control over financial reporting. Except for the acquisition, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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;

· vendor rebates based upon attaining certain growth goals;

· transitional challenges associated with acquisitions, including the failure to retain customers and the disproportionate demands on management resources to integrate acquired businesses;

· financial risks associated with acquisitions and investments;

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

· seasonality;

· competition;

· possible changes in the use of feed additives (antibiotics, growth promotants) used in production animal products due to trade restrictions, animal welfare and/or government regulations;

· an outbreak of foodborne diseases in production animal products;

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

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

· risks associated with our international operations;

· an outbreak of infectious disease in animals;

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

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

· a disruption caused by adverse weather (i.e. drought) or other natural conditions or disasters;

· 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;

· the impact of general economic trends on our business;

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

· 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;

· unforeseen litigation;

· 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; and

· risks from potential increases in variable interest rates.

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.

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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 not currently a party to any material pending legal proceedings and are not aware of any claims that individually or in the aggregate could have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A.  Risk Factors

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.

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, 2014.

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, 2014	160	(1)	$	186.26	—	—
February 1 to February 28, 2014	307	(1)	$	177.19	—	—
March 1 to March 31, 2014		(1)	$		—	—
Total	467		$	180.30	—	—
(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

Not applicable.

Item 5.  Other Information

None.

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Item 6.  Exhibits

10.1	Fifth 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 February 3, 2014.
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.

Ruary
	MWI Veterinary Supply, Inc.
	(Registrant)
Date: May 6, 2014	/s/ Mary Patricia B. Thompson
	Mary Patricia B. Thompson
	Senior Vice President of Finance and Administration, Chief Financial Officer

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