Summary of MWI VETERINARY SUPPLY, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

All dollar and sterling pound 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.

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. 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. 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. 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.

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. 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. We continually assess our customers' ability to pay us and adjust our allowance for doubtful accounts, as necessary.

Table of Contents
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.

Total Revenues.?Our total revenues increased from $831,364 for our fiscal year ended September 30, 2008 to $2,075,146 for our fiscal year ended September 30, 2012. Our revenue growth has been driven primarily from internal growth and, to a lesser extent, selective acquisitions and our ability to offer a broad product selection at competitive prices with high levels of customer service and support and an expansion in the number of veterinary practices to which we distribute products. We have continually added new vendor relationships to expand our product offering and field sales representatives to increase our customer reach, principally in the Southeast, Northeast and Midwest regions of the United States.

Operating Expenses.?Our selling, general and administrative expenses increased from $84,123 for our fiscal year ended September 30, 2008 to $172,104 for our fiscal year ended September 30, 2012. Selling, general and administrative expenses consist mainly of compensation and benefits, warehouse operating supplies, occupancy and location expenses and other general corporate expenses. Our selling, general and administrative expenses as a percentage of total revenues were 10.1% for our fiscal year ended September 30, 2008, compared to 8.3% for the same period in 2012.

Table of Contents
Acquisitions.?In February 2010, we acquired all of the share capital of Centaur. Based in Castle Cary, England, Centaur is a distributor of animal health products to veterinarians in the United Kingdom.

In March 2011, we acquired substantially all of the assets of Nelson. Nelson was a distributor of animal health products to over 1,100 veterinary practices, primarily in the Midwestern United States. This acquisition allows us to better serve our customers in this region of the United States.

On October 31, 2011, we acquired substantially all of the assets of Micro. 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 assets acquired and the certain liabilities assumed relate to (a) the development and implementation of proprietary computerized systems for feed, health, information and production animal management which include individual animal identification and management, food safety assurance, trace back and process verification systems, (b) ongoing research and development of such systems, and (c) the distribution and sale of micro feed ingredients, animal health products and dairy sanitation solutions.

Fair values of the assets acquired and liabilities assumed as a result of these acquisitions are discussed in Note 3 "Business Acquisitions" to the consolidated financial statements.

Table of Contents

Results of Operations

The following tables summarize our historical results of operations for our fiscal years ended September 30, 2012, 2011 and 2010.

                                                   Year Ended September 30,
                                  2012        %           2011        %           2010        %
                                              (In thousands, except per share data)
Revenues:
   Product sales             $  1,996,294    96.2%   $  1,489,500    95.2%   $  1,169,545    95.1%
   Product sales to related
   party                           61,873     3.0%         55,185     3.5%         43,017     3.5%
   Commissions                     16,979     0.8%         20,655     1.3%         16,780     1.4%
       Total revenues           2,075,146   100.0%      1,565,340   100.0%      1,229,342   100.0%

Cost of product sales           1,808,230    87.1%      1,359,755    86.9%      1,064,339    86.6%
Gross profit                      266,916    12.9%        205,585    13.1%        165,003    13.4%

Selling, general and
administrative expenses           172,104     8.3%        130,656     8.3%        105,793     8.6%
Depreciation and
amortization                        9,045     0.4%          6,263     0.4%          4,992     0.4%
Operating income                   85,767     4.2%         68,666     4.4%         54,218     4.4%

Other income (expense):
   Interest expense                 (926)     0.0%          (741)     0.0%          (539)     0.0%
   Earnings of equity method
   investees                          318     0.0%            268     0.0%            220     0.0%
   Other                              781     0.0%            507     0.0%            427     0.0%
       Total other income
       (expense)                      173     0.0%             34     0.0%            108     0.0%

Income before taxes                85,940     4.2%         68,700     4.4%         54,326     4.4%
Income tax expense               (32,463)    -1.6%       (26,120)    -1.7%       (20,886)    -1.7%
Net income                   $     53,477     2.6%   $     42,580     2.7%   $     33,440     2.7%

Earnings per common share:
   Basic                     $       4.24            $       3.42            $       2.73
   Diluted                   $       4.23            $       3.40            $       2.70

Weighted average common
shares
   outstanding:
   Basic                           12,616                  12,464                  12,241
   Diluted                         12,647                  12,513                  12,395

Fiscal 2012 Compared to Fiscal 2011

Total Revenues.?Total revenues increased $509,806, or 32.6%, to $2,075,146 for the fiscal year ended September 30, 2012 from $1,565,340 for the fiscal year ended September 30, 2011. Excluding the impact of the acquisition of Micro, revenue growth in the United States was 17.3% for the fiscal year ended September 30, 2012 as compared to the fiscal year ended September 30, 2011. Revenues from the acquisition of Micro, which was acquired on October 31, 2011, were $246.6 million for the fiscal year ended September 30, 2012. Revenue growth in the United Kingdom was 14.7% for the fiscal year ended September 30, 2012 as compared to the fiscal year ended September 30, 2011, consisting of 16.8% organic growth and a decline of 2.1% related to foreign currency exchange. Excluding the impact of Micro, the growth in revenues in the United States came primarily from increased business as a result of the growth from our e-commerce platform, the addition of new flea, tick and heartworm products, the addition of sales representatives over the past twelve months and the acquisition of Nelson. Excluding the impact of Micro, revenues in the United States attributable to new customers represented approximately 36% of the growth in total revenues during the fiscal year ended September 30, 2012. Excluding the impact of Micro, revenues in the United States attributable to existing customers represented approximately 64% of the growth in total revenues during the fiscal year ended September 30, 2012. For the purpose of calculating growth rates of new and existing customer revenue, we have defined a new customer as a customer that did not purchase product from us in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered an existing customer. Revenues from new customers for each fiscal quarter are summed to arrive at the estimated year-to-date revenue for new customers.

Table of Contents
Commission revenues decreased $3,676, or 17.8%, to $16,979 for the fiscal year ended September 30, 2012 from $20,655 for the fiscal year ended September 30, 2011. The decrease of commission revenues was due to the loss of a pet food line that we represented for most of fiscal year 2011 that we did not represent in fiscal year 2012 and a shift in commissions to buy-sell revenues for certain parasiticides. Gross agency billings decreased by $38,681, or 10.4%, to $332,343 for the fiscal year ended September 30, 2012 from $371,024 for the fiscal year ended September 30, 2011. Additionally, the decrease in commissions was due to an incentive that we earned from one of our vendors during fiscal year 2011 that was earned at a substantially lower level in the fiscal year ended September 30, 2012.

Gross Profit.?Gross profit increased $61,331, or 29.8%, to $266,916 for the fiscal year ended September 30, 2012 from $205,585 for the fiscal year ended September 30, 2011. The change in gross profit is primarily a result of increased total revenues as discussed above. Gross profit as a percentage of total revenues was 12.9% and 13.1% for the fiscal years ended September 30, 2012 and 2011, respectively. Gross profit as a percentage of total revenues decreased due to the reduction in commissions, lower product margins and lower vendor rebates as a percentage of revenues, partially offset by improved freight as a percentage of total revenues. Vendor rebates increased by $1,330 for the fiscal year ended September 30, 2012 as compared to the fiscal year ended September 30, 2011. This increase in vendor rebates was primarily due to revenue growth achieved during the fiscal year.

Selling, General and Administrative Expenses ("SG&A").?SG&A increased $41,448, or 31.7%, to $172,104 for the fiscal year ended September 30, 2012 from $130,656 for the fiscal year ended September 30, 2011. SG&A as a percentage of revenue was 8.3% for the each of the fiscal years ended September 30, 2012 and 2011. The increase in SG&A expenses was primarily due to the addition of Micro and the added support for our revenue growth. Additionally, stock based compensation expense increased $2,182, of which $1,278 was related to accelerated vesting on restricted stock awards granted during the quarter ended September 30, 2012 that did not occur in the same period of the prior fiscal year.

Depreciation and Amortization.?Depreciation and amortization expense increased $2,782, or 44.4%, to $9,045 for the fiscal year ended September 30, 2012 from $6,263 for the fiscal year ended September 30, 2011. The increase was primarily due to the increase in fixed assets and intangibles as a result of the acquisition of Micro.

Fiscal 2011 Compared to Fiscal 2010

Total Revenues.?Total revenues increased $335,998, or 27.3%, to $1,565,340 for the fiscal year ended September 30, 2011 from $1,229,342 for the fiscal year ended September 30, 2010. Revenue growth in the United States was 21.5% as compared to the fiscal year ended September 30, 2010. Revenue growth in the United Kingdom was 68.0% as we owned Centaur for the full fiscal year compared to approximately eight months in the same period in the prior fiscal year. The growth in organic revenues in the United States came primarily from increased business as a result of the bankruptcy and liquidation of a competitor that is no longer in business, growth from our e-commerce platform, the addition of new flea, tick and heartworm products, the acquisition of Nelson and the addition of sales representatives over the past twelve months. Organic revenues in the United States attributable to new customers represented approximately 53% of the growth in total revenues during the fiscal year ended September 30, 2011. Organic revenues in the United States attributable to existing customers represented approximately 47% of the growth in total revenues during the fiscal year ended September 30, 2011.

Commission revenues increased $3,875, or 23.1%, to $20,655 for the fiscal year ended September 30, 2011 from $16,780 for the fiscal year ended September 30, 2010. The increase of commission revenues was due to the increase in gross agency billings of $42,971, or 13.1%, to $371,024 for the fiscal year ended September 30, 2011 from $328,053 for the fiscal year ended September 30, 2010. Additionally, the growth in commissions included the achievement of an incentive from one of our vendors during the fiscal year ended September 30, 2011, which was not achieved in fiscal year ended September 30, 2010.

Table of Contents
Gross Profit.?Gross profit increased $40,582, or 24.6%, to $205,585 for the fiscal year ended September 30, 2011 from $165,003 for the fiscal year ended September 30, 2010. The change in gross profit is primarily a result of increased total revenues as discussed above including the additional gross profit from Centaur for the full fiscal year as compared to approximately eight months in the prior fiscal year. Gross profit as a percentage of total revenues was 13.1% and 13.4% for the fiscal years ended September 30, 2011 and 2010, respectively. Gross profit as a percentage of total revenues decreased partially due to the addition of Centaur as well as a slight decrease in the gross margin in the United States. The gross margin is impacted by the addition of Centaur because Centaur's gross profit as a percentage of total revenues is generally lower than MWI's, which serves to reduce the overall gross margin of the consolidated Company when compared to our results for the same period in the prior year. Vendor rebates increased by $2,362 for the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010. This increase in vendor rebates was primarily due to revenue growth achieved during the fiscal year.

Selling, General and Administrative Expenses ("SG&A").?SG&A increased $24,863, or 23.5%, to $130,656 for the fiscal year ended September 30, 2011 from $105,793 for the fiscal year ended September 30, 2010. This increase was primarily due to the addition of Centaur's operating expenses for the full fiscal year compared to approximately eight months in the prior fiscal year, increased compensation and benefits costs and increased bank service fees. Also included in the increase in SG&A expenses are the direct acquisition-related expenses of $861 incurred in connection with acquisitions. SG&A as a percentage of revenue was 8.3% for the fiscal year ended September 30, 2011 and 8.6% for the fiscal year ended September 30, 2010. SG&A expenses as a percentage of total revenues decreased due, in part, to the addition of Centaur because Centaur's SG&A expenses as a percentage of total revenues are generally lower than MWI's, which serves to reduce the overall SG&A expenses as a percentage of total revenues when compared to our results for the same period in the prior year.

Depreciation and Amortization.?Depreciation and amortization expense increased $1,271, or 25.5%, to $6,263 for the fiscal year ended September 30, 2011 from $4,992 for the fiscal year ended September 30, 2010. The increase was primarily due to the acquisition of Centaur plus capital expenditures during the year including an office building purchased in Boise, Idaho for our headquarters, equipment for our new distribution center in Visalia, California and other distribution center technology.

Income Tax Expense.?Our effective tax rate was 38.0% for the fiscal year ended September 30, 2011 and 38.4% for the fiscal year ended September 30, 2010. This decrease was primarily due to the impact of the Centaur acquisition that contributed additional earnings at a lower effective tax rate. Additionally, there was a lower international enacted tax rate change during the quarter ended September 30, 2011.

Seasonality in Operating Results

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. The sales of production animal products can vary due to changes in commodity prices and 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) which may also affect seasonality. 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 vendors' and distributors' marketing programs or price increase announcements, 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. See "Risk Factors - Our quarterly operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall." Additionally, while we accrue rebates as they are earned, our rebates have historically been highest during the quarter ended December 31, since some of our vendors' rebate programs were designed to include targets to be achieved near the end of the calendar year. This trend has slowed some in recent years due to certain changes in vendor contracts but it still remains our largest quarter for vendor rebates.

Our companion animal products tend to have a different product use cycle that minimally overlaps with that of production animal products. In the companion animal market, sales of flea, tick and mosquito products are highest during the spring and summer months. The differing product use cycles of companion animal products partially offsets the seasonality we typically experience due to our sales of production animal products.

Table of Contents
For the reasons and factors discussed above our quarterly operating results may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and our sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. If this occurs, the price of our stock would likely decrease.