Overview

TECHNE Corporation and Subsidiaries (the Company) are engaged in the development, manufacture and sale of biotechnology products and hematology calibrators and controls. These activities are conducted domestically through its wholly-owned subsidiaries, Research and Diagnostic Systems, Inc (R&D Systems) and BiosPacific, Inc. (BiosPacific). The Company distributes biotechnology products in Europe through its wholly-owned U.K. subsidiary, R&D Systems Europe Ltd. (R&D Europe). R&D Europe has a sales subsidiary, R&D Systems GmbH, in Germany and a sales office in France. The Company distributes biotechnology products in China through its wholly-owned subsidiary, R&D Systems China, Co. Ltd. (R&D China).

The Company has three reportable operating segments based on the nature of products and geographic location: biotechnology, R&D Europe and hematology. The biotechnology segment consists of R&D Systems' Biotechnology Division, BiosPacific and R&D China, which develop, manufacture and sell biotechnology research and diagnostic products world-wide. R&D Europe distributes Biotechnology Division products throughout Europe. The hematology segment develops and manufactures hematology controls and calibrators for sale world- wide.

Results of Operations for the Quarters Ended September 30, 2009 and 2008

Consolidated net sales and consolidated net earnings decreased 4.0% and 6.4%, respectively, for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008. Consolidated net sales and net earnings were unfavorably affected by the strengthening of the U.S. dollar as compared to foreign currencies for the quarter ended September 30, 2009. The unfavorable impact on consolidated net sales of the change from the prior year in exchange rates used to convert sales in foreign currencies (primarily British pounds sterling and Euros) into U.S. dollars was $1.2 million for the quarter ended September 30, 2009. The unfavorable impact on consolidated net earnings of the change from the prior year in exchange rates used to convert foreign currency financial statements to U.S. dollars was $566,000 for the quarter ended September 30, 2009. In the first quarter of fiscal 2010, the Company generated cash of $28.0 million from operating activities, paid cash dividends of $9.3 million and had cash, cash equivalents and available-for- sale investments of $280 million at September 30, 2009 compared to $265 million at June 30, 2009.

Net Sales

Consolidated net sales for the quarter ended September 30, 2009 were $66.5 million, a decrease of $2.8 million (4.0%) from the quarter ended September 30, 2008. Excluding the effect of changes in foreign currency exchange rates, consolidated net sales decreased 2.2% the quarter ended September 30, 2009 from the comparable prior-year period. Included in consolidated net sales for the quarter ended September 30, 2009 was $247,000 of sales of new biotechnology products which had their first sale in fiscal 2010.

Biotechnology net sales decreased $2.1 million (4.6%) for the quarter ended September 30, 2009 mainly as a result of decreased sales volume which the Company attributes to continued customer caution in a time of economic uncertainty and the exceptionally strong growth rate of 18.7% in the first quarter of fiscal 2009. North American biotechnology sales to industrial pharmaceutical and biotechnology customers declined approximately 12.8% during the first quarter of fiscal 2010 compared to the same prior-year period. Biotechnology sales to North American academic and Pacific Rim distributors each grew about 3.9% and biotechnology sales in China grew 30.1% during the first quarter of fiscal 2010 compared to the same prior-year period.

R&D Europe net sales decreased $1.1 million (5.8%) for the quarter ended September 30, 2009 from the comparable prior-year period. R&D Europe's net sales increased 0.8% for the quarter ended September 30, 2009 when measured at currency rates in effect in the comparable prior-year period. Approximately 75% of R&D Europe sales are in non-British pound sterling currencies (mainly Euro) which had a favorable impact on consolidated net sales of approximately $1.2 million for the quarter ended September 30, 2009 as a result of the change in exchange rates used to convert sales in other currencies to British pounds sterling. This favorable impact was offset by an unfavorable impact on consolidated net sales of approximately $2.4 million for the quarter ended September 30, 2009 as a result of the change in exchange rates used to convert British pound sterling to U.S. dollars.

Hematology sales increased $422,000 (9.9%) for the quarter ended September 30, 2009 compared to the same prior-year period, as a result of increased sales volume.

Gross Margins

Gross margins, as a percentage of net sales, were as follows:

                              QUARTER ENDED
                           ------------------
                            9/30/09   9/30/08
                           --------  --------
Biotechnology                 80.9%     81.0%
R&D Europe                    53.5%     58.1%
Hematology                    50.3%     44.2%
Consolidated gross margin     80.6%     81.1%

Consolidated gross margins, as a percentage of consolidated net sales, decreased slightly from 81.1% for the quarter ended September 30, 2008 to 80.6% for the quarter ended September 30, 2009. This decrease was primarily caused by unfavorable exchange rates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were composed of the following
(in thousands):
                                                        QUARTER ENDED
                                                      ------------------
                                                       9/30/09   9/30/08
                                                      --------  --------
Biotechnology                                         $  4,734  $  5,141
R&D Europe                                               1,952     2,283
Hematology                                                 370       436
Unallocated corporate expenses                             982       980
                                                      --------  --------
Consolidated selling, general and
  administrative expenses                             $  8,038  $  8,840
                                                      ========  ========

Selling, general and administrative expenses for the quarter ended September 30, 2009 decreased $802,000 (9.1%) from the same prior-year period as a result of a reduction in profit sharing expense of $635,000, which was directly related to the Company's results for the periods, and the change in exchange rates used to convert foreign expenses to U.S. dollars of $198,000.

Research and Development Expenses

Research and development expenses were composed of the following (in
thousands):
                                                        QUARTER ENDED
                                                      ------------------
                                                       9/30/09   9/30/08
                                                      --------  --------
Biotechnology                                         $  5,956  $  5,717
Hematology                                                 198       193
                                                      --------  --------
Consolidated research and development expenses        $  6,154  $  5,910
                                                      ========  ========

Interest Income

Interest income decreased $1.7 million for the quarter ended September 30, 2009 from the comparable prior-year period, primarily as a result of lower rates of return on cash and available-for-sale investments.

Other Non-operating Expense and Income

Other non-operating expense and income consists mainly of foreign currency transaction gains and losses, rental income, building expenses related to rental property, and the Company's share of losses by equity method investees.

                                                        QUARTER ENDED
                                                      ------------------
                                                       9/30/09   9/30/08
                                                      --------  --------
Foreign currency gains (losses)                       $    143 ($    474)
Rental income                                               81        99
Real estate taxes, depreciation and utilities             (548)     (553)
Losses by equity method investees                         (338)     (259)
                                                      --------  --------

Income Taxes

Income taxes for the quarter ended September 30, 2009 and 2008 were provided at rates of 32.6% and 33.4% of consolidated earnings before income taxes, respectively. The U.S credit for research and development expired at the end of calendar 2007 and was not renewed until the quarter ended December 31, 2008, resulting in a higher effective tax rate for the quarter ended September 30, 2008. Foreign income taxes have been provided at rates that approximate the tax rates in the countries in which R&D Europe and R&D China operate. The Company expects its fiscal 2010 effective income tax rate to range from approximately 32.0% to 33.0%.

Liquidity and Capital Resources

At September 30, 2009, cash and cash equivalents and available-for-sale investments were $280 million compared to $265 million at June 30, 2009. The Company believes it can meet its future cash, working capital and capital addition requirements through currently available funds, cash generated from operations and maturities or sales of available-for-sale investments. The Company has an unsecured line of credit of $750,000. The interest rate on the line of credit is at prime. There were no borrowings on the line in the prior or current fiscal year.

Cash Flows From Operating Activities

The Company generated cash of $28.0 million from operating activities in the first quarter of fiscal 2010 compared to $26.8 million in the first quarter of fiscal 2009. The increase from the prior year was primarily due to changes in operating assets and liabilities partially offset by a decrease in net earnings in the current year of $1.8 million.

Cash Flows From Investing Activities

Capital expenditures for fixed assets for the first quarter of fiscal 2010 and 2009 were $563,000 and $742,000, respectively. The capital additions were mainly for laboratory and computer equipment. Capital expenditures in the remainder of fiscal 2010 are expected to be approximately $5.3 million and are expected to be financed through currently available funds and cash generated from operating activities.

During the quarter ended September 30, 2009, the Company purchased $6.4 million and had sales or maturities of $5.3 million of available-for-sale investments. During the quarter ended September 30, 2008, the Company purchased $29.7 million and had sales or maturities of $23.5 million of available-for-sale investment. The Company's investment policy is to place excess cash in bonds and other investments with maturities of less than three years. The objective of this policy is to obtain the highest possible return while minimizing risk and keeping the funds accessible.

During the quarter ended September 30, 2008, the Company received a $1.3 million distribution from its investment in Nephromics, LLC (Nephromics). The Company accounts for its investment in Nephromics under the equity method of accounting as Nephromics is a limited liability company.

Cash Flows From Financing Activities

Cash of $22,000 and $797,000 was received during the quarters ended September 30, 2009 and 2008, respectively, from the exercise of stock options. The Company also recognized excess tax benefits from stock option exercises of $10,000 and $66,000 for the quarters ended September 30, 2009 and 2008, respectively.

During the first quarter of fiscal 2010 and 2009, the Company purchased 9,827 and 22,637 shares of common stock, respectively, for its employee stock bonus plans at a cost of $607,000 and $1.7 million, respectively.

During the first quarter of fiscal 2010, the Company paid cash dividends of $9.3 million to all common shareholders. On October 29, 2009, the Company announced the payment of a $0.26 per share cash dividend. The dividend of approximately $9.7 million will be payable November 23, 2009 to all common shareholders of record on November 9, 2009.

During the first quarter of fiscal 2009, the Company purchased and retired approximately 214,000 shares of common stock at a market value of $15.6 million of which $12.9 million was disbursed prior to September 30, 2008.

Contractual Obligations

There were no material changes outside the ordinary course of business in the Company's contractual obligations during the quarter ended September 30, 2009.

Critical Accounting Policies

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2009. The application of certain of these policies require judgments and estimates that can affect the results of operations and financial position of the Company. Judgments and estimates are used for, but not limited to, valuation of available-for-sale investments, inventory valuation and allowances, impairment of goodwill, intangibles and other long-lived assets and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in fiscal 2010 which would require disclosure. There have been no changes to the Company's policies in fiscal 2010.

Forward Looking Information and Cautionary Statements

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those regarding the Company's expectations as to the effective tax rate, pending litigation, the amount of capital expenditures for the remainder of the fiscal year, the Company's adoption and impact of recent accounting pronouncements and the sufficiency of currently available funds for meeting the Company's needs. These statements involve risks and uncertainties that may affect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: the introduction and acceptance of new biotechnology and hematology products, the levels and particular directions of research by the Company's customers, the impact of the growing number of producers of biotechnology research products and related price competition, general economic conditions, the retention of hematology OEM (private label) and proficiency survey business, the impact of currency exchange rate fluctuations, the costs and results of research and product development efforts of the Company and of companies in which the Company has invested or with which it has formed strategic relationships, the impact of governmental regulation and intellectual property litigation, the recruitment and retention of qualified personnel, the number of business or selling days in a period and the success of financing efforts by companies in which the Company has invested, and the success of the Company's expansion into China. For additional information concerning such factors, see the Company's Annual Report on Form 10-K for fiscal 2009 as filed with the Securities and Exchange Commission.