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 TECHNE Corporation's wholly-owned subsidiaries, Research and Diagnostic Systems, Inc. (R&D Systems), Boston Biochem, Inc. (Boston Biochem), and BiosPacific, Inc. (BiosPacific). TECHNE Corporation's European biotechnology operations are conducted through its wholly-owned U.K. subsidiaries, R&D Systems Europe Ltd. (R&D Europe) and Tocris Holdings Limited (Tocris). R&D Europe has a sales subsidiary, R&D Systems GmbH, in Germany and a sales office in France. TECHNE Corporation distributes its biotechnology products in China through its wholly-owned subsidiary, R&D Systems China Co., Ltd. (R&D China). R&D China has a sales subsidiary, R&D Systems Hong Kong Ltd., in Hong Kong.

The Company has two reportable segments based on the nature of its products (biotechnology and hematology). R&D Systems' Biotechnology Division, R&D Europe, Tocris, R&D China, BiosPacific and Boston Biochem operating segments are included in the biotechnology reporting segment. The Company's biotechnology reporting segment develops, manufactures and sells biotechnology research and diagnostic products world-wide. The Company's hematology reporting segment, which consists of R&D Systems' Hematology Division, develops and manufactures hematology controls and calibrators for sale world-wide.

RESULTS OF OPERATIONS

Consolidated net sales increased 0.6% and consolidated net earnings decreased 1.7% for the quarter ended December 31, 2012 compared to the quarter ended December 31, 2011. Consolidated net sales and consolidated net earnings decreased 1.4% and 4.3%, respectively for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. Consolidated net sales for the quarter and six months ended December 31, 2012 were unfavorably affected by changes in foreign currency exchange rates from the same prior-year periods. A stronger U.S. dollar as compared to foreign currencies reduced sales by $577,000 and $2.5 million in the quarter and six-month periods ended December 31, 2012, from the comparable prior-year periods.

Net Sales

Consolidated net sales for the quarter and six months ended December 31, 2012 were $75.1 million and $150 million, respectively, an increase of $421,000 (0.6%) and a decrease of $2.1 million (1.4%) from the quarter and six months ended December 31, 2011, respectively. Excluding the effect of the change from the comparable prior-year period in exchange rates used to convert sales in foreign currencies (primarily British pound sterling, euros and Chinese yuan), consolidated net sales for the quarter and six months ended December 31, 2012 increased 1.3% and 0.2%, respectively, from comparable prior-year periods. Included in consolidated net sales for the quarter and six months ended December 31, 2012 was $418,000 and $706,000 of sales of new biotechnology products that had their first sale in fiscal 2013.

Net sales by reportable segment were as follows (in thousands):

                                       Quarter Ended            Six Months Ended
                                       December 31,               December 31,
                                     2012         2011         2012          2011
          Biotechnology            $ 69,628     $ 69,808     $ 139,131     $ 142,111
          Hematology                  5,455        4,854        10,977        10,147

          Consolidated net sales   $ 75,083     $ 74,662     $ 150,108     $ 152,258

Biotechnology segment net sales decreased $180,000 (0.3%) and $3.0 million (2.1%) for the quarter and six months ended December 31, 2012, respectively, compared to the same prior-year periods. This decrease resulted primarily from changes in exchange rates from the comparable prior-year periods which impacted sales by $577,000 and $2.5 million, as noted above.

Biotechnology segment sales growth (decline), excluding the effect of changes in exchange rates, from the same prior-year periods were as follows:

                                                          Quarter Ended                Six Months Ended
                                                          December 31,                   December 31,
                                                       2012           2011            2012            2011
U.S. industrial, pharmaceutical and biotechnology       (5.2 %)         4.6 %           (5.1 %)         7.0 %
U.S. academic                                           (3.9 %)        (4.1 %)          (3.9 %)        (3.3 %)
Europe                                                   2.4 %         (0.8 %)           2.7 %         (0.8 %)
China                                                   12.6 %         32.8 %           16.5 %         23.8 %
Pacific rim distributors, excluding China                3.3 %         11.2 %            1.7 %          5.8 %

Biotechnology segment net sales consisted of the following:

                                                          Six Months
                                                             Ended
                                                         December 31,
                                                             2012
          United States:
          Industrial, pharmaceutical and biotechnology              30 %
          Academic                                                  14 %
          Other                                                     11 %

                                                                    55 %
          Europe                                                    29 %
          China                                                      5 %
          Pacific rim distributors, excluding China                  9 %
          Rest of world                                              2 %

                                                                   100 %

Hematology segment net sales increased $601,000 (12.4%) and $830,000 (8.2%) for the quarter and six months ended December 31, 2012 compared to the same prior-year periods as a result of increased sales volume.

Gross Margins

Fluctuations in gross margins, as a percentage of net sales, are typically the result of changes in foreign currency exchange rates, changes in product mix and seasonality. Such fluctuations are normal and expected to continue in future periods. Gross margins have also been affected by acquisitions completed in prior years.

Segment gross margins, as a percentage of net sales, were as follows:

                                  Quarter Ended           Six Months Ended
                                   December 31,             December 31,
                                 2012        2011         2012          2011
                Biotechnology     75.5 %      75.8 %        75.8 %       76.5 %
                Hematology        49.4 %      46.3 %        49.0 %       47.3 %
                Consolidated      73.6 %      73.9 %        73.8 %       74.6 %

Biotechnology segment gross margin percentages for the quarter and six months ended December 31, 2012 decreased from the same prior-year periods primarily due to lower sales caused by unfavorable exchange rates. This negative gross margin impact was partially offset by a decline in the costs recognized upon the sale of inventory acquired in fiscal 2011 which was written-up to fair value. Hematology segment gross margin percentage for the quarter and six months ended December 31, 2012 increased slightly from the comparable prior-year periods as a result of changes in product mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $305,000 (2.9%) for the quarter and decreased $140,000 (0.7%) for the six months ended December 31, 2012 from the same prior-year periods. The increase in expense for the quarter ended December 31, 2012 included $170,000 consulting fees related to executive recruitment. Selling, general and administrative expenses for the quarter and six months were impacted by decreases from the comparable prior-year periods in profit sharing expense of $62,000 and $747,000, respectively.

Consolidated selling, general and administrative expenses were composed of the following (in thousands):

                                                      Quarter Ended              Six Months Ended
                                                       December 31,                December 31,
                                                    2012          2011          2012          2011
Biotechnology                                     $  9,223      $  9,003      $ 18,363      $ 18,473
Hematology                                             379           400           798           880
Unallocated corporate expenses                       1,354         1,248         2,123         2,071

Consolidated selling, general and
administrative expenses                           $ 10,956      $ 10,651      $ 21,284      $ 21,424

The Company is in the process of searching for a new Chief Executive Officer (CEO). It is believed that the compensation for the previous CEO was below market and that it is likely the Company will incur increased selling, general and administrative costs as a result. These increases, if any, should not be significant in the fiscal year ending June 30, 2013, but could impact financial results beginning in fiscal 2014. This change could also impact other compensation and benefit costs.

Research and Development Expenses

Research and development expenses were composed of the following (in thousands):



                                                       Quarter Ended             Six Months Ended
                                                        December 31,               December 31,
                                                     2012         2011          2012          2011
Biotechnology                                       $ 7,196      $ 6,624      $ 14,455      $ 13,093
Hematology                                              207          213           400           411

Consolidated research and development expenses      $ 7,403      $ 6,837      $ 14,855      $ 13,504

Research and development expenses for the quarter and six months ended December 31, 2012 increased $566,000 (8.3%) and $1.4 million (10.0%) from the same prior-year periods. The increase was mainly due to increases in personnel and supply costs associated with the development and release of new high-quality biotechnology products. The Company expects research and development expenses to continue to increase in future periods as a result of its ongoing product development program.

Other Non-operating Expense, Net

Other non-operating expense, net, 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. Amounts
were as follows (in thousands):



                                                 Quarter Ended           Six Months Ended
                                                  December 31,             December 31,
                                                2012        2011        2012          2011
Foreign currency gains (losses)                $  149      $ (105 )    $    71      $   (629 )
Rental income                                     215         198          385           332
Building expenses related to rental property     (457 )      (482 )       (986 )      (1,069 )
Losses by equity method investees                 (42 )      (218 )        (83 )        (416 )

Other non-operating expense, net               $ (135 )    $ (607 )    $  (613 )    $ (1,782 )

Income Taxes

Income taxes for both the quarter and six-month period ended December 31, 2012 were provided at rates of 32.3% of consolidated earnings before income taxes compared to 31.8% and 31.9% for the same prior-year periods. In January 2013, the U.S. federal credit for research and development was reinstated retroactively for the period of January 2012 through December 2013. As a result, in addition to the credit for the quarter ended March 31, 2013, the Company will record the credit for calendar 2012 in the third quarter of fiscal 2013. The amount of the retroactive credit is approximately $975,000. The Company expects its fiscal 2013 effective income tax rate for fiscal 2013 range from approximately 31% to 33%.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2012, cash and cash equivalents and available-for-sale investments were $415 million compared to $413 million at June 30, 2012. Included in available-for-sale-investments at December 31, 2012 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $69.1 million. The fair value of the Company's CCXI investment at June 30, 2012 was $94.7 million.

At December 31, 2012, approximately 59%, 39%, and 2% of the Company's cash and cash equivalents of $143 million are located in the U.S., United Kingdom and China, respectively. At December 31, 2012, approximately 96% of the Company's available-for-sale investment accounts are located in the U.S., with the remaining 4% in China. The Company has either paid U.S. income taxes on its undistributed foreign earnings or intends to indefinitely reinvest the undistributed earnings in the foreign operations.

The Company believes it can meet its cash and working capital requirements, facility expansion and capital addition needs and share repurchase, cash dividend, investment and acquisition strategies for at least the next twelve months through currently available funds, cash generated from operations and maturities or sales of available-for-sale investments.

Cash Flows From Operating Activities

The Company generated cash of $60.6 million from operating activities in the first six months of fiscal 2013 compared to $54.9 million in the first six months of fiscal 2012. The increase from the prior year was primarily due to changes in deferred income taxes and income taxes payable as a result of the timing of tax payments, offset by decreased net earnings for the period.

Cash Flows From Investing Activities

During the six months ended December 31, 2012, the Company purchased $42.6 million and had sales or maturities of $38.9 million of available-for-sale investments. During the six months ended December 31, 2011, the Company purchased $84.0 million and had sales or maturities of $76.0 million of available-for-sale investments. The Company's investment policy is to place excess cash in municipal and corporate 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.

Capital expenditures for fixed assets for the first six months of fiscal 2013 and 2012 were $10.7 million and $3.3 million, respectively. Included in capital expenditures for the first six months of fiscal 2013 and 2012 was $9.6 million and $1.9 million, respectively, related to expansion and remodeling of office and laboratory space at the Company's Minneapolis facility. The remaining capital additions were mainly for laboratory and computer equipment. Capital expenditures in the remainder of fiscal 2013 are expected to be approximately $18.0 million including $13.4 million related to expansion space in Minneapolis and the purchase of land and construction of a new facility in the United Kingdom, both of which are expected to be completed during fiscal 2014. Capital expenditures are expected to be financed through currently available funds and cash generated from operating activities.

Cash Flows From Financing Activities

During the first six months of fiscal 2013 and 2012, the Company paid cash dividends of $21.4 million and $20.4 million, respectively, to all common shareholders. On February 5, 2013, the Company announced the payment of a $0.30 per share cash dividend. The dividend of approximately $11.0 million will be payable March 1, 2013 to all common shareholders of record on February 15, 2013.

Cash of $824,000 and $45,000 was received during the six months ended December 31, 2012 and 2011, respectively, from the exercise of stock options. The Company also recognized excess tax benefits from stock option exercises of $64,000 and $13,000 for the six months ended December 31, 2012 and 2011, respectively.

During the first six months of fiscal 2013 and 2012, the Company repurchased 8,324 and 13,140 shares of common stock for its employee stock bonus plans at a cost of $573,000 and $907,000, respectively.

During the first six months of fiscal 2012, the Company repurchased and retired 263,027 shares of common stock at a market value of $18.2 million, of which $17.7 million was disbursed prior to December 31, 2011. The Company did not repurchase any shares during the first six months of fiscal 2013.

CONTRACTUAL OBLIGATIONS

There were no material changes outside the ordinary course of business in the Company's contractual obligations during the quarter ended December 31, 2012.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2012 and are incorporated herein by reference. The application of certain of these policies requires 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, valuation of intangible assets and goodwill and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in fiscal 2013 that would require disclosure. There have been no changes to the Company's policies in fiscal 2013.

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 effect of changes to accounting policies, the expected effective income tax rate, the amount of capital expenditures for the remainder of the fiscal year, the timeframe for completing facility improvements in the U.S. and the U.K., the source of funding for capital expenditure requirements, the sufficiency of currently available funds for meeting the Company's needs, the impact of fluctuations in foreign currency exchange rates, and expectations regarding gross margin fluctuations, increased research and development expenses and increased selling, general and administrative expenses. 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 products, general economic conditions, increased competition, the reliance on internal manufacturing and related operations, the impact of currency exchange rate fluctuations, economic instability in Eurozone countries, the recruitment and retention of qualified personnel, the impact of governmental regulation, maintenance of intellectual property rights, credit risk and fluctuation in the market value of the Company's investment portfolio, unseen delays and expenses related to facility improvements and the success of financing efforts by companies in which the Company has invested. For additional information concerning such factors, see the Company's Annual Report on Form 10-K for fiscal 2012 as filed with the Securities and Exchange Commission.