| CHURCH & DWIGHT CO INC /DE/ ITEM 1A RISK FACTORS The following risks and uncertainties, as well as others described elsewhere in this report, could materially adversely affect our business, results of operations and financial condition: • We have recently developed and commenced sales of a number of new products which, if they do not gain widespread customer acceptance or if they cause sales of our existing products to decline, could harm our financial performance |
| We have recently introduced new consumer products, such as ELEXA sexual health products and TROJAN MINT TINGLE condoms and line extensions to laundry, toothpaste and depilatory brands |
| The development and introduction of new products involves substantial research, development and marketing expenditures which we may be unable to recoup if the new products do not gain widespread market acceptance |
| In addition, if sales generated by new products result in a concomitant decline in sales of our existing products, our financial performance could be harmed |
| • We may discontinue products or product lines which could result in returns, asset write-offs and shutdown costs |
| We may also engage in product recalls, which would reduce our cash flow and earnings |
| In the past, we have discontinued certain products and product lines which resulted in returns from customers, asset write-offs and shutdown costs |
| We may suffer similar adverse consequences in the future to the extent we discontinue products that do not meet expectations or no longer satisfy consumer demand |
| Product returns, write-offs or shutdown costs would reduce cash flow and earnings |
| Product efficacy or safety concerns could result in product recalls or declining sales, which would reduce our cash flow and earnings |
| • We face intense competition in a mature industry and we may be required to increase expenditures and accept lower profit margins to preserve or maintain our market share |
| Unless the markets in which we compete grow substantially, a loss of market share will result in reduced sales levels and declining operating results |
| US markets for consumer products are considered mature and commonly characterized by high household penetration, particularly with respect to our most significant product categories, such as laundry detergents, deodorizers and household cleaning products, toothpastes and antiperspirants and deodorants |
| Our unit sales growth in domestic markets will depend on increased use of our products by consumers, product innovation and our ability to capture market share from competitors |
| We may not succeed in implementing strategies to increase domestic revenues |
| The consumer products industry, particularly the laundry detergent, personal care and air deodorizer categories, is intensely competitive |
| To protect existing market share or to capture increased market share, we may need to increase expenditures for promotions and advertising and introduce and establish new products |
| Increased expenditures may not prove successful in maintaining or enhancing market share and could result in lower sales and profits |
| Many of our competitors, including The Procter & Gamble Company, Unilever, Inc, The Clorox Company, Colgate-Palmolive Company, Henkel, SSL Industries, Reckitt Benkiser, Pfizer and SC Johnson & Son, Inc, are substantially larger companies that have greater financial resources than we do |
| These competitors have the capacity to outspend us should they attempt to gain market share |
| If we lose market share and the markets in which we compete do not grow, our sales levels and operating results would decline |
| • Providing price concessions or trade terms that are acceptable to our trade customers, or the failure to do so, could adversely affect our sales and profitability |
| Consumer products, particularly those that are value-priced like many of our products, are subject to significant price competition and in recent years have been characterized by price deflation |
| From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures and 11 ______________________________________________________________________ [38]Table of Contents to maintain market share |
| Any reduction in prices to respond to these pressures would harm profit margins |
| In addition, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer |
| Because of the competitive environment facing retailers, many of our trade customers, particularly our high-volume retail store customers, have increasingly sought to obtain pricing concessions or better trade terms |
| To the extent we provide concessions or better trade terms, our margins are reduced |
| Further, if we are unable to maintain terms that are acceptable to our trade customers, these trade customers could reduce purchases of our products and increase purchases of products from our competitors, which would harm our sales and profitability |
| • Reductions in inventory by our trade customers, including as a result of consolidations in the retail industry, could adversely affect sales in periods during which the reduction results in reduced orders for our products |
| From time to time our retail customers have reduced inventory levels in managing their working capital requirements |
| Any reduction in inventory levels by our retail customers would harm our operating results for the financial periods affected by the reductions |
| In particular, continued consolidation within the retail industry could potentially reduce inventory levels maintained by our retail customers, which could adversely affect our results of operations for the financial periods affected by the reductions |
| • A continued shift in the retail market from food and drug stores to club stores and mass merchandisers could cause our sales to decline |
| Our performance also depends upon the general health of the economy and of the retail environment in particular and could be significantly harmed by changes affecting retailing and by the financial difficulties of retailers |
| Industry wide, consumer products such as those marketed by us are increasingly being sold by club stores and mass merchandisers, while sales of consumer products by food and drug stores are comprising a smaller proportion of the total volume of consumer products sold |
| Sales of our products are stronger in the food and drug channels of trade and not as strong with the club stores and mass merchandisers |
| Although we have taken steps to improve sales by club stores and mass merchandisers, if we are not successful in improving sales to these channels, and the current trend continues, our financial condition and operating results could suffer |
| • Loss of any of our principal customers could significantly decrease our sales and profitability |
| Wal-Mart, including its affiliate Sam’s Club, is our largest customer, accounting for approximately 18prca of net sales in 2005, 18prca of net sales in 2004 and 17prca of net sales in 2003 |
| Our top three customers accounted for approximately 25prca of net sales in 2005, 26prca of net sales in 2004 and 26prca of net sales in 2003 |
| The loss of or a substantial decrease in the volume of purchases by Wal-Mart or any of our other top customers would harm our sales and profitability |
| • We may make acquisitions that could result in dilution to our current stockholders or increase our indebtedness, or both |
| In addition, acquisitions that are not properly integrated or are otherwise unsuccessful could strain or divert our resources |
| We have made several acquisitions in the past few years, including the acquisition of a skin care brand in South America, the SPINBRUSH battery-operated toothbrush brand, Unilever’s oral care brands in the United States and Canada and some of the consumer products businesses of Carter-Wallace, Inc, which was completed through the acquisition of Armkel, and may make additional acquisitions or substantial investments in complementary businesses or products in the future |
| Any future acquisitions or investments would entail various risks, including the difficulty of assimilating the operations and personnel of the acquired businesses or products, the potential disruption of our ongoing business and, generally, our potential inability to obtain the desired financial and strategic benefits from the acquisition or investment |
| The risks associated with assimilation are increased to the extent acquisitions are made with businesses or operations outside of the United States and 12 ______________________________________________________________________ [39]Table of Contents Canada such as the acquisition of the skin care brand in South America and the SPINBRUSH business, for which products are manufactured by third party contract manufacturers in China |
| These factors could harm our financial condition and operating results |
| Any future acquisitions or investments could result in substantial cash expenditures, the issuance of new equity by us and the incurrence of additional debt and contingent liabilities |
| In addition, any potential acquisitions or investments, whether or not they are ultimately completed, could divert the attention of management and divert other resources from other matters that are critical to our operations |
| • Our condom product line could suffer if the spermicide N-9 is proved or perceived to be harmful |
| Our distribution of condoms under the TROJAN and other trademarks is regulated by the US Food and Drug Administration (FDA) |
| The World Health Organization and other interested groups have issued reports suggesting that N-9 should not be used rectally or for multiple daily acts of vaginal intercourse, given the ingredient’s potential to cause irritation to human membranes |
| FDA has recently issued non-binding draft guidance concerning the labeling of condoms in general and those with N-9 in particular |
| We have filed a response recommending alternative labeling with the FDA We believe that our present labeling for condoms with N-9 is compliant with the overall objectives of the draft guidance and that condoms with N-9 will remain a viable contraceptive choice for those couples who wish to use them |
| However, we cannot predict the nature of the labeling that ultimately will be required by the FDA While awaiting further FDA guidance, we have implemented an interim label statement change cautioning against rectal use and more-than-once-a-day vaginal use of condoms with N-9, and have launched a public information campaign to communicate these messages to the affected communities |
| If the FDA or state governments eventually promulgate rules which prohibit or restrict the use of N-9 in condoms (such as new or additional labeling requirements), we could incur further costs from obsolete products, packaging or raw materials, and sales of condoms could decline, which, in turn, could decrease our operating income |
| • Price increases in raw and packaging materials or energy costs could erode our profit margins, which could harm operating results |
| Increases in the prices of raw materials such as surfactants, which are cleaning agents, paper products and bottles, or increases in energy costs, could significantly affect our profit margins |
| In particular, during 2005 we experienced extraordinary price increases for raw and packaging materials, diesel fuel and energy costs, particularly as a result of strong demand from China and supply interruptions caused by Hurricanes Katrina and Rita |
| We use surfactants and bottles in the manufacture and marketing of laundry and household cleaning products such as ARM & HAMMER and XTRA laundry detergents and SCRUB FREE and CLEAN SHOWER bathroom cleaners |
| We use paper products for packaging in many of our consumer and specialty chemical products |
| We have attempted to address these price increases through costs reduction programs and price increases of our own products |
| If price increases continue to occur, we may not be able to increase the prices of our products to fully offset these increases |
| This could harm our financial condition and operating results |
| • We are subject to various government regulations in the countries in which we operate that could adversely affect our business |
| The manufacturing, processing, formulation, packaging, labeling and advertising of our products are subject to regulation by federal agencies, including the FDA, the Federal Trade Commission, or FTC, and the Consumer Product Safety Commission |
| In addition, our operations are subject to the oversight of the Environmental Protection Agency, the Occupational Safety and Health Administration and the National Labor Relations Board |
| Our activities are also regulated by various agencies of the states, localities and foreign countries in which our products are sold |
| In particular, the FDA regulates the safety, manufacturing, labeling and distribution of condoms, home pregnancy and ovulation test kits, and over-the-counter pharmaceuticals |
| The FDA also exercises a somewhat 13 ______________________________________________________________________ [40]Table of Contents less rigorous oversight over cosmetic products such as depilatories |
| In addition, pursuant to a memorandum of understanding between the FDA and the FTC, the FTC has jurisdiction with regard to the promotion and advertising of these products, and the FTC regulates the promotion and advertising of our other products as well |
| As part of its regulatory authority, the FDA may periodically conduct inspections of the physical facilities, machinery, processes and procedures that we use to manufacture regulated products and may observe compliance issues that would require us to make certain changes in our manufacturing facilities and processes |
| It may be necessary to make additional expenditures to address these regulatory observations or possibly stop selling certain products until a compliance issue has been remediated |
| As a result, our business could be adversely affected |
| Our international operations, including the production of over-the-counter drug products, are subject to regulation in each of the foreign jurisdictions in which we manufacture or market goods |
| Changes in product standards or manufacturing requirements in any of these jurisdictions could require us to make certain modifications to our operations or product formulations, or to cease manufacturing certain products completely |
| As a result, our business could be adversely affected |
| • We are subject to risks related to our international operations that could adversely affect the results of operations |
| In 2004, we acquired the remaining 50prca ownership interest in Armkel that we did not already own, increasing the scope of our foreign operations |
| These operations subject us to risks customarily associated with foreign operations, including: • currency fluctuations; • import and export license requirements; • trade restrictions; • changes in tariffs and taxes; • restrictions or repatriating foreign profits back to the United States; and • difficulties in staffing and managing international operations |
| In all foreign jurisdictions in which we operate, we are subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions |
| These laws and regulations may limit our ability to repatriate cash as dividends or otherwise to the United States and may limit our ability to convert foreign currency cash flow into US dollars |
| Outside the United States, sales and costs are denominated in a variety of currencies, including the euro, British pound, Brazilian real, Canadian dollar, Mexican peso and Australian dollar |
| A weakening of the currencies in which sales are generated relative to the currencies in which costs are denominated may decrease operating profits and cash flow |
| • Environmental matters create potential liability risks |
| We must comply with various environmental laws and regulations in the jurisdictions in which we operate, including those relating to the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances |
| A release of such chemicals due to accident or an intentional act could result in substantial liability to governmental authorities or to third parties |
| We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with environmental laws and regulations |
| It is possible that we could become subject to additional environmental liabilities in the future that could result in a material adverse effect on the results of operations or financial condition |
| 14 ______________________________________________________________________ [41]Table of Contents • Failure to maximize or successfully assert intellectual property rights could materially impact our competitiveness |
| We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights |
| We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted |
| There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights necessary to support new product introductions |
| We cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future |
| In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold do not protect intellectual property rights to the same extent as the laws of the United States |
| Our failure to perfect or successfully assert intellectual property rights could make us less competitive and could have a material adverse effect on our business, operating results and financial condition |
| • Our substantial indebtedness could adversely affect our financial condition and ability to operate our businesses and repay the indebtedness |
| As of December 31, 2005, we had dlra756dtta5 million of total consolidated indebtedness |
| This level of indebtedness could (i) limit our ability to borrow money to fund working capital, capital expenditures, acquisitions and debt service requirements and other financing needs and (ii) make us more vulnerable to a downturn in our business, industry or the economy in general |
| In the event of a general increase in interest rates our interest expense would increase because a substantial portion of the indebtedness, including all of the indebtedness under our senior credit facilities, bears interest at floating rates |
| Our failure to service our indebtedness or obtain additional financing as needed could have a material adverse effect on our business operating results and financial condition |
| The terms of our subordinated notes and agreement relating to our credit facility place a limit on the amount of certain cash payments we can make |
| This limitation includes the amount we can pay in dividends on our common stock |
| As long as we are not in default under either agreement, we do not anticipate that the limitation will have an effect on our ability to pay dividends at the current rate |