The Clorox Company (the Company or Clorox) is a leading manufacturer and marketer of consumer products. The Company sells it products primarily through mass merchandisers, grocery stores and other retail outlets. Clorox markets some of consumers' most trusted and recognized brand names, including its namesake bleach and cleaning products, Green Works™ natural cleaners, Poett® and Mistolín® cleaning products, Armor All® and STP® auto-care products, Fresh Step® and Scoop Away® cat litter, Kingsford® charcoal, Hidden Valley® and KC Masterpiece® dressings and sauces, Brita® water-filtration systems, Glad® bags, wraps and containers, and Burt's Bees® natural personal care products. With approximately 8,300 employees worldwide, the Company manufactures products in more than 15 countries and markets them in more than 100 countries.

The Company operates through two operating segments: North America and International. The North America operating segment includes all products marketed in the United States and Canada. The International operating segment includes all products marketed outside the United States and Canada. The Company reflects certain nonallocated administrative costs, amortization of trademarks and other intangible assets, interest income, interest expense, foreign exchange gains and losses, and other nonoperating income and expense, in its Corporate segment.

The Company primarily markets its leading brands in midsized categories with attractive economic and competitive sets. Most of the Company's products compete with other nationally-advertised brands within each category and with "private-label" brands.

The Company reported net earnings of $128 and $111 and diluted net earnings per share of $0.91 and $0.76 for the three months ended September 30, 2008 and 2007, respectively. Restructuring costs, including related incremental cost of products sold charges were $0.03 per diluted share on an after-tax basis for the three months ended September 30, 2008. Restructuring and asset impairment charges and incremental cost of products sold were $0.12 per diluted share on an after-tax basis for the three months ended September 30, 2007 (See "Restructuring costs" below for more information).

The Company continues to face a challenging cost environment, largely driven by cost pressures across a large spectrum, including commodity costs, primarily resin and agricultural commodities, and increased energy-related manufacturing and logistics costs. The Company is addressing these challenges through price increases, on-going cost savings programs, focus on product mix and assortment, innovative product improvements and new products, and advertising and trade promotional spending to support and grow its brands.

The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and Condensed Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, which was filed with the Securities and Exchange Commission (SEC) on August 19, 2008, and the unaudited Condensed Consolidated Financial Statements and related notes contained in this quarterly report on Form 10-Q.

                             Results of Operations

Management's Discussion and Analysis of the Results of Operations, unless
otherwise noted, compares the three months ended September 30, 2008 (the current
period), to the three months ended September 30, 2007 (the prior period), using
percentages calculated on a rounded basis, except as noted.

                                            Three Months Ended                          % of Net Sales
                                        9/30/2008       9/30/2007     % Change     9/30/2008     9/30/2007
Diluted net earnings per share          $     0.91     $      0.76      20 %
Net sales                               $    1,384     $     1,239      12            100.0 %       100.0 %
Gross profit                                   562             528       6             40.6          42.6
Selling and administrative expenses            184             155      19             13.3          12.5
Advertising costs                              119             118       1              8.6           9.5
Research and development costs                  27              23      17              2.0           1.9

Diluted net earnings per share increased by $0.15 primarily due to increased net earnings and a decrease in shares outstanding as a result of the Company's repurchase of its shares in August 2008 (See "Share Repurchases" section under Financial Condition, Liquidity and Capital Resources below). The increase in net earnings was primarily due to volume growth, price increases, the benefit of cost savings and lower restructuring and asset impairment charges (See "Restructuring and asset impairment costs" section below). These increases were partially offset by increased commodity costs, primarily resin and agricultural commodities, higher manufacturing and logistic costs, selling and administrative costs, including costs associated with the acquisition of Burt's Bees Inc. (BBI) and increased interest costs associated with higher debt levels.

Net sales increased 12% while volume increased 4%. The volume increase was primarily driven by the acquisition of BBI, the launch of Green Works™, increased shipments of Glad® ForceFlex® trash bags, strong results in Brita®, increased shipment in the charcoal business and continued growth in Fresh Step® scoopable cat litter. Also contributing to volume growth were increased shipments of Clorox 2® stain fighter & color booster, and increased shipments of bleach and dilutable cleaners in Latin America. These increases were partially offset by the Company's exit from the private-label food bags business and lower shipments of Clorox® liquid bleach, Pine-Sol® cleaner, Clorox® toilet bowl cleaner, Clorox® disinfecting cleaner and Glad® regular trash bags. Net sales growth outpaced volume growth primarily due to the benefit of price increases and favorable product mix.

Gross profit increased by 6% and decreased by 200 basis points as a percentage of net sales. The decline as a percentage of net sales was primarily due to increased commodity costs, primarily resin and agricultural commodities, and higher manufacturing and logistic costs. These factors were partially offset by volume growth, price increases, the benefit of cost savings and favorable product mix.

Selling and administrative expenses increased by 19% in the current period. This increase was primarily driven by the acquisition of BBI, incremental investments to support our Centennial strategy, including additional sales resources to support growth in the grocery channel, and higher commissions resulting from sales growth. In addition, the Company slightly increased its allowance for doubtful accounts as it continues to monitor its customer receivables.

Advertising costs remained relatively unchanged in comparison to the prior period as the Company continues to support its new products and established brands.

Research and development costs increased 17% in the current period primarily due to higher compensation costs.

Restructuring costs decreased from $25 to $1 in the current period. Total restructuring charges, including cost of products sold, were $6, of which $4 were non-cash. These charges, which commenced in fiscal year 2008, related to the simplification of the Company's supply chain and other restructuring charges (Supply Chain and Other restructuring) the Company decided to take in light of its Centennial Strategy.

The Supply Chain restructuring involves closing certain domestic and international manufacturing facilities. The Company is redistributing production from these facilities between the remaining facilities and third-party producers to optimize available capacity and reduce operating costs. As a result of this initiative, a number of positions are being eliminated. The Company anticipates the Supply Chain restructuring will be completed in fiscal year 2012. The Other restructuring charges relate primarily to the write-down of certain new venture investments, intangible assets and equipment and the cost of exiting the Company's private-label food bags business in fiscal year 2008, which the Company decided not to pursue.

The following table summarizes, by segment, the costs associated with the Company's Supply Chain and Other restructuring initiatives for the three months ended September 30, 2008 and to date:

                                                                    North
                                                                   America      International      Corporate      Total
Cost of products sold                                              $      4    $             1    $         -    $     5

Restructuring:
    Severance                                                             1                  -              -          1
Total costs for the three months ended September 30, 2008          $      5    $             1    $         -    $     6

Total costs to date                                                $     52    $            10    $         3    $    65

The Company anticipates incurring approximately $20 to $25 of Supply Chain and Other restructuring-related charges to be incurred in fiscal year 2009, of which approximately $8 are non-cash related. The Company anticipates that approximately $19 to $24 of the fiscal year 2009 charges will be in the North America segment, including approximately $16 to $20 which are estimated to be recognized as cost of products sold charges (primarily accelerated depreciation for manufacturing equipment and other costs associated with the Supply Chain restructuring), and the remainder to be severance charges. The remaining estimated charges will be in the International segment and are expected to be classified as cost of products sold and severance. The total anticipated charges for the Supply Chain and Other restructuring initiatives for the fiscal years 2010 through 2012 are estimated to be approximately $24. Total restructuring payments for the three months ended September 30, 2008, were $3 and the total accrued restructuring liability as of September 30, 2008, was $4.

The Company may, from time to time, decide to pursue additional restructuring-related initiatives that involve charges in the future.

Interest expense increased from $33 to $42 in the current period. The increase was primarily due to higher debt levels in the current period, used to finance the BBI acquisition and the Accelerated Share Repurchase (ASR) (See "Share Repurchases" section under Financial Condition, Liquidity and Capital Resources below).

Other expense, net increased from $0 to $3 in the current period. The increase was primarily driven by other investment losses and a decrease in interest income due to timing differences of commercial paper issued for share repurchases.

The effective tax rate was 31.4% for the current period as compared to 36.1% for the prior period, on a rounded basis. The lower rate in the current quarter was principally due to favorable audit settlements.

Segment Results

NORTH AMERICA

                                    Three Months Ended
                                9/30/2008       9/30/2007     % Change
Net sales                       $    1,167     $     1,049          11 %
Earnings before income taxes           329             286          15

North America reported 11% net sales growth, 4% volume growth and a 15% increase in earnings before income taxes. Volume growth was primarily driven by the acquisition of BBI in fiscal year 2008, the launch of Green Works™, record shipments of Glad® ForceFlex® trash bags, higher shipments of Brita® driven by merchandising events and continued growth in cat litter, primarily related to Fresh Step® scoopable cat litter. Also contributing to the volume growth were increased charcoal shipments primarily related to merchandising events and higher shipments of Clorox 2® stain fighter & color booster, which was relaunched with a concentrated formula. Volume increases were partially offset by the Company's exit from the private-label food bags business and lower shipments of Clorox® liquid bleach, Pine-Sol® cleaner, Clorox® toilet bowl cleaner, Clorox® disinfecting cleaner and Glad® regular trash bags. Net sales growth outpaced volume growth primarily due to favorable brand mix and pricing. The increase in earnings before income taxes was primarily driven by sales growth, cost savings and the impact of pricing partially offset by unfavorable commodity, manufacturing and logistic costs and higher selling and administrative costs.

INTERNATIONAL

                                    Three Months Ended
                                9/30/2008       9/30/2007     % Change
Net sales                       $      217      $      190          14 %
Earnings before income taxes            29              37         (22 )

International reported 14% net sales growth, 5% volume growth and a 22% decrease in earnings before income taxes. Volume growth was primarily driven by laundry and homecare product sales growth in Latin America. Sales growth outpaced volume growth due primarily to price increases and favorable foreign exchange rates. The decrease in earnings before income taxes was primarily related to increased cost of products sold, including unfavorable commodity, manufacturing and logistic costs, increased advertising expense, and higher joint venture royalties, partially offset by sales growth.

CORPORATE

Losses before income taxes attributable to the corporate segment increased 15%. The increase was primarily attributable to increased interest expense and compensation costs.

Operating Activities

The Company's financial condition and liquidity remain strong as of September 30, 2008. Net cash provided by operations was $93 for the three months ended September 30, 2008, compared to $163 for the three months ended September 30, 2007. The decrease was primarily due to higher working capital. Working capital reflected the impact of the BBI acquisition and higher inventory levels resulting from increased commodity costs and inventory builds to support both new product launches and the manufacturing network consolidation. Also contributing to the decline in cash flow were higher incentive compensation and interest payments versus the prior year quarter.

The fair value of the Company's pension plan assets declined approximately 11% from $316 at June 30, 2008, to $280 at September 30, 2008. There have been further declines in the fair value of the Company's pension plan assets since September 30, 2008, and the Company continues to monitor the fair value of its pension plan assets. If the value of the Company's pension plan assets remains at present levels or continues to decline, it may result in future additional pension contributions by the Company. Based on current fiscal year funding projections, the Company is not required to make any contributions in fiscal year 2009.

Approximately 20% of the Company's net sales are generated outside of the United States. As a result, the Company is exposed to currency exchange rate risks and risks associated with economic or political instability. The Company expects certain foreign currencies to experience devaluation versus the U.S. dollar during fiscal year 2009.

Working Capital

The Company's balance of working capital, defined in this context as total current assets net of total current liabilities, increased by $16 from June 30, 2008 to September 30, 2008, principally due to decreases in accrued liabilities and accounts payable, partially offset by a decrease in receivables and other current assets. The $99 decrease in accrued liabilities and accounts payable was primarily driven by $50 of profit sharing and incentive compensation payments offset by a net decrease of $13 in accrued interest on long-term debt due to the timing of payments. These working capital changes were partially offset by a $50 decrease in receivables, driven by the seasonality of sales in the charcoal category and a decrease in the fair value of commodity purchase contracts of approximately $38 in other current assets.

Investing Activities

Capital expenditures were $39 during the three months ended September 30, 2008, compared to $26 in the comparable prior year quarter. Capital spending as a percentage of net sales was 2.8% during the three months ended September 30, 2008, compared to 2.1% during the three months ended September 30, 2007. Higher capital spending during the three months ended September 30, 2008, was driven primarily by the Company's manufacturing network consolidation efforts.

Financing Activities

Net cash used for financing activities was $75 for the three months ended September 30, 2008, compared to $110 in the comparable prior year quarter. The change in cash used for financing activities was primarily due to lower repayments of commercial paper due to the decrease in cash provided by operations described above.

At September 30, 2008, the Company had $754 commercial paper outstanding at a weighted average interest rate of 5.3%. At June 30, 2008, the Company had $781 commercial paper outstanding at a weighted average interest rate of 2.9%. The credit markets, including the commercial paper markets in the United States, have recently experienced significant volatility. The Company continues to successfully issue commercial paper, although at higher interest rates compared to the prior year. Continuing volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. Notwithstanding these adverse market conditions, the Company believes that current cash balances and cash generated by operations, together with access to external sources of funds as described below, will be sufficient to meet the Company's operating and capital needs in the foreseeable future.

Credit Arrangements

At September 30, 2008, the Company had a $1,200 revolving credit agreement, which expires in April 2013. The Company believes the revolving credit is now available and will continue to be available for general corporate purposes and to support commercial paper issuances. The $1,200 revolving credit agreement includes certain restrictive covenants. The primary restrictive covenant is a maximum total debt to EBITDA for the trailing 4 quarters ratio (EBITDA ratio), as contractually defined, of 3.5 through December 30, 2008, and 3.25 thereafter. EBITDA as defined by the revolving credit agreement may not be comparable to similarly titled measures used by other entities. The Company's EBITDA ratio at September 30, 2008, was 3.17.

The following table sets forth the calculation of the EBITDA ratio, as contractually defined, at September 30, 2008:

                                                                                         Three Months Ended
                                                                 12/31/2007      3/31/2008      6/30/2008      9/30/2008      Total
Net earnings                                                    $         92    $       100    $       158    $       128    $    478
Add back:
     Interest expense                                                     46             46             43             42         177
     Income tax expense                                                   36             51             82             58         227
     Depreciation and amortization                                        50             56             51             47         204

EBITDA                                                          $        224    $       253    $       334    $       275    $  1,086

                                                                                               Debt at September 30, 2008    $  3,447

                                                                                                             EBITDA ratio        3.17



The Company is in compliance with all restrictive covenants and limitations as
of September 30, 2008. The Company anticipates being in compliance with all
restrictive covenants for the foreseeable future.

The following banks participate in the Company's revolving credit agreement:

Bank                                   Committed
JPMorgan Chase Bank, N.A.              $       180
Wachovia Bank, National Association            180
Citicorp USA, Inc.                             180
The Bank of Tokyo-Mitsubishi UFJ, Ltd.         150
BNP Paribas                                    100
William Street LLC *                           100
Lehman Brothers Bank, FSB                      100
Wells Fargo Bank, N.A.                          75
The Northern Trust Company                      50
PNC Bank, National Association                  50
Fifth Third Bank                                35

Total                                  $     1,200

* William Street LLC is a subsidiary of The Goldman Sachs Group, Inc.

On September 15, 2008, Lehman Brothers Holdings Inc., filed a petition under Chapter 11 of the U.S. Bankruptcy code with the U.S. Bankruptcy Court for the Southern District of New York. To the Company's knowledge, Lehman Brothers Bank, FSB, an affiliate of Lehman Brothers Holdings, Inc., has not filed a petition in bankruptcy. On October 3, 2008, Wells Fargo & Company announced a merger agreement with Wachovia Corporation. The Company is continuing to monitor changes in the financial markets and assessing the impact of these events on its ability to fully draw under its revolving credit facility, but expects that any drawing under the facility will be substantially satisfied. If Lehman Brothers Bank, FSB and Wachovia Bank, N.A. are unable to fulfill their funding commitments, the Company believes it has sufficient remaining borrowing capacity under its revolving credit agreement to meet its commercial paper maturity requirements should the Company be unable to issue commercial paper.

In addition, the Company had $46 of foreign working capital credit lines and other facilities at September 30, 2008, of which $24 was available for borrowing.

Share Repurchases

The Company has two share repurchase programs: an open-market purchase program, which had, as of June 30, 2008, a total authorization of $750, and a program to offset the impact of share dilution related to share-based awards (Evergreen Program), which has no authorization limit as to amount or timing of repurchases.

No shares were repurchased under the open-market program during the three months ended September 30, 2008. In August 2007, the Company entered into an ASR agreement with two investment banks. Under the ASR agreement, the Company repurchased $750 of its shares of common stock from the investment banks for an initial per share amount of $59.59, subject to adjustment. The banks delivered an initial amount of 10.9 million shares to the Company in August 2007. Under the terms of the ASR agreement, the final number of shares the Company repurchased and the timing of the final settlement depended on prevailing market conditions, the final discounted volume weighted average share price over the term of the ASR agreement and other customary adjustments. The final purchase price adjustment was settled in January 2008, resulting in the receipt of an additional 1.1 million shares by the Company. The final settlement under the ASR agreement did not require the Company to make any additional cash or share payments. Upon final settlement, the average per share amount paid for all shares purchased under the ASR agreement was $62.08.

Share repurchases under the evergreen program were zero during the three months ended September 30, 2008 and $118 (2 million shares) during the three months ended September 30, 2007.

Guarantees

In conjunction with divestitures and other transactions, the Company may provide indemnifications relating to the enforceability of trademarks; pre-existing legal, tax, environmental and employee liabilities; as well as provisions for product returns and other items. The Company has indemnification agreements in effect that specify a maximum possible indemnification exposure. As of September 30, 2008, the Company's aggregate maximum exposure from these agreements is $291, which consists primarily of an indemnity of up to $250 made to Henkel in connection with general representations and warranties made by the Company in connection with the Share Exchange Agreement, subject to a minimum threshold of $12 before any payments would be made. As of September 30, 2008, the Company had not made, nor does it anticipate making, any payments relating to the indemnities contained in the Share Exchange Agreement. The general representations and warranties were made to guarantee statements of fact at the time of the transaction closing and pertain to environmental, legal and other matters.

In addition to the indemnifications related to the general representations and warranties, the Company entered into an agreement with Henkel regarding certain tax matters. The Company and Henkel agreed to be responsible for each other's taxes on the transaction if their respective actions result in a breach of certain tax representations and warranties in a manner that causes the share-exchange to fail to qualify for tax-free treatment. The Company is unable to estimate the amount of maximum potential liability relating to the tax indemnification but notes that the tax exposure, if any, could be very significant. Any exposure under the agreement would be limited to taxes assessed prior to the expiration of the statute of limitations period for assessing taxes on the share exchange transaction.

During the first quarter of fiscal year 2008, the Company entered into an agreement with the IRS, agreeing to the tax-free treatment of the share exchange transaction. Henkel has advised the Company that the IRS has completed its audit of Henkel's U.S. group's federal income tax return for the year in which the share exchange transaction took place and did not propose any adjustments to Henkel's tax-free treatment of the share exchange transaction. Thus, while the . . .