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 $86 and $214 and diluted net earnings per share of $0.62 and $1.52 for the three and six months ended December 31, 2008, respectively. This compares to net earnings of $92 and $203 and diluted net earnings per share of $0.65 and $1.41 for the three and six months ended December 31, 2007, respectively. Restructuring costs and incremental cost of products sold charges were $0.01 and $0.04 per diluted share on an after-tax basis for the three and six months ended December 31, 2008. This compares to restructuring and asset impairment costs and incremental cost of products sold of $0.02 and $0.14 per diluted share on an after-tax basis for the three and six months ended December 31, 2007 (See "Restructuring and asset impairment costs" below for more information).

The Company continues to face a volatile cost environment, largely driven by cost pressures, 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 and six months ended December 31, 2008 (the
current periods), to the three and six months ended December 31, 2007 (the prior
periods), using percentages calculated on a rounded basis, except as noted.

                                        Three Months Ended                           % of Net Sales
                                    12/31/2008     12/31/2007     % Change     12/31/2008     12/31/2007
Diluted net earnings per share      $      0.62    $      0.65      (5 )%
Net sales                           $     1,216    $     1,186       3 %           100.0 %        100.0 %
Gross profit                                486            479       1              40.0           40.4
Selling and administrative expenses         172            168       2              14.1           14.2
Advertising costs                           107            109      (2 )             8.8            9.2
Research and development costs               27             28      (4 )             2.2            2.4

                                         Six Months Ended                            % of Net Sales
                                    12/31/2008     12/31/2007     % Change     12/31/2008     12/31/2007
Diluted net earnings per share      $      1.52    $      1.41       8 %
Net sales                           $     2,600    $     2,425       7 %           100.0 %        100.0 %
Gross profit                              1,048          1,007       4              40.3           41.5
Selling and administrative expenses         356            323      10              13.7           13.3
Advertising costs                           226            227       -               8.7            9.4
Research and development costs               54             51       6               2.1            2.1

Diluted net earnings per share decreased by $0.03 and increased by $0.11 in the current periods, respectively, compared to the prior periods. The decrease during the three months ended December 31, 2008, was primarily due to increased commodity costs, primarily resin, higher manufacturing and logistic costs and a higher effective tax rate. The increase during the six months ended December 31, 2008, was primarily due to volume growth, price increases, the benefit of cost savings and lower restructuring and impairment charges (See "Restructuring and asset impairment costs" section below) partially offset by increased commodity costs and a higher effective tax rate.

Net sales increased 3% and 7% in the current periods, respectively, compared to the prior periods, while volume decreased 1% and increased 2% in the current periods, respectively, compared to the prior periods.

The volume decrease in the current quarter was primarily driven by the Company's exit from the private-label food bags business and lower shipments of Glad® trash bags, Pine-Sol® cleaner and Clorox® liquid bleach due to the impact of pricing. The volume decline was partially offset by volume growth due to the acquisition of Burt's Bees Inc. (BBI) on November 30, 2007, increased shipments of Clorox® disinfecting wipes, Hidden Valley® bottled salad dressing and bleach and dilutable cleaners in Latin America, the launch of Green Works™, and higher shipments of Clorox 2® stain fighter & color booster.

The volume growth during the six months ended December 31, 2008, was primarily driven by the acquisition of BBI, the launch of Green Works™, increased shipments of bleach and dilutable cleaners in Latin America, increased shipments of Clorox® disinfecting wipes, continued growth in cat litter, higher shipments of Clorox 2® stain fighter & color booster and Hidden Valley® bottled salad dressing, and strong results in Brita®. These volume increases were partially offset by the Company's exit from the private-label food bags business and lower shipments of Pine-Sol® cleaner, Clorox® liquid bleach and Clorox® disinfecting cleaner due to the impact of pricing.

Net sales growth outpaced the change in volume in both periods primarily due to price increases. These were partially offset by unfavorable exchange rates.

Gross profit decreased 40 basis points and 120 basis points as a percentage of sales for the current periods, respectively, compared to the prior periods. The decline was largely due to increased commodity costs, primarily resin, unfavorable foreign exchange and higher manufacturing and logistics costs. These factors were partially offset by volume growth, price increases and the benefit of cost savings.

Selling and administrative expenses increased 2% and 10% in the current periods, respectively, compared to the prior periods. The increase for both periods was primarily driven by the acquisition of BBI. The increase for the current quarter was partially offset by lower incentive compensation accruals. Also contributing to the increase for the six months ended December 31, 2008, were 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.

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

Research and development costs remained relatively consistent in comparison to the prior periods as the Company continues to support product innovations.

Restructuring and asset impairment costs in the current and prior periods relate to a restructuring plan which the Company began in fiscal year 2008. The plan involves simplifying its supply chain and other restructuring activities (Supply Chain and Other restructuring plan). In February 2009, the Company expanded its Supply Chain and Other restructuring plan to include additional costs, primarily severance, associated with the Company's plan to reduce certain staffing levels.

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. 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. As a result of the Supply Chain and Other restructuring plan, a number of positions are being eliminated.

The following table summarizes, by segment, the total restructuring costs associated with the Company's Supply Chain and Other restructuring plan for the three and six months ended December 31, 2008 and 2007:

                                                              Three Months Ended 12/31/08                   Six Months Ended 12/31/08
                                                         North         International                   North        International
                                                        America        and Corporate       Total      America       and Corporate     Total
Cost of products sold                                  $       2      $             -      $    2    $       6     $             1    $    7
Restructuring:
    Severance                                                  1                    -           1            2                   -         2
Total costs                                            $       3      $             -      $    3    $       8     $             1    $    9
Non-cash costs                                                                             $    1                                     $    5

                                                              Three Months Ended 12/31/07                   Six Months Ended 12/31/07
                                                         North         International                   North        International
                                                        America        and Corporate       Total      America       and Corporate     Total
Cost of products sold                                  $       2      $             1      $    3    $       4     $             1    $    5
Restructuring and asset impairment:
    Severance                                                  -                    2           2            1                   2         3
    Asset impairment                                           -                    -           -           22                   2        24
        Total restructuring and asset impairment costs $       -      $             2      $    2    $      23     $             4    $   27
Total costs                                            $       2      $             3      $    5    $      27     $             5    $   32
Non-cash costs                                                                             $    3                                     $   28

Total restructuring payments for the three and six months ended December 31, 2008, were $3 and $5, respectively and the total accrued restructuring liability as of December 31, 2008, was $2.

Total costs to date associated with the Supply Chain and Other restructuring plan were $55 for the North America segment and $13 for the International and Corporate segments at December 31, 2008.

Including the February 2009 expansion of the Supply Chain and Other restructuring plan, the Company anticipates incurring approximately $35 to $37 of Supply Chain and Other restructuring-related charges in fiscal year 2009, of which approximately $6 are expected to be non-cash related. Excluding the costs associated with the decision to expand the plan in February 2009, 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 (including accelerated depreciation for manufacturing equipment and other costs associated with the Supply Chain restructuring), and the remainder will be severance charges. The Company is currently evaluating which segments will be impacted by the restructuring plan expansion announced in February 2009. The total anticipated charges related to the Supply Chain and Other restructuring plan for the fiscal years 2010 through 2012 are estimated to be approximately $25 to $30.

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

Interest expense decreased by $2 and increased by $7, respectively, in the current periods. The decrease in the current quarter was primarily due to a lower weighted average interest rate for total debt, partially offset by higher debt levels, used to finance the BBI acquisition and the Accelerated Share Repurchase (ASR) (See "Share Repurchases" section under Financial Condition, Liquidity and Capital Resources below). The increase in the six months ended December 31, 2008, was primarily due to higher debt levels.

Other expense (income), net was $4 and $7 for the current periods, compared with $(2) for each of the prior periods. The change in other expense (income), net, was primarily due to decreased interest income and increased other costs.

The effective tax rate was 33.9% and 32.5% for the current periods, respectively, as compared to 28.4% and 32.8% for the prior periods, respectively, on an unrounded basis. The lower rate in the year-ago quarter and the current year-to-date period was primarily the result of tax settlements.

SEGMENT RESULTS

NORTH AMERICA

                                  Three Months Ended                           Six Months Ended
                              12/31/2008      12/31/2007     % Change     12/31/2008     12/31/2007     % Change
Net sales                    $      1,007    $        977          3 %    $     2,174    $     2,026          7 %
Earnings before income taxes          273             257          6 %            602            543         11 %

North America reported 3% net sales growth, 2% volume decline and 6% increase in earnings before income taxes, for the current quarter as compared to the year-ago quarter. The segment also reported 7% net sales growth, 1% volume growth and 11% increase in earnings before income taxes for the six months ended December 31, 2008, as compared to the year-ago period.

Volume decline in the current quarter was primarily driven by the Company's exit from the private-label food bags business and lower shipments of Glad® trash bags, Pine-Sol® cleaner and Clorox® liquid bleach due to the impact of pricing. The volume decline was partially offset by volume growth due to the acquisition of BBI on November 30, 2007, increased shipments of Clorox® disinfecting wipes and Hidden Valley® bottled salad dressing, the launch of Green Works™ and higher shipments of Clorox 2® stain fighter & color booster.

Volume growth during the six months ended December 31, 2008, was primarily driven by the acquisition of BBI, the launch of Green Works™, increased shipments of Clorox® disinfecting wipes, continued growth in cat litter, primarily related to Fresh Step® scoopable cat litter, higher shipments of Clorox 2® stain fighter & color booster, which was relaunched with a concentrated formula, increased shipments of Hidden Valley® bottled salad dressing, and strong results in Brita®. These volume increases were partially offset by the Company's exit from the private-label food bags business and lower shipments of Pine-Sol® cleaner, Clorox® liquid bleach and Clorox® disinfecting cleaner due to the impact of pricing.

Net sales growth outpaced the change in volume in both periods primarily due to price increases. These were partially offset by an unfavorable Canadian exchange rate.

The increase in earnings before income taxes in both periods was primarily driven by the impact of pricing, cost savings and lower restructuring and asset impairment charges, partially offset by unfavorable commodity, manufacturing and logistic costs.

INTERNATIONAL

                                  Three Months Ended                            Six Months Ended
                             12/31/2008       12/31/2007      % Change     12/31/2008     12/31/2007      % Change
Net sales                    $       209     $        209          - %     $       426    $       399          7 %
Earnings before income taxes          29               38        (24 )%             58             75        (23 )%

International reported flat sales, 3% volume growth and 24% decrease in earnings before income taxes for the current quarter as compared to the year-ago quarter. The segment also reported 7% net sales growth, 4% volume growth and 23% decrease in earnings before income taxes for the six months ended December 31, 2008, as compared to the year-ago period.

Volume growth for both of the current periods was primarily driven by laundry and homecare product sales growth in Latin America. Volume growth outpaced net sales in the current quarter primarily due to unfavorable foreign exchange rates, partially offset by the impact of pricing. Net sales outpaced volume growth in the six months ended December 31, 2008, primarily due to the impact of pricing.

The decrease in earnings before income taxes for both periods was primarily related to increased cost of products sold, including unfavorable foreign exchange, unfavorable commodity, manufacturing and logistic costs, higher joint venture royalties, and increased advertising expense, partially offset by sales growth.

CORPORATE

Losses before income taxes attributable to the corporate segment increased by 2% and 9% in the current periods, respectively, as compared to prior periods. The increase for both periods was primarily attributable to increased professional services costs, partially offset by lower incentive compensation costs for the current quarter. Also contributing to the increase in losses before income taxes for the six months ended December 31, 2008, were higher compensation costs and increased interest expense.

Operating Activities

The Company's financial condition and liquidity remain strong as of December 31, 2008. Net cash provided by operations was $191 for the six months ended December 31, 2008, compared to $311 for the six months ended December 31, 2007. The decrease was primarily due to the timing of tax and interest payments.

The fair value of the Company's pension plan assets declined approximately 28% from $316 at June 30, 2008, to $227 at December 31, 2008. There have been further declines in the fair value of the Company's pension plan assets since December 31, 2008, and the Company continues to monitor the fair value of its pension plan assets. However, based on current pension funding rules, the Company is not required to make any contributions in fiscal year 2009. The Company is considering making a voluntary contribution to the Company's pension plan of approximately $20 to $25 during the fourth quarter of 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. During the six months ended December 31, 2008, the Company experienced devaluation of certain foreign currencies versus the U.S. Dollar and expects certain foreign currencies to continue 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 $23 from June 30, 2008 to December 31, 2008, principally due to decreases in accrued liabilities, accounts payable and notes and loans payable and an increase in inventories, partially offset by a decrease in accounts receivable. The $98 decrease in accrued liabilities and accounts payable was primarily driven by $54 of capital projects payments and $34 of profit sharing and incentive compensation payments, $39 related to a reduction in the fair value of the Company's commodity derivatives and increases in inventories of $21 primarily due to seasonal inventory builds and higher commodity costs. These working capital changes were partially offset by a $96 decrease in receivables, driven by the seasonality of sales in the charcoal category.

Investing Activities

Capital expenditures were $84 during the six months ended December 31, 2008, compared to $71 in the comparable prior year period. Capital spending as a percentage of net sales was 3.2% during the six months ended December 31, 2008, compared to 2.9% during the six months ended December 31, 2007. Higher capital spending during the six months ended December 31, 2008, was driven primarily by the Company's manufacturing network consolidation efforts.

On November 30, 2007, the Company acquired BBI, a leading manufacturer and marketer of natural personal care products, for an aggregate price of $913, excluding $25 that the Company paid for tax benefits associated with the agreement. The Company also incurred $8 of costs in connection with the acquisition of BBI.

Financing Activities

Net cash used for financing activities was $210 for the six months ended December 31, 2008, compared to net cash provided by financing activities of $768 in the comparable prior year period. The change in cash used for financing activities was primarily due to borrowings to finance the acquisition of BBI and share repurchases in the prior period. Cash used for financing activities was primarily to pay down debt.

At December 31, 2008, the Company had $666 of commercial paper outstanding at a weighted average interest rate of 3.7%. At June 30, 2008, the Company had $781 of commercial paper outstanding at a weighted average interest rate of 2.9%. The credit markets, including the commercial paper markets in the United States, experienced significant volatility during the six months ended December 31, 2008. The Company continues to successfully issue commercial paper. 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 December 31, 2008, the Company had a $1,200 revolving credit agreement, which expires in April 2013. The Company believes that borrowings under the revolving credit facility are 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 December 31, 2008, was 3.11.

The following table sets forth the calculation of the EBITDA ratio, as contractually defined, at December 31, 2008:

                                                                                    Three Months Ended
                                                         3/31/2008      6/30/2008      9/30/2008      12/31/2008         Total
Net earnings                                             $    100      $     158      $     128      $        86      $      472
Add back:
   Interest expense                                            46             43             42               44             175
   Income tax expense                                          51             82             58               45             236
   Depreciation and amortization                               56             51             47               46             200
   Non-cash restructuring and asset impairment charges          5              -              -                -               5
Deduct:
   Interest income                                             (3 )           (2 )           (2 )             (1 )            (8 )
EBITDA                                                   $    255      $     332      $     273      $       220      $    1,080