The Clorox Company (the Company or Clorox) is a leading manufacturer and marketer of consumer products. The Company sells its 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 and laundry products, Poett ® and Mistolín ® cleaning products, Armor All ® and STP ® auto-care products, Fresh Step ® and Scoop Away ® cat litter, Kingsford ® charcoal, Hidden Valley ® and K C 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 two dozen countries and markets them in more than 100 countries.

The Company operates through strategic business units which are aggregated into four reportable segments: Cleaning, Household, Lifestyle and International. The four reportable segments consist of the following:

º Cleaning consists of laundry, home-care, professional products and auto-care products marketed and sold in the United States.

º Household consists of charcoal, cat litter and plastic bags, wraps and container products marketed and sold in the United States.

º Lifestyle consists of food products and water-filtration systems and filters marketed and sold in the United States and all natural personal care products.

º International consists of products sold outside the United States.

Corporate includes certain nonallocated administrative costs, interest income, interest expense and certain other nonoperating income and expenses.

The Company primarily markets its leading brands in midsized categories considered to have attractive economic profit potential. 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 $157 and diluted net earnings per share of $1.11 based on weighted average diluted shares outstanding of approximately 141 million for the three months ended September 30, 2009. This compares to net earnings for the three months ended September 30, 2008, of $128 and diluted net earnings per share of $0.90 based on weighted average diluted shares outstanding of approximately 140 million. Restructuring-related charges were $0.03 per diluted share for the three months ended September 30, 2009 and 2008 (See "Restructuring and asset impairment costs" below). Foreign currency transaction losses were $0.04 and $0.02 per diluted share for the three months ended September 30, 2009 and 2008, respectively. Also included in the Company's results for the three months ended September 30, 2008, were costs of $0.01 per diluted share related to the Company's acquisition of Burt's Bees, Inc. which was acquired on November 30, 2007.

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 Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, which was filed with the Securities and Exchange Commission (SEC) on August 25, 2009, 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, 2009 (the current
period), to the three months ended September 30, 2008 (the prior period), using
percentages calculated on a rounded basis, except as noted.

                                       Three Months Ended                            % of Net Sales
                                    9/30/2009      9/30/2008      % Change      9/30/2009      9/30/2008
Diluted net earnings per share      $     1.11     $     0.90         23 %
Net sales                           $    1,372     $    1,384         (1 )%        100.0 %        100.0 %
Gross profit                               619            562         10            45.1           40.6
Selling and administrative expenses        175            184         (5 )          12.8           13.3
Advertising costs                          127            119          7             9.3            8.6
Research and development costs              27             27          -             2.0            2.0

Diluted net earnings per share increased $0.21 primarily due to favorable commodity costs, price increases, cost savings and lower interest expense in the current period. These increases were partially offset by increased advertising costs, unfavorable product mix, and increased manufacturing, logistics and trade spending costs.

Net sales decreased 1% while volume increased 1%. The volume increase was primarily driven by increased shipments of Clorox ® disinfecting wipes due to the H1N1 flu pandemic and increased distribution of food products primarily due to effective marketing of Hidden Valley® bottled salad dressing. Also contributing to the increase in volume was the launch of the Green Works™ natural laundry products and increased shipments of Pine-Sol®. Partially offsetting these volume increases were lower shipments of Glad® products primarily due to competitive activity in the trash category and the exit from a private-label food bags business. Volume growth outpaced net sales growth primarily due to unfavorable foreign exchange rates (approximately 150 basis points), unfavorable product mix (approximately 150 basis points) and increased trade spending (approximately 120 basis points), partially offset by the benefit of pricing actions (approximately 270 basis points).

Gross profit increased 10% and increased as a percentage of net sales to 45% from 41% in the prior period. Gross margin expansion in the current period reflects approximately 240 basis points due to favorable commodity costs and 170 basis points each from pricing and cost savings. These factors were partially offset by 40 basis points from increased manufacturing and logistics costs and 90 basis points from other items, including unfavorable product mix, trade merchandising and other cost inputs.

Selling and administrative expenses decreased 5% primarily due to lower consulting spending and lower incentive compensation accruals.

Advertising costs increased 7% as a result of higher spending to support the new product launch for Green Works™ natural laundry detergent, higher spending for Glad® premium trash bags and higher marketing investments for established brands.

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

Restructuring costs in the current and prior periods relate to the Company's Supply Chain and Other restructuring initiative. In fiscal year 2008, the Company began a restructuring plan that involves simplifying its supply chain and other restructuring activities (Supply Chain and Other restructuring plan), which was subsequently expanded 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 Company's 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.

During the three months ended September 30, 2009, the Company recognized $2 of restructuring costs in Corporate. Additionally, the Company recognized restructuring-related costs associated with the Supply Chain and Other restructuring plan of $1 and $3, included in selling and administrative expenses and cost of products sold, respectively. Of these amounts, $2, $1 and $1 were related to the Cleaning and Household segments and Corporate, respectively.

During the three months ended September 30, 2008, the Company recognized $1 of restructuring costs in the Cleaning segment. In addition, the Company recognized in cost of products sold restructuring-related costs associated with the Supply Chain and Other restructuring plan of $5. Of these amounts, $1, $3 and $1 were related to the Cleaning, Household and International segments, respectively.

Total costs associated with the Supply Chain and Other restructuring plan since inception through September 30, 2009, were $104, of which $31, $41, $12 and $20 related to the Cleaning, Household, International segments and Corporate, respectively.

The Company anticipates incurring approximately $18 to $25 of Supply Chain and Other restructuring-related charges in fiscal year 2010, of which approximately $2 are expected to be noncash related. The Company anticipates approximately $5 to $8 of the fiscal year 2010 charges to be in Corporate and $9 to $11 to be in the Cleaning segment, of which approximately $7 to $9 are expected to be recognized as cost of products sold charges. The remaining estimated charges of $4 to $6 are expected to be recognized as cost of products sold in the Household segment. The total anticipated charges related to the Supply Chain and Other restructuring plan for the fiscal years 2011 and 2012 are estimated to be approximately $10 to $12.

Total restructuring cash payments for the three months ended September 30, 2009, were $3 and the total accrued restructuring liability as of September 30, 2009, was $14. The total accrued restructuring liability as of June 30, 2009, was $15.

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

Interest expense decreased from $42 to $36, primarily due to a decline in average debt balances and a lower weighted average interest rate for total debt.

Other expense, net increased from $3 to $8 in the current period. The increase was primarily driven by an increase in foreign exchange transaction losses of $6.

The effective tax rate was 35.5% for the current period as compared to 31.4% for the prior period, on an unrounded basis. The lower rate in the prior period was principally due to favorable audit settlements.

SEGMENT RESULTS

The following presents the results of operations from the Company's reportable segments excluding certain unallocated costs included in Corporate:

CLEANING

                                Three Months Ended
                             9/30/2009      9/30/2008      % Change
Net sales                    $      503     $      487           3 %
Earnings before income taxes        137            115          19 %

Volume, net sales and earnings before income taxes increased for the current quarter as compared to the year-ago quarter. Volume growth of 4% was primarily due to increased shipments of Clorox® disinfecting wipes to meet demand associated with the H1N1 flu pandemic. Also contributing to the volume growth was the increased distribution of Pine-Sol® cleaner and Clorox® toilet bowl cleaners. These were partially offset by lower shipments of auto-care products due to distribution losses. The increase in earnings before income taxes was primarily driven by the benefit of lower commodity costs of $9, primarily resin, cost savings of $8, including more efficient sourcing of raw materials and transportation costs, the implementation of cost-effective packaging, including a concentrated formulation for Clorox 2® stain fighter and color booster and packaging simplification. Also contributing to the increase was the impact of price increases of $6.

HOUSEHOLD

                                  Three Months Ended
                              9/30/2009         9/30/2008       % Change
Net sales                    $       381       $       426       (11 )%
Earnings before income taxes          55                62       (11 )%

Net sales, volume and earnings before income taxes declined in the current quarter as compared to the year-ago quarter. Volume decline of 7% was primarily driven by lower shipments of Glad® products primarily due to category softness, competitive activity and the company's exit from its private label food bags business, partially offset by increased shipments of Fresh Step® cat litter. The variance between changes in volume and sales was primarily due to unfavorable product mix (approximately 150 basis points) and higher trade spending in response to competitive activity (approximately 150 basis points). The decrease in earnings before income taxes was primarily driven by lower sales of Glad® products and higher advertising of $4 in response to the competitive activity partially offset by lower commodity costs of $18, primarily resin, and cost savings of $7 primarily associated with the Company's diversification of its supplier base and various manufacturing efficiencies.

LIFESTYLE

                                  Three Months Ended
                              9/30/2009         9/30/2008       % Change
Net sales                    $       200       $       194          3 %
Earnings before income taxes          66                56         18 %

Net sales, volume and earnings before income taxes increased for the current quarter as compared to the year-ago quarter. Volume growth of 4% was due to increased shipments of Hidden Valley® bottled salad dressing, propelled by highly effective marketing. Partially offsetting the growth were lower shipments of Brita® and Burt's Bees® products due to the comparison with strong volume increases in the year-ago quarter. The increase in earnings before income taxes was primarily driven by favorable commodity costs, including the decrease in the cost of diesel fuel of $5 and favorable foreign exchange rates of $4. Also contributing to the increase was the impact of cost savings of $3 due to more efficient sourcing of raw materials.

INTERNATIONAL

                                  Three Months Ended
                              9/30/2009         9/30/2008       % Change
Net sales                    $       288       $       277          4 %
Earnings before income taxes          47                34         38 %

Net sales, volume and earnings before income taxes increased in the current quarter as compared to the year-ago quarter. Volume growth of 3% was primarily driven by increased shipments of bleach and other disinfecting products in Latin America due to increased demand as a result of the H1N1 flu pandemic. The increase in earnings before income taxes was primarily due to an increase in volume and the impact of price increases of $29. The increases were partially offset by $11 from the negative impact of foreign exchange rates and $9 of foreign currency transaction losses.

CORPORATE

The decrease in losses before income taxes attributable to Corporate during the current quarter, was primarily due to lower interest expense primarily due to a decline in average debt balances, a decrease in average interest rates paid on commercial paper borrowings, and lower consulting costs.

Financial Condition, Liquidity and Capital Resources

Operating Activities

The Company's financial condition and liquidity remain strong as of September 30, 2009. Net cash provided by operations was $94 for the three months ended September 30, 2009 as compared to $93 for the year-ago period. Higher net earnings in the current period were largely offset by a $33 voluntary pension plan contribution. Based on current pension funding rules, the Company is not required to make any contributions in fiscal year 2010.

The Company is exposed to foreign currency risk associated with foreign governments imposing currency remittance restrictions. During the three months ended September 30, 2009, the Company incurred foreign currency transaction losses in Venezuela of approximately $8.

Working Capital

The Company's working capital, defined in this context as total current assets net of total current liabilities, increased by $92 from June 30, 2009 to September 30, 2009, principally due to a decrease in accounts payable and accrued liabilities. The decrease in accounts payable and accrued liabilities was primarily due to $43 related to the payment of the fiscal year 2009 annual incentive program and value sharing awards, net of fiscal year 2010 first quarter annual incentive and value sharing accruals, $13 due to the timing of interest payments, $9 due to an increase in the fair value of commodity contracts, and the remainder relating to timing of vendor payments and a decrease in the volume of information technology related purchases.

Investing Activities

Capital expenditures were $34 during the three months ended September 30, 2009, compared to $39 in the comparable prior year period. Capital spending as a percentage of net sales was 2.5% during the three months ended September 30, 2009, compared to 2.8% during the three months ended September 30, 2008.

Financing Activities

Net cash used for financing activities was $35 for the three months ended September 30, 2009, compared to net cash used for financing activities of $75 in the comparable prior year period. The decrease was primarily due to increased borrowings in the current period used to finance the $33 voluntary pension plan contribution.

At September 30, 2009, the Company had $455 of commercial paper outstanding at a weighted average interest rate of 0.3%. The Company continues to successfully issue commercial paper. 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.

In January 2010, $575 of debt will become due and payable. The Company anticipates that the debt repayment will be made through a partial refinancing through the use of a combination of long-term and short-term debt, and operating cash flows.

Credit Arrangements

At September 30, 2009, the Company had a $1,100 revolving credit agreement with an expiration date of April 2013. There were no borrowings under this revolving credit arrangement, which the Company believes is now available and will continue to be available for general corporate purposes and to support commercial paper issuances. The revolving credit agreement includes certain restrictive covenants. The primary restrictive covenant is a maximum ratio of total debt to EBITDA for the trailing 4 quarters (EBITDA ratio), as defined in the Company's lending agreements, of 3.25. 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, 2009, was 2.61.

The following table sets forth the calculation of the EBITDA ratio, as defined in the Company's lending agreement, at September 30, 2009:

                                   12/31/2008       3/31/2009       6/30/2009       9/30/2009         Total
Net earnings                      $       86       $     153       $     170       $     157       $      566
Add back:
    Interest expense                      44              39              36              36              155
    Income tax expense                    45              80              91              87              303
    Depreciation and amortization         46              49              48              48              191
    Asset impairment charges               -               -               3               -                3
Deduct:                                                                                                     -
    Interest income                       (1 )            (1 )            (1 )            (1 )             (4 )
EBITDA                            $      220       $     320       $     347       $     327       $    1,214

The Company is in compliance with all restrictive covenants and limitations as of September 30, 2009. The Company anticipates being in compliance with all restrictive covenants for the foreseeable future.

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 fully funded.

In addition, the Company had $44 of foreign working capital credit lines and other facilities at September 30, 2009, of which $31 was available for borrowing. The Company was also a party to letters of credit of $21, primarily related to one of its insurance carriers.

Share Repurchases

The Company has two share repurchase programs: an open-market purchase program, which had, as of September 30, 2009, a total authorization of $750, and a program to offset the impact of share dilution related to share-based awards (the Evergreen Program), which has no authorization limit as to amount or timing of repurchases.

The Company did not repurchase any shares during the three months ended September 30, 2009 and 2008.

Contingencies

The Company is involved in certain environmental matters, including Superfund and other response actions at various locations. The Company recorded a liability of $19 at both September 30, 2009 and June 30, 2009, for its share of the related aggregate future remediation cost. One matter in Dickinson County, Michigan, for which the Company is jointly and severally liable, accounts for a substantial majority of the recorded liability at both September 30, 2009 and June 30, 2009. The Company is subject to a cost-sharing arrangement with Ford Motor Co. (Ford) for this matter, under which the Company has agreed to be liable for 24.3% of the aggregate remediation and associated costs, other than legal fees, as the Company and Ford are each responsible for their own such fees. If Ford is unable to pay its share of the response and remediation obligations, the Company would likely be responsible for such obligations. In October 2004, the Company and Ford agreed to a consent judgment with the Michigan Department of Environmental Quality, which sets forth certain remediation goals and monitoring activities. Based on the current status of this matter, and with the assistance of environmental consultants, the Company maintains an undiscounted liability representing its best estimate of its share of costs associated with the capital expenditures, maintenance and other costs to be incurred over an estimated 30-year remediation period. The most significant components of the liability relate to the estimated costs associated with the remediation of groundwater contamination and excess levels of subterranean methane deposits. The Company made payments of less than $1 during each of the three months ended September 30, 2009 and 2008, towards remediation efforts. Currently, the Company cannot accurately predict the timing of the payments that will likely be made under this estimated obligation. In addition, the Company's estimated loss exposure is sensitive to a variety of uncertain factors, including the efficacy of remediation efforts, changes in remediation requirements and the timing, varying costs and alternative clean-up technologies that may become available in the future. Although it is possible that the Company's exposure may exceed the amount recorded, any amount of such additional exposures, or range of exposures, is not estimable at this time.

The Company is subject to various other lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, employee and other matters. Although the results of claims and litigation cannot be predicted with certainty, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on the Company's consolidated financial statements taken as a whole.

Recently adopted pronouncements

On July 1, 2009, the Company adopted a new accounting standard which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities that must be included in the computation of earnings per share pursuant to the two-class method. These payment awards were previously not considered participating securities. Accordingly, the Company's unvested performance units, restricted stock awards and restricted stock units that provide such nonforfeitable rights are now considered participating securities in the calculation of net earnings per share (EPS). The Company's share-based payment awards granted in fiscal year 2010 are not participating securities The new standard requires the retrospective adjustment of the Company's earnings per share data. The retrospective adoption of the new accounting standard resulted in a $0.01 decrease in the previously reported basic and diluted EPS for the three months ended September 30, 2008, and a $0.04 and $0.02 decrease in the previously reported basic and diluted EPS, respectively, for the fiscal year 2009. The calculation of EPS under the new standard is disclosed in Note 6 to Condensed Consolidated Financial Statements.

On July 1, 2009, the Company adopted a new accounting standard which establishes principles and requirements for how the acquirer of a business recognizes and . . .