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Table of Contents
Managing translational exposures
To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. dollars for consolidated reporting, certain
foreign subsidiaries use excess cash to purchase U.S. dollar denominated available−for−sale investments. The variable future cash flows associated with the
purchase and subsequent sale of these U.S. dollar denominated securities at non−U.S. dollar functional currency subsidiaries creates a foreign currency
exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and options to
partially, or entirely, hedge the variability of the forecasted future purchases and sales of these U.S. dollar investments. This has the effect of partially
offsetting the year−over−year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available−for−sale
investments are accounted for as cash flow hedges. The fair value of instruments used in this manner at May 31, 2010 and 2009 was $78 million and $104
million in assets, respectively. There were no instruments in a liability position at May 31, 2010 or 2009. The effective portion of the changes in fair value
of these instruments is reported in OCI and reclassified into earnings in other (income) expense, net in the period during which the hedged
available−for−sale investment is sold and affects earnings. Any ineffective portion, which was not material for any period presented, is immediately
recognized in earnings as a component of other (income) expense, net.
We estimate that the combination of translation of foreign currency−denominated profits from our international businesses and the year−over−year
change in foreign currency related gains included in other (income) expense, net had a favorable impact of approximately $34 million and $124 million on
our income before income taxes for fiscal 2010 and 2009, respectively.
Refer to Note 18 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional
quantitative detail.
Net investments in foreign subsidiaries
We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly−owned foreign subsidiaries denominated in a
currency other than the U.S. dollar, which could adversely impact the U.S. dollar value of these investments and therefore the value of future repatriated
earnings. During fiscal 2008, we began to hedge certain net investment positions in Euro−functional currency foreign subsidiaries to mitigate the effects of
foreign exchange fluctuations on net investments with the effect of preserving the value of future repatriated earnings. In accordance with the accounting
standards for derivatives and hedging, the effective portion of the change in fair value of the forward contracts designated as net investment hedges is
recorded in the cumulative translation adjustment component of accumulated other comprehensive income. Any ineffective portion, which was not material
for any period presented, is immediately recognized in earnings as a component of other (income) expense, net. To minimize credit risk, we have structured
these net investment hedges to be generally less than six months in duration. Upon maturity, the hedges are settled based on the current fair value of the
forward contracts with the realized gain or loss remaining in OCI; concurrent with settlement, we enter into new forward contracts at the current market
rate. The fair value of outstanding net investment hedges at May 31, 2010 and 2009 were $32 million in assets and $23 million in liabilities, respectively.
Cash flows from net investment hedge settlements totaled $5 million and $191 million in the years ended May 31, 2010 and 2009, respectively.
Liquidity and Capital Resources
Cash Flow Activity
Cash provided by operations was $3.2 billion for fiscal 2010 compared to $1.7 billion for fiscal 2009. Our primary source of operating cash flow for
fiscal 2010 was net income of $1.9 billion as well as positive cash flows from working capital. Our working capital provided a net positive cash flow of $0.7
billion for fiscal 2010 as compared to a net cash outflow of $0.4 billion for fiscal 2009. The increase in cash flows from working capital
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