Keeping St. Jude's Slide From Getting Lost in Translation

A colleague pointed out one of great examples of corporate-speak in recent memory, lifted from a slide presented Friday morning by CEO Dan Starks of St. Jude Medical at the company's investor day .

As a former financial officer for a NASDAQ company, I accepted the personal challenge of properly translating it.

The context here is that Starks was covering a few of the good things that happened in the recent past including a consolidation into a more efficient operation. And here's the bottom bullet point from that slide:

"This will help us continue to leverage adjusted EPS on a constant currency basis in a growth oriented environment in 2015 and beyond."

Read it again slowly. "This will help us continue to leverage adjusted EPS on a constant currency basis in a growth oriented environment in 2015 and beyond."

Okay, let's start with leverage. That's easy.

By focusing on efficiency, St. Jude's profits will can go up faster than sales do. It's called operating leverage, with sales going up a little faster than the total of the product costs and operating expenses it takes to generate the new sales. If managed well, it should be pretty easy to grow profits quite a bit with just a little growth in sales.

As for "adjusted," St. Jude is not the only company that talks about numbers that have been tweaked just a bit from what appears on the financial statements required under Generally Accepted Accounting Principles. In doing so it's trying to be easier to understand, not throw dust in the air. The company reports its profits, in things like the earnings release, as adjusted EPS, and the analysts all track and forecast adjusted EPS.

What's being adjusted out of the calculation for St. Jude are the after-tax impact of restructuring activities, litigation charges and the like. It's a perfectly fine practice, but it's also important to read the footnotes to find out exactly what companies are doing.

Next is that part about "constant currency."

This is a global company, like all big medical device companies, and a lot of its business gets done using local currency rather than dollars. The financial results are all reported in dollars, however. The thing to do, then, is report the financial results after correcting for swings in exchange rates since the same quarter last year, which is the quarter everybody uses to compare progress.

If the company like St. Jude didn't do that, and depending on what happened with the value of the dollar, it would be possible to report a growth quarter when the actual sales, meaning products actually shipped to customers, went down compared to the prior year's quarter. Using constant currency is a better practice.