Suketu Upadhyay
Executive Vice President and Chief Financial Officer at Zimmer Biomet
Thanks and good morning everyone. For today's call, I'm going to focus on three topics: first, our fourth quarter results; second, how that performance and recent macro trends translate into our 2023 guidance; and third, I'll provide a brief update on our long-term financial priorities.
With that, I'll turn to the fourth quarter results. Unless otherwise noted, my statements will be about the fourth quarter of 2022 and how it compares to the same period in 2021, and my commentary will be on a constant currency and adjusted continuing operations basis.
Net sales in the fourth quarter were $1.825 billion, an increase of 2.7% on a reported basis and an increase of 8.3% on a constant currency basis. As previously noted, we had a selling day headwind of 150 to 200 basis points that impacted each category at about the same level.
U.S. sales grew 6.2%, driven by strong elective procedure recovery and commercial execution, especially in our knee and hip businesses. In addition, the U.S. business saw strength across our three priority areas within SET. International sales grew 11.1% driven by strong procedure volumes across most markets in EMEA and APAC, in tandem with lighter comps and continued strong commercial execution. EMEA performance was driven by recovery in developed markets and continued strength in emerging markets. APAC was impacted by COVID-19 surges and lockdowns in China that were broadly offset by strength in other markets.
Now turning to our business category performance, global knees grew 10.2% with U.S. knees up 10.8% and international knees up 9.3%, with strong performance driven by knee procedure recovery across most regions and an easier comp outside of the U.S. Continued global traction for our Persona knee system, including both Persona primary and revision in the U.S., and continued increase in Rosa procedure penetration and pull through. Global hips grew 8.4% with U.S. hips up 9.5% and international hips up 10.8%, driven by strong international procedure recovery and easier comps outside the U.S., continued traction across hip products including the G7 revision system, and Avenir Complete primary hip, which is focused on the direct anterior surgical approach, and lastly continued solid Rosa pull through in the hip category, especially in the U.S.
The sports extremity and trauma category grew 7.6% and was impacted by continued strong performance across our key focus areas of CMFT, sports medicine, and upper extremities. SET was also impacted by a comp tailwind from China VBP that was partially offset by reimbursement changes in restorative therapies.
Finally, our other category grew 1.3%.
Moving to the P&L, for the quarter we reported a GAAP diluted loss per share of $0.62 compared to GAAP diluted loss per share of $0.40 in the fourth quarter of 2021. The change was driven by higher revenues partially offset by a goodwill impairment in EMEA as a result of macro factors. On an adjusted basis, diluted earnings per share of $1.88 represented an increase from $1.79 in the fourth quarter of 2021. Adjusted gross margin was 71.7%, bringing full-year gross margin to 71.2% or about in line with full year 2021, despite significant headwinds from inflationary pressure. Our adjusted operating expenses were $791 million, an increase versus the prior year due to inflationary pressures in tandem with higher investments into R&D and commercial infrastructure to support new products.
For the year, overall opex was flat to 2021 with an increase in R&D and lower SG&A. We remain disciplined in realizing efficiencies while investing in our priority areas and offsetting headwinds.
Adjusted operating profit margin for the quarter was 28.3%, up slightly from the prior year, bringing total year operating margins to 27.3%, ahead of full year 2021 despite macro headwinds.
The adjusted tax rate was 16.9% in the quarter, slightly higher than our expectations due to certain one-time discrete tax items. For the full year, the adjusted tax rate was 16.5% and in line with our full year guidance.
Turning to cash and liquidity, operating cash flows were $244 million and free cash flow totaled $115 million for the quarter, bringing our total free cash flow for the full year to $910 million. We continued to reduce our net debt by approximately $150 million in the fourth quarter, excluding the effect of foreign currency, and ended the quarter with cash and cash equivalents of approximately $375 million.
Moving to our financial outlook for 2023, we've based our projections in the following key assumptions. We expect to experience procedure cancellations and staffing challenges, but the impact will be less acute than what we experienced in 2022. Supply chain headwinds will continue throughout the year but with improvement in the second half of '23. Pricing headwinds are expected to be slightly better than our historic average of 200 to 300 basis points. Inflationary pressure will remain stable to 2022 exit, and an expected adjusted EPS dilution of about $0.05 to $0.10 due to our acquisition of Embody in the first quarter of 2023.
Against this backdrop, our expectations for the full year '23 financial outlook are reported revenue growth in the range of 1.5% to 3.5% versus 2022, an expected foreign currency exchange headwind of approximately 150 basis points resulting in revenue growth of 3% to 5% on a constant currency basis, and adjusted diluted earnings per share in the range of $6.95 to $7.15.
Inside of that guidance, at our midpoint we expect adjusted operating profit margins to be flat to slightly up compared to 2022 levels. We also expect net interest and other non-operating expenses will be about $190 million primarily due to higher interest rates. Our adjusted tax rate should be broadly in line with 2022 and total shares outstanding are expected to remain in line with full year 2022 average fully diluted shares outstanding. Finally, we expect our free cash flow to be in the range of $925 million to $1.025 billion.
In terms of cadence through the year, we expect that the constant currency revenue growth rate for the first half will be slightly higher than the growth rate in the second half, and we do expect choppiness by quarter. Q1 is projected to be our highest growth quarter due to easier comps and will be followed by the fourth quarter, driven by improved supply and innovation building throughout the year. Q2 and Q3 will be lighter quarters given tougher comps.
Lastly, we don't expect any material day rate impact of full year results; however, Q1 and Q4 will benefit by about 100 basis points of tailwind that will be offset by headwinds in Q2 and Q3.
In summary, we delivered accelerated growth in 2022 with a margin profile that is better than '21 as we overcame headwinds while investing in our priority areas. We navigated a number of macro challenges and delivered on our commitments to all of our stakeholders. As we look forward to 2023, while the environment remains dynamic, we see a path to delivering solid growth and earnings performance with robust free cash flow.
To close out, let me make a few comments about our financial priorities moving forward. We've made significant progress over the past few years in strengthening our balance sheet through improved financial performance and ongoing reductions in debt. This ultimately provides ZB with greater strategic flexibility as we look to transform our portfolio with a focus on increasing our WAMGR and driving improved long term growth. We will remain committed to our investment-grade rating and will continue to look at ways to accelerate profitable growth with a focus on achieving our mission.
I'm so very proud of the ZB team for their perseverance and dedication throughout 2022 and I'm excited about what we can accomplish in 2023.
With that, I'll turn the call back over to Keri.
