Executive Vice President and Chief Financial Officer at Zimmer Biomet
Thanks and good morning, everyone. For this morning's call, I'm going to focus on three topics: first, our Q4 results, including commentary on the impact of COVID; second, how that translates into full-year '22 financial guidance that we provided this morning; and third, I'll provide a brief update on our longer-term outlook. Moving forward, unless otherwise noted, my statements will be about the fourth quarter 2021 and how it compares to the same period in 2020, and my revenue and P&L commentary will be on a constant currency or adjusted basis. We've also provided changes versus the fourth quarter of 2019 or pre-pandemic results as we feel it is an important comparison.
Net sales in the fourth quarter were $2.04 billion, a reported decline of 2.3% and a constant currency decline of 0.8%, or down 4.4% versus '19. On a consolidated basis, we were about flat through November versus 2019 and declined in December due to the Omicron variant surge. Expectations for the fourth quarter had contemplated the impact of China VBP in hip and knee, and that was largely in line with expectations. Separately, we booked a sales adjustment related to channel inventory for China VBP in trauma of approximately $30 million, triggered in part by the Chinese government's announcement relating to a national trauma VBP which was made on January 24th. This adjustment was about a 650 basis point headwind to S.E.T. category growth and about 150 basis point drag on consolidated Q4 growth.
In short, excluding the impact of the China VBP on our S.E.T. results, the quarter was generally in line with the assumptions that we provided on our third quarter call and broadly consistent with the midpoint of our implied fourth quarter guidance range. The declined 1.5% in the fourth quarter, down 1.9% versus 2019 with the U.S. declining 2.3% or down 2.4% versus 2019. The impact of Omicron late in the quarter in tandem with lingering hospital staffing challenges drove lower regional results. EMEA grew 17.3%, or down 3% versus '19. The region experienced positive growth versus '19 earlier in the quarter, but quickly decelerated with the emergence of Omicron. Lastly, Asia-Pacific declined 17.5%, or down 15.1% versus '19, driven primarily by price adjustments on channel inventory ahead of hip, knee, and trauma VBP, as well as some negative impact from a spike in COVID cases starting in December in markets like Japan and Australia.
Now turning to our business category performance in the fourth quarter. The global knee business increased 0.4%, or down 3.9% versus 2019 with U.S. knees declining 5.2% or 3.9% versus '19. In the quarter, China VBP had a negative impact on knee growth of about 250 basis points. Our global hip business declined 2.8%, or down 6% versus '19, with U.S. hips declining 4.4%, or 3% versus '19. The VBP impact on hip was about 700 basis points in the quarter.
Our sports, extremity, and trauma category decreased 4.3%, or down 6.2% versus '19. The sequential deceleration was due to a softer market due to COVID and the impact of China national VBP and trauma as discussed earlier. Excluding the impact of trauma VBP in the quarter, S.E.T. was growing low single digits versus 2020 and about flat versus '19 on an underlying basis. The dental and spine category declined 3% or down 3.8% versus '19 with dental posting growth and spine declining primarily due to continued pressure from COVID. Finally, our other category grew 14.1%, or up 1.9% versus '19. Inside this category, we saw ongoing demand for ROSA knee as well as increased revenues from the launch of our ROSA partial knee and hip applications.
Moving on to our P&L. For the fourth quarter, we reported GAAP diluted loss per share of $0.40 compared to our GAAP diluted earnings per share of $1.59 in the fourth quarter of 2020. This decrease was driven primarily by lower revenue, a debt extinguishment loss recognized under bond tender offer, litigation-related charges, and restructuring charges that we incurred in Q4 to continue to address pressures on revenue from COVID and the stranded costs associated with the spin. On an adjusted basis, diluted earnings per share of $1.95 represented a decline from $2.11 in the fourth quarter of 2020. The decrease was primarily from lower revenues in tandem with lower gross margins due to COVID-19 and the impact of China VBP in both recon and trauma, which were partially offset by targeted reductions in SG&A and a slightly lower tax rate. In addition, FX was a modest headwind to earnings per share in the quarter.
Adjusted gross margin was 69.1%. Fourth quarter gross margin was pressured due to lower manufacturing volumes and the impact of China VBP. For the full year, adjusted gross margin was 70.7% and in line with prior commentary. Our adjusted operating expenses of $882 million declined year over year. In spite of that we continue to invest in R&D and commercial infrastructure across priority areas like S.E.T., robotics, and data and informatics, which are being funded by accelerated improvements in efficiency across other areas of SG&A. Our adjusted operating margin for the quarter was 25.9%, down versus the prior year but in line with the prior quarter. The adjusted tax rate was 14.4% in the quarter. The Q4 and full-year tax rates were favorable to our expectations due to some discrete one-time items in the quarter.
Turning to cash and liquidity. Operating cash flows were $366 million and free cash flows totaled $224 million with an ending cash and cash equivalents balance of just $480 million. We continue to make good progress on de-levering the balance sheet. In the fourth quarter we reduced debt by approximately $400 million bringing the total debt reduction in '21 to approximately $900 million, excluding the effects of foreign currency on non-U.S. denominated debt.
Moving to our financial outlook for 2022. We are issuing '22 financial guidance based on the following key assumptions. COVID and customer staffing pressures are expected to continue throughout 2022. We expect the COVID and staffing pressures that we saw in December to accelerate into the first quarter of this year with the first half of 2022 being more pressured than the second half. We do not see China VBP as a material impact to growth in '22 versus '21, but we expect variability by quarter with more pressure in the first half. Furthermore, we anticipate completing the spin of our dental and spine businesses in the near-term. And as such, the guidance we are providing is only for RemainCo Zimmer Biomet. For the first quarter, ZimVie will be reported as discontinued operations, and we expect to provide pro forma 2021 information for RemainCo on or around our first quarter earnings call. While we do not have full P&L restatements available at this time, for comparison we have provided our unaudited net sales estimate of $6.827 billion for RemainCo Zimmer Biomet.
Against this backdrop, our current expectations for the full-year 2022 financial outlook are reported revenue growth in the range of negative 4% to zero versus 2020 with an expected foreign currency exchange headwind of approximately 200 basis points. This translates to negative 2% to positive 2% on a constant currency basis, adjusted operating profit margin of 26.5% to 27.5%, adjusted tax rate of 16.0% to 16.5%, adjusted diluted earnings per share in the range of $6.40 to $6.80, and free cash flow of $700 million to $800 million. Inside of that guidance, we expect Q1 revenue to be flat to up slightly versus the first quarter 2021 due to headwinds from COVID and the impact of the VBP, being somewhat offset by the easier comp relative to the first quarter of last year and a roughly 130 basis point selling day tailwind that will largely be reversed in the fourth quarter. We expect approximately $160 million of net interest expense and approximately $212 million average shares outstanding for the year. We remain committed to our investment grade rating and expect to pay down $750 million of debt maturing in the second quarter of this year.
Now turning to our longer-term outlook. With the ZimVie spin transaction nearing completion, we are also taking this opportunity to update our long-term margin expectations. Given the prolonged impact COVID '19 is having on our business, we are removing our target of at least 30% adjusted operating profit margin exiting 2023. However, we do expect to improve margins over the long term as we will continue to make targeted investments in our business to enhance top line growth while also accelerating cost savings to fund those investments.
In summary, the macroenvironment presents challenges, but our underlying business fundamentals remain strong as we continue to execute successfully against what we can control. With that, I'll turn the call back over to Bryan.