Good day, ladies and gentlemen, and welcome to the LabCorp conference call. At this time, all participants are in a listen-only mode, so if anyone should require assistance during the call, please press star, then zero on your touch-tone telephone. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Scott Frommer, Vice President of Investor Relations. Sir, please go ahead.
Good morning, and welcome to our conference call to discuss LabCorp's agreement to acquire Chiltern. We trust that you have had an opportunity to review the press release and presentation that we issued this morning, both of which are available on the Investor Relations section of LabCorp's website. On the call today are Dave King, Chairman and Chief Executive Officer, Glenn Eisenberg, Executive Vice President and Chief Financial Officer, and John Ratliff, CEO of Covance Drug Development. We will make forward-looking statements during today's call. These forward-looking statements may address, among others, the benefits we expect from the combined business, our future performance, our expectations about the closing of the acquisition and its financing, as well as the combined company's financial position once the transaction is complete. These statements are based upon current expectations and are subject to change based upon various factors that could affect these expectations.
Some of these factors are set forth in detail in our 2016 Form 10-K, subsequent SEC filings, as well as the presentation materials that we published this morning. We have no obligation to provide any updates to these forward-looking statements, even if our expectations change. Now, I'll turn the call over to Dave King.
Thank you, Scott. Good morning, and thank you for joining us on short notice today. The acquisition of Chiltern marks a very exciting day for all of us at LabCorp and Covance. Chiltern is a leading clinical research organization with global reach, providing customized clinical development solutions focused on the high-growth, emerging, and mid-market biopharma segments. Let me begin by setting the groundwork for this transaction, followed by highlighting its strong strategic fit, and then commenting on its clear financial merits. We acquired Covance in 2015, beginning the transformation of our company from a leading national laboratory competing in an $80 billion market into an integrated global life sciences company and the world's largest laboratory, with significantly greater growth opportunities and addressable markets of over $200 billion.
We have already grown Covance to nearly $3 billion in revenue, with industry-leading capabilities across all aspects of drug development and broad therapeutic expertise. At the enterprise level, the combination has accelerated revenue and profit growth and generated strong returns for our shareholders through share price appreciation. Thus, we have demonstrated the value from combining diagnostic and CRO capabilities, expertise, data, and leadership. At the same time, we have identified opportunities to further our growth strategy by investing in our late-stage clinical business, including adding global scale, enhancing FSP capabilities, and gaining broader reach into the emerging and mid-market biopharma customer segments. The addition of Chiltern meets these needs in every respect. First, Chiltern expands our global footprint by adding more than 4,500 drug development colleagues across 47 countries, including a 50% increase in the high-value Asia-Pacific region.
Together, we will have even greater scale, with more than 20,000 employees worldwide dedicated to drug development. The addition of Chiltern's capabilities will enhance our ability to recruit patients and enroll investigator sites around the world, strengthen our ability to deliver studies competitively, and improve our positioning to win clinical trial awards in all geographic locations of all sizes and of every degree of complexity. Second, Chiltern broadens Covance's customer base and brings an experienced team and established model to address the needs of emerging and mid-market biopharma customers, the fastest-growing segments of drug development. Chiltern's capabilities advance Covance's offering in this area and also enhance Covance's capabilities and attractiveness as a valued partner to the large biopharma segment. Given the expanded and more diverse customer base, we see a great opportunity for broader penetration into this attractive market, leading to accelerated revenue growth over time.
Third, Covance is widely regarded for its deep therapeutic expertise and world-class scientific innovation. Chiltern extends our capabilities in key high-value therapeutic areas, where R&D spend, innovation, and pipelines are robust. For example, Chiltern brings a standalone oncology business unit with proficiency in early clinical development that will enable Covance to offer an even stronger portfolio of oncology solutions across all phases of drug development. Fourth, Chiltern adds significant breadth and depth to our functional service provider, or FSP, capabilities, including biometrics and safety, an important consideration for certain customers. These capabilities will enable us to improve how we serve our customers by offering clinical development solutions tailored to their specific needs. Finally, Chiltern brings additional opportunities for profitable revenue growth to Covance. Chiltern has comprehensive capabilities dedicated to the rapidly growing medical device development area, a new market opportunity for Covance.
In addition, Chiltern's Endpoint suite of interactive response technologies is complementary to Covance's award-winning Xcellerate suite of clinical trial technologies. Through the combined company, we will reach new markets and broaden our range of technology-driven solutions for our customers. The addition of Chiltern is strategically and financially compelling. As you know, we are disciplined acquirers. This all-cash transaction values Chiltern at $1.2 billion. We project Chiltern revenue and Adjusted EBITDA in 2017 of approximately $550 million and $95 million, respectively. The acquisition meets our stated financial criteria, as we expect it to be accretive to Adjusted EPS and free cash flow in year one and to earn its cost of capital by year three. This includes the realization of synergies of approximately $30 million within three years of closing.
In addition, we expect to maintain our investment-grade credit ratings with pro forma gross debt to adjusted EBITDA of approximately 3.3 times, assuming a year-end close. As a result, this transaction enables us to retain financial flexibility, as we expect to use our strong free cash flow to pursue additional strategic acquisitions, to continue to fulfill our stated commitment to return capital to shareholders, and to pay down debt. In short, after thorough and careful consideration of several opportunities, we are convinced that this transaction is the best strategic fit for Labcorp and Covance and creates the greatest possible value for our business, our customers, and our shareholders. Before I conclude, I would like to address Chiltern's employees around the world and recognize them for their dedication and hard work, which has helped create the outstanding company that Chiltern is today.
I am pleased to welcome them to the LabCorp family, as we work together to realize the promise of this unique and powerful combination. I would also like to thank my LabCorp and Covance colleagues for their passion, hard work, and commitment to deliver world-class diagnostics and bring innovative medicines to patients faster, which over nearly 50 years has turned us from a small local clinical laboratory into a $10 billion global enterprise dedicated to improving health and improving lives. Today, with the acquisition of Chiltern, we significantly strengthen our position so we may better serve our customers, create long-term value for our shareholders, and achieve our salutary mission. That concludes our prepared remarks, and we will now take your questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the pound key. Again, if you'd like to ask a question at this time, that's star, then one. Our first question comes from the line of Ross Muken with Evercore ISI.
Good morning, guys, and congrats. It seems like a fantastic transaction for you. So obviously, very complementary in terms of adding some new capabilities. How should we think about, in the parts where there's some overlap, the integration process there? Are there really that many pieces that fit on top of one another, or is it sort of a really nice puzzle where you're plugging in a few new capabilities and enhancing maybe FSP and Asia and a few of the other parts? So how should we think about what's incremental and new and really builds on, and then what's sort of additive?
Fair enough. Ross, it's John Ratliff, and so we do view this as primarily complementary, whether it's in the emerging and mid-market addition of Chiltern to our presence in the top 20, or whether it's fortifying the oncology area with their broad therapeutic expertise, and especially on the functional service provider services, where we have a substantive group within the monitoring area, and they have it much more so in the analytics and technology services area. It's actually a very, very beautiful marriage. At the same time, there are synergies. There are certain overlaps in the clinical business and as well in terms of executive team, and we're committed to getting the best of the best there.
And as we detailed out $30 million of synergies, you can view that as about one-third, one-third, one-third, as well as about 75% in the SG&A area versus about a quarter in the cost area.
And Ross this is Dave, I would just add, we've obviously had a lot of experience in both businesses and running successful integrations, and John and his team are highly experienced here. It will be a collaborative process with Chiltern, and we will take the best of the best in terms of talent. But this acquisition is focused very, very heavily on complementing our capabilities and on growth, profitable revenue growth, and that's the way that we are fundamentally thinking about it.
Makes total sense. And maybe quickly, I mean, it seemed like a pretty nice return on capital. I mean, the deal size seems pretty ideal for you. How should we think about where that sets us with the buyback now? Obviously, you had been returning some cash. This will take your leverage up a bit, but it's still in kind of a manageable range. Obviously, as you said, it leaves you room for some M&A. How should we think about those preferences and how you're thinking about sort of the return tier? Because for us, it seemed in sort of almost the double-digit range.
Hey, Ross. This is Glenn. One, we agree. The size of the transaction obviously does a lot for us strategically, but from a balance sheet perspective, it really puts us right kind of where we are. By the end of this year, assuming it closes, our leverage is just going to be slightly higher than where it is currently. We ended the second quarter at 3.2 times leverage, and we were currently in the market, so given the strength of the free cash flow that Dave talked about in his opening remarks, our expectation is to continue to utilize our free cash flow through a combination of strategic acquisitions, share repurchases, as well as paying down debt to get our leverage a little bit lower than where it currently is.
Awesome. Thanks.
Our next question comes from Nicholas Jansen with Raymond James.
Hey, guys. Congrats on the news this morning. Just two questions for me. Just in terms of one, in terms of the diligence process on Chiltern, maybe just walk us through when the asset came for bid, when you guys started the look. Obviously, there was another large CRO deal consummated last month. Just wanted to kind of get your thoughts on the diligence process here.
Nick and Steve, obviously, we're not going to comment on the details of this process or of any other transaction. Just suffice to say it was a competitive process. Our team diligenced it very thoroughly. There was great collaboration with the Chiltern team, and we're excited about the opportunity here.
Okay. And then my follow-up question would just be on the necessary need for more M&A on the CRO side. Do you feel like this complementary asset puts you in position to kind of really drive deeper on the Covance acceleration of revenue growth that you kind of talked about over the last two to three years? And then is there another, or does there need to be more M&A on the CRO side as we think about this transaction? Thanks.
It's Dave again. I'll start, and then John may have a comment. From my perspective, this deal, as I said in the prepared remarks, meets all of the near-term needs for the opportunity to grow the clinical revenue at Covance. We will continue to invest in organic opportunities within the business: therapeutic expertise, geographic expertise, country presence. But we don't foresee any near-term M&A needs, which is why, as Glenn reiterated, we continue to view ourselves as being in a position of looking at other strategic deals across both businesses, continuing share buyback, and paying down debt. John?
Focus on organically building and from the standpoint of integrating this acquisition, and so that's our focus.
That's it for me. Thanks, guys.
Our next question comes from Steven Valiquette of Bank of America Merrill Lynch.
Yeah, thanks. Good morning. I had kind of a similar question to the last one, just in terms of your Asian presence. Has this deal checked the box on what you were thinking about when you talked about over the past six months wanting to expand there? Also, just quickly on slide six, you talk about Chiltern's deep expertise in early clinical development. Is that just in relation to oncology, or is that kind of across the board? We should think of Chiltern more as kind of early-stage expertise. Thanks.
This is John again. The nice thing about Chiltern is it about increases our APAC personnel by about 50%. Nice concentration in India as well, and so we like both the technical skill and the spread that allows. They have a nice concentration also in Eastern Europe as well, and nice balance between the European corridor and the Americas, and then as to then their early clinical, as in their full-service provider area, about 39%-40% is in the oncology area, so early clinical is within that therapeutic area, but it's also across their broad spectrum of therapeutic areas, so it's not just focused on oncology, but obviously, with their backlog, etc., it's a big part of who they are.
And just to be clear, it's Dave, so when we refer to early clinical development, this is still in the clinical trial business.
It's not the early development part of the business. So it fits within the late-stage clinical business, even though we're referring to it as the early development. It's very important for the oncology capabilities.
Okay. Got it. That's helpful. Thanks.
Our next question comes from Lisa Gill with J.P. Morgan.
Great. Thanks very much, and good morning. I was just wondering if you have any kind of historical context you can give us as far as growth rates go, either Glenn or Dave. How do we think about this? I mean, clearly, this is a nice margin-accretive acquisition, but how do we think about how this business is growing versus Covance?
Lisa, it's Dave. We're not going to give specifics because they are a private company, but suffice it to say, as set out on slide three of our presentation, they've had consistent strong growth both in revenue and in EBITDA over the last several years, and the last 12 months, ending June 30th, their book-to-bill was at 1.28, so both the past growth and the future prospects are very attractive to us.
Okay. Great. And then my second question just would be, do you anticipate any synergies from this acquisition?
We identified the cost synergies of $30 million over three years. We also see the opportunity for a nice set of revenue synergies, but we haven't incorporated that into any of the projections for the future. Obviously, when we close the transaction, we'll update guidance to incorporate our perspective of how the asset will grow over the next year.
Okay. Great. Thank you, and congratulations.
Thank you.
Our next question comes from Amanda Murphy with William Blair.
Hi. Good morning. So I just had a question, and this may be a bit early to ask this, but I just was curious, given obviously the global piece of the story and just the fact that Chiltern's adding quite a lot OUS, and you've got this great data asset in the U.S. through the lab side. I just was curious, have you started to think about how to leverage the diagnostic piece more globally? I know you've talked a little bit about trials that are not in the U.S. and how to leverage data there, but I just wanted to get your initial sense on that piece.
Amanda and it's Dave, we've talked about thinking about expanding the diagnostics footprint globally as something that we'll look at over the long term. It's not a near-term priority. Obviously, right now, near-term priorities are the closing of this transaction and the integration of the business and continuing the strong performance that we saw in the diagnostics part of the business in the first half of the year. So it's out there as something to consider in terms of the diagnostics footprint, but it's not a near-term area of focus for us.
I'd also say, with respect to the patient data, with the greater infrastructure and resources, the combination improves the competitiveness of the clinical development business. At the same time, that expanded customer base can benefit from our differentiated offering. Whether that's the lab side or whether that's the companion diagnostic side or leveraging the health system partnerships, clearly, that capability can be further broadened with the marriage of Covance and Chiltern.
Okay. Got it. And then I did have another question just, I guess, on the customer side. And I don't know if you talked about it being more complementary, but are there any shared customers that we might want to be aware of just in terms of anything on the revenue line as this rolls into the business that might be at risk?
No, we do not believe so. And their largest customer is 6% of their base. And then when combined, there is no 10% customer. So it's, as you stated, a nice complementary customer mix.
Great. Okay. Thanks very much.
Our next question comes from Jack Meehan with Barclays.
Hi. Thanks. This is actually Mitchell on for Jack this morning. Expanding on Nick's earlier question, I was hoping you could comment on the diligence measures you took to get comfortable with the company's backlog, and was the $1 billion that you called out, is that measured under LabCorp's new methodology? Thanks.
It is actually measured under their backlog measures. We did look at the actual contracted versus awarded, and it's a pretty minimal difference. We looked at the aging of the backlog, etc., and at the same time, looked at the details of the backlog. We had L.E.K. also from a blinded standpoint, also taking a look at the specifics of the backlog. So I feel very comfortable with the $1 billion number.
That's helpful. And then going off Lisa's earlier question, I was just hoping you could comment specifically on the revenue synergy opportunity that you see in Central Lab. Is there an opportunity to start routing kits from the Chiltern-acquired business through Covance's Central Lab? Thanks.
Sure, Mitchell. This is John again. We do see that clearly we can leverage the Covance lab business with the Chiltern customers and that that's an increased penetration that we could see from the actual acquisition.
Great. Very helpful. Thanks.
Our next question comes from Erin Wright with Credit Suisse.
Great. Thanks. Chiltern has been active on the M&A front, recently acquiring some assets in Asia. Can you speak to the residual synergies from its recent past acquisitions that are embedded in your assumption? Thanks.
Erin, it's Dave. We're not going to talk to the actions that have been taken, but anything residual is relatively small, and it's all incorporated into the numbers that we've given you in terms of the revenue and Adjusted EBITDA.
Okay. Great. And then you mentioned in the slide deck, and potential opportunities on the medical device side, what exposure, I guess, do you have now, and what does this potentially add? And how would you kind of characterize demand trends across that segment?
I really like that segment. I've always liked that segment. It's a high-growth segment. This is almost a total add to our services, and it's nice to have that dedicated unit that Chiltern has in order to now enable that. We obviously have customers that have both the medical device side as well as the clinical development side. So we believe we can further discussions within our own customer base. And I truly like it. But in terms of this is a nice addition to our portfolio of services.
Our next question comes from a line of Kevin Ellich of Craig-Hallum.
Good morning. Thanks for taking the questions. Dave or John, I guess just following up on that question. On slide six in the presentation, there's a nice pie chart that shows Chiltern's service revenue by therapeutic area. I guess we clearly can see there's a lot of oncology. Can you give us an idea of what the pro forma Covance will look like for that pie chart?
Kevin, it's Dave. A couple of comments. First of all, just note, that's the full service revenue, so it doesn't include the clinical and the FSP. So I just want to make sure we're on the same page here. Second of all, I don't think it's possible or appropriate at this point, given that we're still two separate companies, to talk about the pro forma combination, but we will update that, obviously, when we update the guidance and we update the opportunities when we talk to you after the deal closes.
Okay. That's fair, Dave. And then just quickly, financially, first off, Glenn, can you remind us what your target leverage ratio is or optimal? And then what should we expect for cost of capital on the bonds, do you think? And then, Dave, one last one. I'll try on the financial side of Chiltern. What was the standalone free cash flow?
That was a lot of questions, Kevin, for a follow-up. All right. You asked Glenn about the cost of debt. Let's take that one first.
Obviously, it depends on what the maturity will be, but we're going to use both bank debt as well as some bonds. If you want to use a proxy, call it 3%-3.5% pre-tax cost of debt would be a fair range.
Okay.
Okay. Then you asked about the free cash flow.
Yep. For Chiltern.
And it's accretive to our free cash flow. And again, we'll update the free cash flow number when we close and update guidance. And I forgot your other.
Last one. Leverage, optimal leverage.
Yeah, optimal leverage. So our stated target leverage is 2.5 times, and it has been for some time. Having said that, we have demonstrated that we're willing to be flexible about our leverage, and we would be very comfortable in a range of approximately 3 times leverage as a proxy as we get bigger, as we have more EBITDA for kind of where we think about where we want to be. We'll be 3.3 times if we close at year-end. So you should expect us, over time, to move ourselves down to approximately at least that 3.0 and recognize that our expectation is we would never go below 2.5 times, which is our stated target.
Got it. Thanks so much, Dave.
Our next question comes from Ralph Giacobbe with Citi.
Thanks. Morning. Did you say the $30 million cost synergy over three years would be captured sort of fairly evenly over that time? And then maybe any help just in terms of if that's just related to people costs or where is that opportunity on the cost side?
So I think John commented that it would be about a third, a third, a third, and that the bulk of it would come from SG&A. But again, I want to emphasize most of it is going to be in areas where there's overlap of personnel. And so this is a growth-oriented opportunity. We don't view it as primarily a synergy exercise.
Okay. All right. Fair enough. And then does the 3.3 times leverage assume full synergy capture, or is there some sort of debt paydown assumed in the number just relative to your most recent quarter and kind of the debt balance? If you run the numbers, it looks like it's closer to 3.5, so I'm off somewhere. Is there some other incremental debt paydown that's assumed?
Yeah. If you look at, we said assuming year-end, and obviously, based upon the guidance that we've given on free cash flow, that means around midpoint of $550 million of free cash flow, of which we assume some of that would be for debt paydown, but still some of it available for M&A or share repurchases at that time. So the leverage, again, we feel very good about it. Obviously, it depends on when we close, but more importantly, at today's point, we'll be going into next year with, let's say, plus or minus around a 3.3 times leverage with generating significant free cash flow to pursue various opportunities.
Okay. Fair enough. Thank you.
Our next question comes from Ricky Goldwasser with Morgan Stanley.
Yeah. Hi. Good morning and congratulations on the deal. When you think about your portfolio of assets and services now in the drug development area, how do you think about the preclinical assets that you have? Do they fit within your enhanced clinical capabilities and any strategic opportunities there?
Ricky, good morning. It's Dave. We really obviously focused on complementing the late-stage capabilities. And so I think at this point, we like the broad end-to-end capabilities within the Covance business. Obviously, in all of our businesses, diagnostics as well as drug development, we're always reviewing the portfolio. But at this time, we don't have anything further to talk about other than we're very excited about the transaction that we've announced today.
Okay. And when we think about the market shares that this provides you in Asia-Pacific and overall, can you give us some details there?
No, we're not going to talk about market shares. We are obviously significantly enhancing our capabilities in Asia-Pacific, our strength in India. We still intend to do some organic investing in some of the other Asia-Pac areas. We like the Eastern Europe capabilities here. So if you look at the presentation, now we're over 20,000 strong around the globe, and we've added capabilities in the specific areas that we had called out as needed. So again, very pleased with the way that this business fits with ours.
Thank you.
Our next question comes from Donald Hooker with KeyBanc.
Hey, great. Good morning. So a lot of my questions have been asked and answered. I'll just ask one, just sort of as an aside, your comment of Chiltern having some informatics capabilities, and I was curious how that overlaps or does not overlap with the Xcellerate platform that Covance has developed.
Yeah. It does not overlap whatsoever. And so it's a nice addition to the technology suite. And so we look at it as highly complementary with Endpoint focus on the interactive response technologies and then the Xcellerate suite being much more so that clinical trial technology. And so nice addition.
Thank you.
Our next question comes from Dave Windley with Jefferies.
Hi. Thanks for taking my question. Probably for John. I've heard some of your competitor management teams talk about some pharma partnership renewals coming up in the not-too-distant future. Not sure if those, I presume you'd probably be aware of those, and not sure if those are incumbencies for Covance. But the real question here is whether you think Chiltern enhances your competitive position for those, and timing-wise, does it close in time for that to make a difference?
It's a great question, Dave. We do believe that it enhances our position, especially in that FSP area. They are looking for the full complement. I was just with a customer on Friday night, and that global infrastructure, that FSP concentration with the biometrics area and the capability of doing complex oncology trials plays into their decisions and on a go-forward. Yes, I believe the timing is right and can influence in terms of decisions as it would apply late in fourth quarter and then into the first half of 2018. Nice addition in terms of the decisions to be made.
Awesome. Thanks for that. And just a quick follow-up. On the oncology, I'm curious if you can maybe peel the onion back a layer on the complementarity. One side has, say, solid tumor expertise and the other liquid tumor expertise. Or could you give us a sense of how their oncology capability builds you out a little further?
It's not in one specific area that the complementary nature works to. I would say that their oncology is obviously focused in the early clinical side and with a set of customers that we are not in, and so it's really that addition that then allows us to be a much broader base within that therapeutic area.
Got it. Thank you very much.
Our next question comes from Isaac Ro with Goldman Sachs.
Good morning, guys. Thank you. Just hoping you could give us some sense of your expectations going forward. What's making your guidance for top-line growth? I think the earlier question was on the historical growth, but just trying to figure out what growth assumption you're making relative to your synergy and return goals.
Isaac, it's Dave. As we said, we're not giving guidance or guiding to the impact of this acquisition. We will incorporate it into our guidance when we close, and we'll update at that time.
Fair enough. And then just to follow up on tax rates, can you just talk a little bit about the impact to your overall tax rate in the short term and then over the longer term? I think Chiltern has a higher ex-US mix than your corporate total. Thank you.
Yeah. Isaac, that's right. They have a slightly lower effective tax rate than we would as an enterprise, given their mix of where they generate their earnings. But when you look at the size of the company and the materiality, it's a marginal impact. So we've talked about roughly around a 34% tax rate. That would still be the case with Chiltern, but with the fairness that it does have a slightly lower tax rate than we would as a standalone business itself.
Okay. Thank you.
Our next question comes from A.J. Rice with UBS.
Hi, everybody. Just one question. Obviously, we've been talking about the last few quarters, the LaunchPad initiative and Covance and the savings you expect over time from that. Does anything about doing this deal affect what you're doing with LaunchPad? And I doubt if it affects the savings number for this year, but maybe in the out years, is the $30 million of synergies on top of what you hope to achieve for LaunchPad?
A.J., it's Dave. Nothing about this transaction affects the LaunchPad plan, and the $30 million of synergies is additive to the projections. We haven't given any long-term projections for LaunchPad, but the $45 million annualized off of this year's actions, the $30 million would be additive to that.
Okay. All right. Thanks.
Our next question comes from Line of Himenguva with Bank of America. Himenguva, your line is now open.
Sorry. Can you hear me now?
Yes.
Oh, I'm sorry about that. Thanks for taking my question. And I wanted to talk a little bit about leverage in the balance sheet and probably questions for Glenn. So this transaction is going to take the leverage up only by a bit, but just wanted to know your conversation with rating agencies and if they're on board with the future outlook for M&A and then your rating targets in terms of M&A itself. What kind of, how much do you think your flexibility on the balance sheet?
Yeah. As we commented earlier, we feel very good about the size of the transaction from a financial standpoint. We have talked to the rating agencies. We're very aware of the amount of leverage that we can to maintain the current ratings, which are solid investment-grade ratings. So as we've commented, given the size of the acquisition, given the free cash flow that we generate as a company, we have a lot of flexibility to continue to look at M&A, continue to repurchase shares, as well as paying down debt to get to, as Dave said, get to what the three or below range, if you will, to maintain the ratings. But feel very good from the financial flexibility that we have even after doing this transaction.
Great. Thank you very much.
I'm not showing any further questions at this time. I'd like to turn the call back to Mr. King for any closing remarks.
Thank you. Again, we are very excited about the transaction announced this morning. We are convinced that it is a great strategic fit for LabCorp and Covance and that, in combination with the Chiltern team, we will create terrific value over time for our business, our customers, and our shareholders. With that, thank you for joining us this morning, and we hope you have a great day. Good day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.