Balchem Corp

NASDAQ:BCPC

Earnings Call Transcript 2020-Q1

[Operator]

Greetings. Welcome to the Balchem Corporation financial results call. [Operator Instructions]. Please note this conference is being recorded. At this time, I'll turn the conference over to Martin Bengtsson, Chief Financial Officer. Mr. Bengtsson, please go ahead.

[Carl Bengtsson, CFO & Treasurer]

Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending March 31, 2020. My name is Martin Bengtsson, Chief Financial Officer. And hosting this call with me is Ted Harris, our Chairman, CEO and President. Following the advice of our counsel, auditors and the SEC, at this time, I'd like to read our forward-looking statement. The release does contain or likely will contain forward-looking statements, which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K.

Forward-looking statements are qualified in their entirety by this cautionary statement. I will now turn the call over to Ted Harris, our Chairman, CEO and President.

[Theodore Harris, Chairman CEO & President]

Thanks, Martin. Good morning, and welcome to our conference call. Before I get into the quarter, I'd like to discuss our response to the COVID-19 crisis. As we shared in the press release this morning, the COVID-19 response effort has been the primary focus for the company since early in the first quarter. Having 2 of our 3 manufacturing facilities in Europe, located in Italy, one of the first countries to be impacted by the pandemic. We got off to an early start to this situation, something that prepared us well for actions that needed to be taken in the rest of the world as the pandemic became more widespread. We were early to take actions around the safety of our employees, such as international, domestic travel restrictions; site visitation restrictions to both internal, external personnel; strict protocols to deal with necessary visitors to sites, for example, delivery drivers; elimination of large groups gatherings; mandatory work from home for all non-manufacturing and non-research and development employees; separation of employees in smaller work groups to reduce density within work teams; and new protocols relative to personal protection equipment, including face masks and sanitation procedures.

We also moved to ensure the continuity of our business and our ability to serve our customers with the important products and services they need by examining our supply chains and lowering risk by increasing inventory levels where appropriate as well as prepositioning certain goods in various locations in case one specific facility would be disruptive. Very early on, we activated our Crisis Management Team, or CMT, to manage the day-to-day activities relating to the pandemic response efforts and to make timely decisions. Some examples of the early decisions made by the CMT are holding a special Board of Directors meeting to ensure Board engagement and involvement in the response plan, creation of an individual response plan for the eventuality of positive cases within our employee base, based on the Centers of Disease Control and Prevention, or CDC guidelines; execution of a communication strategy to keep employees and customers informed of requirements, decisions and outcomes; and approval of special bonuses to nonexecutive employees to recognize the hourly and salaried workforce attendance and hard work during the pandemic.

The combination of the various actions taken and the commitment and resilience of our employees have enabled us to keep all of our manufacturing sites open and running at near-normal conditions, allowing us to keep our customers supplied. Our research and development teams advancing our innovation efforts, and all of our other employees carrying on their responsibilities and functions remotely. We have had 2 employees that we are aware of, out of our approximately 1,400 employees, test positive for COVID-19. Both cases were early in the stages of the pandemic, and both employees are recovering well. We managed the cases effectively using our individual response plan, which is based on the CDC guidelines, and believe our early adoption of exposure mitigation actions played an important role in mitigating the impact of these cases on our employees and our company.

From a financial perspective, the impact of the pandemic on Balchem in the first quarter was limited. However, the pandemic is far from over and the longer it carries on, the more likely it will be that impact on demand from our customers will be more significant. And therefore, we are studying the markets that we serve very closely, and at the same time, staying attuned to our customers' needs to aid in our ability to respond to demand shifts. We have stress tested our balance sheet and liquidity position under various significant downturn scenarios. And given our relatively low net debt position of 1.1x trailing 12 months adjusted EBITDA, cash on hand, access to our undrawn revolving credit facility and expected free cash flows, we are pleased with the strength of our balance sheet going into this uncertain market environment. Despite this relative strength, we are taking actions to reduce capital expenditures and noncritical cash expenses wherever possible to preserve cash.

As we look ahead, sales over the next few quarters will be challenged by weaker demand in food services; the animal protein markets, including dairy protein; medical device sterilization due to fewer elective surgeries and lower fracking activities. We anticipate that there will be somewhat offsetting potential strengthening demand in grocery store food products, functional technologies aiding food preservation needs, immunity strengthening minerals and nutrients, and certain benefits from lower raw material costs. While we understand the market dynamics impacting these downsides and upsides is very difficult at this time to tell the specific dimensional impact of these forces, but our overall expectation is that we will experience sequentially lower overall revenues in the second quarter and for the duration of the pandemic, given the significant disruption on economic activity across global markets.

We will watch each of these markets very closely and remain nimble, flexible and ready to respond accordingly. Balchem has dedicated significant resources to the COVID-19 response over the first quarter, and we are pleased with the results to date given the circumstances. I would like to take this opportunity to thank all of the approximately 1,400 employees of Balchem across the world for their tremendous and compassionate response to the pandemic that we are all living through. I could not be more proud to be part of the Balchem team.

Now with regard to the first quarter of 2020, this morning, we reported record quarterly consolidated net sales of $174.4 million, which resulted in record first quarter net income of $19.8 million or $0.61 per share on a GAAP basis. A record first quarter non-GAAP net earnings of $26.4 million or $0.81 per share, exclude tax adjusted noncash amortization and other items, as detailed in our earnings release this morning of $6.7 million to facilitate comparative evaluation of operating performance versus the prior year period. These first quarter record non-GAAP net earnings of $26.4 million or $0.81 per share represent an increase of $2.7 million or $0.08 per share compared with the prior year quarter of $23.7 million or $0.73 per share. We also delivered solid quarterly cash flows from operations of $22.6 million for the first quarter of 2020, with quarterly free cash flow of $17.4 million.

Our quarterly net sales of $174.4 million were 11.1% higher than the prior year comparable quarter. As noted in our earnings release this morning, in order to align with our strategic focus on health and nutrition, our allocation of resources and our evaluation of operating performance and given the previously reported 2019 reduction in portfolio scale of Industrial Products, we have revised our reporting segment structure to three reportable segments: Human Nutrition & Health, Animal Nutrition & Health and Specialty Products. This realignment has been retrospectively applied. Industrial Products sales and production and other minor business activities are included in other and unallocated. We achieved all-time record sales in all 3 of our reporting segments. With these record sales partially offset by a decrease in sales related to business formerly included in the Industrial Products segment, driven primarily by a decline in shale fracking activity. The impact of foreign exchange to our sales was a negative $0.5 million due to the weaker euro, driving a negative 33 basis point impact to our year-over-year sales growth.

Our Q1 consolidated gross margin dollars of $55.3 million were up $6.2 million or 12.7% compared with $49.1 million for the same period in the prior year. Our consolidated gross margin percent was 31.7% of sales in the quarter, up 46 basis points from 31.3% in Q1 of 2019. The 46 basis point increase was primarily due to mix and certain lower raw material costs. Consolidated operating expenses for the first quarter of 2020 were $29.1 million as compared to $22.6 million in the prior year. The increase was principally due to incremental operating expenses related to the Chemogas and Zumbro acquisitions, and the prior year benefiting from the timing of an insurance recovery. Excluding noncash operating expense associated with amortization of intangible assets of $6.3 million, operating expenses were $22.8 million or 13.1% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.

GAAP earnings from operations for the first quarter were $26.3 million, a decrease of $0.2 million or 0.8% compared to prior year. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $34.7 million were up $1.6 million or 4.9% compared to $33.1 million in the prior year. Record adjusted EBITDA of $42.4 million was $2.7 million or 6.8% above the $39.7 million posted in the first quarter of 2019. Interest expense for the first quarter 2020 was $1.7 million, and our net debt was $179.6 million with an overall leverage ratio on a net debt basis of 1.1. The company's effective tax rates for the first quarter 2020 and 2019 were 19.3% and 24.2%, respectively. The decrease in the effective tax rate is primarily attributable to lower enacted tax rates from several states.

Consolidated net income closed the quarter at $19.8 million, up 5.2% from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.61 for the current year, an increase of $0.03 from last year's comparable quarterly result of $0.58. On an adjusted basis and as detailed in our earnings release, our first quarter-adjusted net earnings were $26.4 million or $0.81 per diluted share, up $2.7 million or 11.4% compared with $23.7 million or $0.73 per diluted share in the prior year quarter. We generated quarterly free cash flow of $17.4 million, and we closed out the quarter with $74 million of cash on the balance sheet. I'm now going to turn the call back over to Martin to go through the detailed results for each of our segments.

[Carl Bengtsson, CFO & Treasurer]

Thank you, Ted. For the quarter, our Human Nutrition & Health segment achieved all-time record quarterly sales of $95.5 million, an increase of $10.4 million or 12.2% from the prior year. The sales increase was primarily driven by higher sales within food and beverage markets, strong sales growth of chelated minerals and choline nutrients, and the beneficial impact of the Zumbro acquisition we closed in December 2019, partially offset by the elimination of sales associated with the Redding Pennsylvania manufacturing site that we divested in 2019.

The impact of the COVID-19 pandemic on our HNH business was relatively limited in the first quarter. However, we do expect to see some impact to coming quarters as a portion of our HNH business serves the food service market, where end-market demand has been negatively impacted by all the shutdowns.

Our Human Nutrition & Health segment also delivered first quarter earnings from operations of $12.1 million, a decrease of $1.6 million or 11.4% compared to prior year, primarily due to higher operating expenses resulting from the prior year benefiting from the timing of an insurance recovery, partially offset by the aforementioned higher sales. Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $4.8 million and an inventory valuation adjustment of $0.2 million, adjusted earnings from operations for this segment were $17.2 million, a decrease of $1.5 million or 8% compared to $18.7 million in the prior year quarter. The decrease, as mentioned earlier, resulted from the prior year benefiting from the timing of an insurance recovery.

Our Animal Nutrition & Health segment delivered all-time record quarterly sales of $48.6 million, an increase of 12.2% or $5.3 million compared to the prior year. The increase in sales was primarily the result of higher volumes in both the ruminant and monogastric markets. Ruminant volumes were up over 17% with strong demand for ReaShure, a rumen-protected choline as well as strong demand for AminoShure XM, a rumen-protected methionine that we launched in mid-2019.

In terms of the dairy economics, we spoke on the last 2 earnings calls about the healthier environment with improved milk and protein prices for us to market our unique line of products for the health and nutrition of dairy cows. With the current COVID-19 pandemic, this environment is highly volatile at the moment with a high degree of uncertainty, and it's hard for us to predict what impact this may have on demand for our products.

Monogastric volumes were up approximately 10%, with solid demand for aqueous and dry choline, strong growth in our chelated minerals and further supported by strong growth in our companion animal offerings. We continue to experience competitive price pressure in Europe, and we expect this to continue in the near term.

Additionally, we noted increased demand related to certain European customers increasing their stock due to the COVID-19 uncertainties. And we estimate that this contributed to ANH growth of approximately 200 basis points in the first quarter.

Animal Nutrition & Health quarterly earnings from operations of $8 million were up $2.8 million or 53% from the prior year quarter, primarily due to the aforementioned higher sales and certain lower raw material costs. Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $0.2 million, adjusted earnings from operations for this segment were $8.2 million, an increase of $2.8 million or 51.2% compared to $5.4 million in the prior year quarter.

Our Specialty Products segment delivered all-time record quarterly sales of $28.0 million as compared with $18.4 million for the prior year quarter. The increase of 52% was driven by higher sales of ethylene oxide for the medical device sterilization market due to both the contribution of Chemogas and higher legacy product sales, as well as increased volumes in the plant nutrition business.

The impact of the COVID-19 pandemic on our medical device sterilization market has been relatively neutral with a decline in scheduled surgeries, largely offset by an increase in other medical equipment and supplies used to fight the COVID-19 pandemic.

The Specialty Products segment also achieved record first quarter earnings from operations of $8.0 million versus $6.7 million in the prior year quarter, an increase of $1.3 million or 19.2%. The increase was primarily driven by the aforementioned higher sales, partially offset by mix and higher operating expenses due to the acquisition of Chemogas. Excluding the effect of noncash expense associated with amortization of intangible assets of $1.6 million, first quarter adjusted earnings from operations for this segment were $9.6 million compared to $7.4 million in the prior year, an increase of $2.2 million or 29.6%.

Sales relating to business formerly included in the Industrial Products segment were $2.3 million, a decrease of $7.8 million or 77.3% from the prior year quarter. And earnings from operations were a loss of $0.2 million, a decrease of $1.9 million compared with the prior year quarter, driven primarily by decline in shale fracking activity, further accelerated by the sharp decline in oil prices.

I'm now going to turn the call back over to Ted for some closing remarks.

[Theodore Harris, Chairman CEO & President]

Thanks, Martin. The Balchem team has responded extraordinarily well to the COVID-19 pandemic with a special caring for one another and a strong sense of purpose. With the safety of our employees as our top priority, we have continued to provide sterilants to the medical device industry, choline to the infant formula manufacturers, minerals and nutrients to the prenatal vitamin makers, mineral micronutrients to the agricultural industry, vital nutrients and minerals to the animal protein market, and food ingredients to food manufacturers, given the criticality of our products and services to our customers in global health and nutrition supply chains. These extraordinary efforts by the Balchem team helped to deliver solid sales growth in all 3 of our business segments and allowed us to deliver the strong net earnings and free cash flow that we reported today for the first quarter. The COVID-19 response effort has been the primary focus for the company since early in the first quarter and will continue to have to be the leading focus for some additional time period.

As we head into the second quarter, we will once again have to dedicate substantial resources toward the response, and we recognize that there will be more impact on our company in the coming quarters. The resilience of our business model, combined with our net debt leverage ratio of 1.1x trailing 12-month adjusted EBITDA, strong balance sheet, cash generation and access to liquidity, will allow us to continue to invest in our key growth initiatives and long-term positioning of the company, while maneuvering our way through today's uncertain global market environment.

I would now like to hand the call back over to Martin, who will open up the call for questions. Martin?

[Carl Bengtsson, CFO & Treasurer]

Thanks, Ted. This now concludes the formal portion of the conference. At this point, we will open up the conference call for questions.

[Operator]

[Operator Instructions]. Our first question is from the line of Ram Selvaraju with H.C. Wainwright.

[Raghuram Selvaraju, H.C. Wainwright & Co.]

I was just wondering, if in a general sense, you could comment on how differential the COVID-19 impact is that you're seeing in the U.S. versus international markets, particularly Europe?

[Theodore Harris, Chairman CEO & President]

Yes, Ram, thanks for joining, and thanks for the question. We certainly saw an earlier impact in Europe than we did in the U.S. That's sort of the obvious statement. But I think, generally speaking, we also saw more significant prebuying and activity from our customers. So when we highlighted that about 200 basis points of the overall strong growth we saw in ANH was from COVID-19 related prebuy. Almost all of that, we would say, was in Europe. So the impact for us, regionally, which is what your question was focused on was really that it was much earlier in Europe, and the prebuying impact that we saw was almost 100% in Europe. We just did not see the same sort of prebuying activities in the U.S. And that may have been because our manufacturing sites in Europe, 2 of the 3, are -- were really in the, call it, the epicenter of Europe, being in Italy. And so part of our strategy was to work very closely with our customers and ask them to preorder, whereas, of course, in the U.S., we have plants across the United States in various different states, and didn't necessarily feel like we were in the center. So that's really been the difference regionally from my perspective.

[Raghuram Selvaraju, H.C. Wainwright & Co.]

Specifically within the U.S., since you mentioned that you have plants spread out across the U.S., and clearly we're seeing differential responses by the individual states regarding reopening, could you maybe give us some granularity on the locations of your plants relative to states responses to the pandemic, in particular with respect to how they're going about the reopening process? And how you expect that to impact the operations on an individual plant basis, to whatever extent you can?

[Theodore Harris, Chairman CEO & President]

Right. So I think it's first important to note that all of our manufacturing sites, whether in Italy, in the epicenter or in Louisiana or New York or Ohio, Utah, Missouri and so forth across the country have continued to operate at near-normal conditions through the pandemic. And so as states start to open up, it really will only facilitate, I would say, shipments, availability of drivers and things like that, that we've managed reasonably well through the pandemic to ship our products relatively on time and to the full demand of our customers. So I think that the opening up by the states will facilitate things, but not change the performance of the plants drastically.

What it will start to impact is when our office employees and our sales organizations start to go back to work and work normally. And I think on that, we've done a really good job of managing those functions remotely, whether it's finance or marketing or IT or what have you, sales, we've been managing those relatively well, which indicates to me, we can be a bit conservative on how quickly we rush back to get everybody back in the offices. Obviously, we're going to do that. But we're going to take our time because we have been able to manage those functions pretty well. I'll just give one anecdote. We, for a long time, in our Animal Nutrition & Health business have been giving seminars by phone or video. And normally, we get 30 or 40 people to sign up and 20 or 30 may actually attend the call. The ones that we've had over the last month or so, we've had something like 800 or 900 people sign up and 600 or 700 actually participate on the call. So we feel pretty good about how we've been able to manage even a difficult function like that sales, and how we've been able to manage that, using tools -- digital tools and video conference and so forth remotely. So the opening up of the states, I think, is just a real positive sign for all of us. It's a light at the end of the tunnel. But it won't have a significant impact on how we're operating our manufacturing sites at this point.

[Raghuram Selvaraju, H.C. Wainwright & Co.]

With respect to the demand for certain specific lines of products, I wanted to ask specifically about 3. In the context of the pandemic, do you expect ethylene oxide demand to rise? Secondly, I was wondering if you could elaborate on which Human Nutrition & Health products you expect to see the largest increase in demand due to the pandemic, for example, because of potential immune boosting capabilities or things like that? And then lastly, on the Animal Nutrition & Health product side, do you expect there to be any negative impact from livestock culling due to disruptions in the meat and dairy processing industries, which we've, of course, heard a lot about here in the U.S., but not really sure how that would impact your ANH division at all?

[Theodore Harris, Chairman CEO & President]

Right. So obviously, a lot in there and all really important topics, and we tried to highlight those in our prepared remarks. And of course, the caveat is, it's just incredibly difficult to tell. But ethylene oxide, to date, we have seen relatively equal or balanced positive and negatives. And the negative has been the reduction in elective surgeries definitely impacts the sterilization market. But the rush to get, whether it's respirators or other medical devices to the appropriate places to respond to the COVID-19 pandemic has largely offset that. So we reported that we did see legacy volumes up in Q1 modestly like they normally have been. I'll speak to -- as we've gone into April, we've seen, in the early part of April, a little bit more of a negative. And we're talking low single digits type negatives associated with the -- I think, the delay of elective surgeries. But towards the end of April, we've seen that pick back up again.

So I think it's going to be a bit dynamic. We don't see a huge boom from the sterilization of masks and other things. We don't think ethylene oxide will be the chosen sterilant for those applications. But we also see -- and I guess, going back to your earlier question, relative to a demand perspective, it's nice to see certain states start allowing elective surgeries. And I think that, that will be a fairly short-lived blip, and we'll see that business pick back up. So overall, ethylene oxide, I think, relatively balanced positives and negatives. On the human nutrition side, we were really pleased to see continued growth in minerals and in choline. And there are certain minerals that are viewed as immunity boosting minerals, and those are zinc and iron and selenium. But I think just generally speaking, people are focusing on their health and taking vitamins and minerals and so forth. And so we're seeing real strength there in Q1.

Our volume of choline was up 18% year-over-year. Minerals was 24% year-over-year on a volume basis. We're seeing a very healthy growth rates, and part of that is driven by continuing work that we're doing relative to awareness. Part of that is the immunity nature of some of those minerals. And part of that, I think, is people increasing their just intake of minerals and vitamins. So we do see those continuing into Q2 and beyond. And I think may actually have a lasting effect as we get used to thinking about immunity and our health. So I think your question was what's specifically jumping out at you? Those are 2 areas specifically. And then in the Animal Nutrition & Health business, obviously, we were in a very, very healthy environment in the first part of Q1, as we were in Q4. I would say, business really was booming and milk prices were high, protein exports were increasing and it was a very positive environment. And I would say that's the area where there's the most uncertainty today.

Milk prices have come down, maybe not quite as far as we thought, and have actually picked up a little bit here. Protein prices have come down, not as much as we thought, may continue to come down. April has continued to actually be quite healthy for our Animal Nutrition & Health business. So we're not necessarily seeing impact yet. But given all the shutdowns of the processing sites, the backlog of inventories, the euthanizing of some animals and the discarding of milk, inevitably, we'll have some impact on our business. It just is -- will be linked to how quickly can the processors get those plants cleaned and back up and running and filling that backlog, and getting the milk to the appropriate places and so forth. So a lot of uncertainty there. We haven't quite seen it yet. We had an incredibly strong Q1. We're really pleased with the results for ANH. And April has continued to move along nicely. But there's just a tremendous amount of uncertainty. And talking to the Animal Nutrition & Health team, it really is almost a day-by-day change in that market. So we're watching it very closely. And in our prepared remarks, I thought it was appropriate to bring that up as a potential concern or challenge going forward.

[Raghuram Selvaraju, H.C. Wainwright & Co.]

Okay. And then just three very quick things. I was just wondering if you expect to take any goodwill impairment charges, specifically as a result of the COVID-19 pandemic? Secondly, if you are weighing the possibility of exiting the industrial choline segment entirely sometime over the course of the next few months? Or if you intend on staying in it for the long term, pending a recovery in the U.S. fracking industry? And then lastly, in a general sense, are you sort of making any internal predictions at this time regarding how long you expect pandemic-related impact to last? Is that sort of 2 or 3 quarters? Or is that on your end, pretty open-ended?

[Theodore Harris, Chairman CEO & President]

First, I'll again try to remember all three of those. But the goodwill question is, no, we absolutely do not expect. We feel like we've got plenty of cushion as we've gone through the audit and closing of the quarter and looked at the various businesses. So no, we do not expect anything from that perspective. Relative to exiting the industrial business. We do not have plans to exit the business. Again, we've obviously changed our reporting structure. It just didn't seem to make sense to us to be reporting out on a segment that's 1.3% of our revenue and really not aligned with our overall strategic focus from a corporate perspective. But as we've talked before, these are sales that leverage existing assets that would not go away if we were to stop selling into that market. I will say that we expect very minimal sales into the industrial market like we saw in Q1 for the foreseeable future, but do not expect to exit at this point in time.

And relative to the length of the pandemic, I do think it is encouraging to see states open up, countries open up. And so at this point in time, we do feel as though Q2 really is the quarter where if we were to see a more significant impact, it will be in Q2 and then starting to come back after that. Again, if you think about the parts of our business that are impacted by the pandemic, it is elective surgeries that are one of the first things to start coming back, and there's a backlog there. So we think that will come back pretty quickly. Food service, you see various chains, whether it's Yum brand making announcements about how many thousands of stores will be opening up over the coming months and so forth. All of those things are positive for our company.

And some of the strengths that we talked about, like the immunity minerals and just nutrients and so forth, generally speaking, I think we'll endure, and we think that the opening up will get some of these businesses that impact us up and running and instead of being down 80%, they'll be down 50% or 30% and so forth and have less and less an impact on us. So we think Q2 is the bigger quarter, and then we'll see improvement from there.

[Raghuram Selvaraju, H.C. Wainwright & Co.]

Stay safe and healthy. And I think you guys are doing a very credible job managing through this crisis. Be well.

[Operator]

[Operator Instructions]. We have a question coming from the line of Mitra Ramgopal with Sidoti & Company.

[Lalishwar Ramgopal, Sidoti & Company]

I just wanted to start with a couple of housekeeping items. If you could give us the relative contributions from both Zumbro and Chemogas in the quarter? And also the potential loss or sales that were eliminated with the sale of the Redding manufacturing site that was divested?

[Carl Bengtsson, CFO & Treasurer]

Sure, Mitra. Zumbro and Chemogas together contributed approximately $15 million, and the Redding divestiture went the other way for about $1.5 million.

[Lalishwar Ramgopal, Sidoti & Company]

Okay. And I was just wondering if you have a sense, obviously, with COVID, just being compliant and being safe, et cetera. A number of companies, I'm sure including yourself, are incurring a lot of incremental costs. And I know it's difficult to balance it in time. But I don't know if you could give us a sense as to when we look at the quarter and the margins, et cetera, how much sort of incremental cost you're getting impacted by as a result of COVID?

[Theodore Harris, Chairman CEO & President]

Yes. So maybe I'll take a stab at that. We saw in Q1, you're right, significant incremental costs. We decided not to adjust those out for various reasons. So they're included in our numbers. And the biggest part of our costs were associated with the incentive -- extra incentive pay or bonuses that we gave to our hourly and salaried employees, obviously, nonexecutive, but primarily the frontline folks who continue to operate our manufacturing sites and work in our labs and so forth. And that was about $600,000, $700,000 for the quarter. We'll see something similar to that in Q2. And I would roughly take double that number to say what the overall incremental expenses for us were in the quarter associated with COVID-19 response. And that would include extra cleaning. Very -- we had to buy a bunch of laptop computers and printers and things like that. So $1 million -- $1.2 million in Q1, something similar maybe in Q2, and we expect that to be it.

[Lalishwar Ramgopal, Sidoti & Company]

Okay. No, that's great. And still on the subject of costs, I was wondering if you can give us a sense as to where you are on the ERP implementation? And how it's being impacted by COVID-19?

[Theodore Harris, Chairman CEO & President]

Yes. So we were really pleased with how we were progressing. And I think the last we reported out, we had something like 60% of our revenue in sites and people on the new system. It's operating well, and we're on budget and on plan. We have had to pause the go-lives at additional sites. And so as you know, the way we are implementing this was really not a big bang theory approach, but more of a 1, 2 sites at a time. And we have paused that. And so we think that, overall we will now be implementing through the end of 2020 and into the first quarter of 2021. We had originally hoped to be finished in the kind of midyear of this year, early second half of this year. So we're delayed probably 6 to 9 months. Some of the new acquisitions are contributing to that. But we still think that we can come in under budget. We had originally budgeted $12 million for the project. We can come in under budget. And we're taking this time to refocus the resources on the project on optimization, and we basically had a plan to leave optimizing until the end. And so we're kind of taking this pause period to dedicate resources to optimization efforts and actually finding that to be a great thing. So it's delayed, still on budget and we're still kind of pleased with the overall project.

[Lalishwar Ramgopal, Sidoti & Company]

Okay. And then just on the balance sheet financials. Obviously, you have a very strong balance sheet, relatively little debt, cash on hand, et cetera. But I know you did mention you are reducing CapEx and looking to preserve cash. And I was just curious in terms of how does that -- any potential changes to the dividend? And in terms of potential acquisition activity, I was wondering if the current environment is maybe resulting in some opportunities that might not have been there before?

[Theodore Harris, Chairman CEO & President]

Yes. Let me just start, and I'll quickly hand it over to Martin. But I think as we -- particularly, I would say, in February, early March, when we're faced with the extraordinary unknown of the pandemic, that's when we started to originally do the stress testing and conserving of cash just for concern of the unknown. I'd say much of that has subsided now as we have a bit of a clearer picture. While there's still a lot of uncertainties, a little bit clearer picture about this and feel really good about our balance sheet and the likely impact of all of this on our business going forward. So we've actually, even in the last month, paid down a little bit of debt. That was something we were not doing to preserve some cash. So we really have no concerns from that perspective. And some of that language is really more related to very early-on response to this. But I'll let Martin get into specifics.

[Carl Bengtsson, CFO & Treasurer]

Sure. I mean, Mitra, we're obviously in a fortunate position going into this with a strong balance sheet and a low debt level, benefiting us. And if you think also about our access to liquidity, we're in a good spot. The revolving credit facility that we have is for $500 million. We're using about half of that. So there's another $250 million round numbers that we can draw on at our discretion, should we need to do so. And that one runs through June 2023. So there's no debt coming due here in the near term. But at that same time, we keep generating favorable cash flows. And as we model various scenarios and various sort of potential sizes of disruptions and downsides that can happen, in most scenarios, we will continue to generate favorable cash flows overall. So it's a good strong balance sheet as we sit here today. From a CapEx perspective, obviously, it's -- we're preserving cash at the moment, just in an abundance of caution, spending less. I think we had guided originally at the beginning of the year that we're planning on spending $30 million to $35 million of cash, and we're not going to be spending that amount this year just due to the delays. It's also hard to do bigger projects in this kind of environment. So I could see that go down by at least $5 million in terms of CapEx, if not more, for the year in terms of spend.

[Lalishwar Ramgopal, Sidoti & Company]

And then again, obviously, I would assume it's difficult to be contemplating or trying to do acquisitions in this environment. But obviously, I know it's something I was keeping an eye on, and there might be some opportunities that could be resulting as a result of this environment and -- but again, I would assume it's just difficult to get anything done now.

[Carl Bengtsson, CFO & Treasurer]

It's obviously a little harder to do a due diligence right now when it's hard to go see people. But I would say, the environment overall, we keep evaluating a number of targets at any one point in time as we always do. We're always looking at a couple of different options, and we continue to do so. So there is, what I would call, still an inflow and work processes that are going on to evaluate targets. They move a little bit slower. It's hard to go into a potential due diligence phase, et cetera, if we should wish to do so. Obviously, the bid-ask spread, I think, is widening a little bit in an environment like this between sellers and buyers based on the environment. But overall, we're continuing to doing what we have been doing for the last few years and push forward with sort of the strategic areas we're looking for. And I'll leave it at that as I can't predict the future really there.

[Lalishwar Ramgopal, Sidoti & Company]

No, that's great. And then finally, just obviously, I know the tax rate is always a tough one to get right in. I know in the first quarter, it was a little lower than I was expecting. I was just wondering how we should view it for the rest of the year?

[Carl Bengtsson, CFO & Treasurer]

Yes. It was a little bit lower. We had, call it, 6 or 7 states there that changed their rates, which had a favorable impact to us, particularly on our deferred tax liabilities, which we appreciate. We had previously said sort of to use for your modeling a tax rate around 23% or so, I believe, when we had this call last time. I think given our first quarter or so, we probably have an opportunity to be somewhere in that range between 22% and 23% on a full year basis. So I would use somewhere in the range.

[Operator]

Our next questions come from the line of Lawrence Goldstein with Santa Monica Partners.

[Lawrence Goldstein, President]

I thought you were out of questions. Otherwise, I wouldn't have asked this one, but I'll ask it since you're not out of questions. What use or uses is EO relative to the pandemic that -- well, that's my question.

[Theodore Harris, Chairman CEO & President]

Yes. Thanks, Larry. I hope you're doing well. Staying safe. Appreciate the question. So ethylene oxide, I would say, as a sterilant doesn't have any necessarily special use relative to the pandemic. But there are syringes that are sterilized with EO. There are catheters sterilized with EO. Some of the other equipments, I'm forgetting the name of, the ventilators, sorry, are sterilized with EO. So as there was a real strong push for getting those supplies to the right places and manufactured, that's been beneficial. There was some discussion around could ethylene oxide play a role in the sterilization of masks, the so-called dirty masks or masks that have already been used. And it's not -- it could do that, and there are some who are promoting protocols for that, but it's not ideal for that application given the need to have a period of time of off gassing and so forth. So that's not a special added new opportunity for us. Where it has benefited has really been just the kind of buildup of getting kind of the adequate number of ventilators out and so on and so forth.

And I've said, we're kind of probably been negatively impacted a little bit here from the delay in elective surgeries. But I think there's a real pent-up demand. My wife is one. She needs a knee surgery, and she's been waiting and waiting and waiting. And the first day that she can get it, she's going to go and get it. So not that I want to extrapolate her experience to the whole market, but we do think that there is a pent-up demand there. And as that works itself out over the year, we'll see sort of normal demand for ethylene oxide.

[Operator]

Our next question is from the line of Tony Polak with Aegis Capital.

[Anthony Polak, Aegis Capital Corporation]

Just wanted to know on CureMark. I know you didn't mention it. I assume there's nothing new. But could you give us a little feedback on whether you're continuing? Are there studies still going on? Or is that all done? And it's just a matter of the FDA.

[Theodore Harris, Chairman CEO & President]

Yes. So you're right, Tony. There really is no news there. CureMark continues to work on their side of things. And we are continuing to work on our optimal manufacturing strategy -- ultimate manufacturing strategy. So there is work continuing. It's, I would say, the pandemic situation. While it has delayed certain things, it really hasn't had an impact on this as far as we're concerned. So we continue to advance those things that we're responsible for, and CureMark is doing the same. And hopefully, we'll have more to update you on next quarter.

[Operator]

At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to Ted Harris for closing remarks.

[Theodore Harris, Chairman CEO & President]

Great. Thanks, Rob. Once again, thank you very much, everybody, for joining the call today and your continued support of the company. We really are very pleased with the strong record Q1 results, the resilience of our business model in the face of difficult market conditions. And I can't say it enough, the extraordinary response of the Balchem team. Just to let you know, on May 14, we will be participating in the 15th Annual BMO Farm-to-Market conference. It will, of course, now be virtual. But we'll be making a presentation and have a full day of one-on-one meeting schedule. So I'm sure we will be talking with some of you then. So thanks again for participating in the call today, and we look forward to reporting out Q2 results in late July. So thanks again.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.