Thank you Jim and good morning everyone. There is a lot of material to cover this morning.
So I will start by summarizing a few key takeaways.
First, the management team took decisive and broad-based actions to reduce our cost structure due to the unprecedented nature and speed of the government required closures across many of our markets, which ultimately drove the 41% revenue decline.
As a result, our first-quarter adjusted operating loss of $35 million was approximately $70 million smaller than it would have been had we not taken such aggressive actions as quickly as we did.
Second, strong accounts receivable collections and a significant increase in customer deposits contributed to sustaining our very strong liquidity position at the end of the quarter, which approximated $800 million and included $162 million of COLI balances.
Third, we are projecting our strong backlog of customer orders and the continuation of significant cost reduction efforts will result in operating income for the second quarter, which we estimate will more than offset the first quarter adjusted operating loss and drive year-to-date profitability halfway through the fiscal year. And lastly, in the midst of continued uncertainty, we are unable to provide an outlook for the remainder of the year. But to help with your modeling, we are sharing that we currently estimate our breakeven point for adjusted operating income is approximately $600 million of quarterly revenue with the current level of salary reductions and other cost containment efforts we have in place. To better understand the impact of the significant revenue decline on our first quarter operating results, I believe it's most insightful for me to walk through a sequential comparison of the first quarter and the fourth quarter. To start, we should first adjust the fourth quarter to exclude a few nonrecurring items, all of which were disclosed in detail last quarter. These items include PolyVision's operating results and the net gain related to the sale of PolyVision, the impact of the extra week and variable compensation expense related to some discrete tax benefits. Adjusted for these items, we estimate fourth quarter revenue would have approximated $885 million and operating income would have approximated $56 million. This compares to our first quarter revenue of $483 million and the adjusted operating loss of $35 million, or an approximate $90 million reduction in our adjusted operating results. Without the actions we took to reduce our cost structure, the $402 million sequential decline in revenue on its own would have reduced operating income by an estimated $160 million or more. The related decremental variable margin of approximately 40% benefited from the impact of a couple items.
First, we made the difficult decision to enact temporary layoffs across much of our hourly workforce in the U.S. and some other markets which maintain the variable nature of our direct labor costs during a period of dramatic revenue decline.
Second, we recorded $23 million of lower variable compensation expense, which had a positive effect on the decremental margin, that is until we crossed variable compensation thresholds as the revenue decline deepened and we began posting losses.
As a partial offset to those benefits, we experienced some labor and logistics inefficiencies related to the shutdown and restart of our operations, plus we funded various temporary employee benefits like the full funding of employee health insurance premiums, return to work incentives and free lunch programs, but these items had a smaller effect on the decremental variable margin.
Beyond these variable items, we took significant actions to reduce our remaining cost structure which had the effect of reducing our spending in the first quarter by an estimated $70 million and lowering the overall decremental operating margin to approximately 22% in the quarter. The actions included significantly reducing salary costs through temporary reductions in hours and base pay plus we substantially eliminated semi-variable costs and aggressively pulled back on project and other discretionary spending. We took similar actions around the world, but the overall decremental operating margins varied by segment, approximating more than 20% in the Americas, approximately 20% in EMEA and less than 20% in the other category, each adjusted for the nonrecurring items in the fourth quarter that I mentioned earlier.
Before I move to our liquidity, I will cover our income tax benefit in the quarter, which approximated 30% of the pretax loss. Historically, we have calculated our tax provision during interim periods by utilizing an estimated full year effective tax rate.
However, for this quarter, we reported our tax provision based on an estimate using only first quarter results, essentially as if we were filing a three month tax return. We took this approach given the heightened uncertainty associated with estimating a reliable effective income tax rate for the fiscal year as well as potential benefits that may be available under the provisions of the CARES Act.
As a result, the mechanics of our first quarter tax provision primarily included the following. We adjusted the pretax loss to exclude the nondeductible impairment charge, as well as some other smaller items and then we estimated our international and U.S. provisions for the three-month period assuming the U.S. portion of the pretax loss would be carried back five years under the CARES Act and reflect the federal benefit of 35%. And lastly, we revalued net deferred tax assets in the U.S. that we estimated would reverse in the period and contribute to the net operating loss which can be carried back five years under the CARES Act and thereby generate tax benefits at the higher statutory rate of 35%.
The first quarter income tax benefit of approximately $17 million included an estimated $10 million of net benefits related to the CARES Act.
Our ability to realize the tax benefits recorded in the first quarter is dependent on our full year results, which could be substantially different compared to the first quarter. It's possible we may be in a better position to estimate an annual effective tax rate for this year in a subsequent interim period and it's also possible we may continue to take a year-to-date approach in the preparation of the second quarter tax provision. In either case, the effective tax rate recorded in the first quarter may not be indicative of what to expect over the course of fiscal 2021.
Our liquidity increased by $98 million compared to the end of last year, despite the adjusted operating loss we recorded in the first quarter. The cash surrender value of our COLI assets increased by a couple million dollars and the remaining $96 million increase in liquidity resulted from the following inflows and outflows. In March, out of an abundance of caution, we borrowed against our global credit facility and $245 million and borrowings were outstanding at the end of the quarter. Consistent with many other companies that initially took a cautionary approach to liquidity and credit facility access, we will be considering whether to repay some or all of the outstanding balance in the coming months based on the level of stability in the overall capital markets. We returned $51 million to shareholders through share repurchases and dividends in the quarter. The share repurchases, included those made to satisfy Participant's Tax Withholding Obligations upon the issuance of equity awards plus we repurchased three million shares during the first three weeks of March under a 10b5-1 repurchase plan we entered into in December 2019. The dividend of $0.07 represented a $9 million reduction compared to the dividend paid in January 2020 and with the increase to $0.10 approved by the Board yesterday, our July dividend represents a $6 million decrease compared to the prior year. We funded approximately $160 million of variable compensation payments and benefit plan contributions relating to fiscal year 2020 as well as retirement and deferred compensation plan payments. Customer deposits increased by $95 million in the quarter, largely due to temporary discounts we offered our dealers to incentivize them to pursue customer deposits and sustain positive banking relationships. The remaining net decrease of $33 million was driven by our operating loss in the quarter along with capital expenditures of $9 million, which were 36% lower than prior year. A modest use of cash related to working capital in the quarter reflected a $116 million reduction in accounts receivable, which was more than offset by a significant reduction in accounts payable due to our reduced spending levels and a $33 million increase in inventories which was driven by government restrictions and the increase in our backlog of orders. We finished the first quarter with a strong backlog of customer orders which totaled $751 million and was 11% higher than the prior year.
We have seen some order cancellations, but so far they have remained relatively small and isolated and some were reordered with different applications and/or at smaller amounts. Most of the backlog is scheduled for manufacturing and delivery by the end of August and all of our manufacturing and distribution facilities are currently open although a few are currently subject to some government restrictions on their operations. It's possible some of the backlog may be further delayed or even canceled and/or our operations could be impacted by changing government restrictions. The level of revenue we post in the second quarter will be dependent on our ability to manufacture and ship the backlog and/or our customers' ability to receive and install the furniture as well as the conversion rates we experienced relative to new orders received throughout the quarter. It's also important to note that the backlog number does not include dealer incentives or various sales returns and allowances which are an offset to revenue and can vary relative to revenue and performance from quarter-to-quarter. We anticipate significant improvement in our second quarter revenue compared to the first quarter but with so many variables in play, we are not providing an estimated revenue range for the quarter.
We expect the incremental operating margin related to the sequential revenue improvement in the second quarter to be better than the decremental operating margin we experienced in the first quarter relative to the sequential revenue decline.
The second quarter incremental margin will benefit from variable compensation expense not being accrued until we offset the first quarter adjusted operating loss and begin to exceed return on invested capital target thresholds.
However, it will be somewhat dampened by the easing of our salary reductions in May, as well as the possible reinstatement of some additional discretionary spending in the second quarter. All in, we estimate the second quarter incremental operating margin percentage related to the sequential revenue improvement will range between the mid-20s to the low-30s.
Thereafter, as we approach the back half of the year, our revenue will be dependent on the state of the broader economic recovery and capital spending, which will be influenced by CEO and CFO sentiment. There are positive scenarios wherein employees return to the office more broadly and in preparation companies invest to reconfigure and retrofit their spaces to improve social distancing, health and safety and there are other scenarios wherein one could imagine that companies extend their work from home strategies and prolong capital preservation. Larger cities may be impacted for longer periods of time than smaller cities due to concerns related to public transportation and elevator logistics in taller buildings. Certain vertical markets may rebound faster than others.
Our recent order patterns reflect some of these variations now, but we don't know how long it will last and which sectors or markets will begin to loosen up and get back to work more quickly than others. Thus we are unable to provide an outlook for the remainder of the year. What I will share is some color around our current breakeven point taking into consideration the current level of temporary salary reductions and other cost containment efforts we have in place.
As I said at the beginning of my remarks, we estimate the adjusted operating income breakeven point approximates $600 million of quarterly revenue. That level of revenue would translate to an approximate organic decline in the second half of the year of between 35% and 40% compared to the prior year, adjusted for the sale of PolyVision and the extra week in the fourth quarter.
Let me stress though that this is not a forecast.
While orders in June have so far averaged a 34% decline from the prior year compared to the 47% and 42% declines we posted in April and May, respectively, they remain volatile week-to-week and the prior year comparisons vary week-to-week and month-to-month as well. And while we are having a growing number of conversations with customers about how to improve the safety and effectiveness of their offices, it's too early to predict the timing and magnitude of any related order patterns.
Our breakeven estimates assumes the continuation of our current cost-reduction efforts, but those may change or take on a different form as we could experience attrition and not backfill all positions or we may choose to increase our investments in growth strategies. It's also possible that we might take action to reduce our cost structure more permanently, if we think our revenue may remain severely impacted through next year. We just don't have enough information to make any of those decisions right now, which is why we are currently maintaining the average 20% salary reduction and keeping very tight control over our semi-variable costs and discretionary spending. In closing, I feel very good about how effectively our leaders are navigating through this crisis, serving our customers, taking care of our employees and supporting our community partners, all while protecting the company and our liquidity. I remain very impressed with the agility of our dealer partners as well as our suppliers across our global supply chain and I cannot say enough positive things about the resiliency of all Steelcase employees, especially those in manufacturing and distribution, many of whom went from working full-time in early March to facing restrictions or being laid off for nearly two months and are now back working as hard as ever to fulfill our backlog while enduring the heat of the summer months with modifications to their standard work due to social distancing and other safety measures. From there, we will turn it over for questions.