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Basis of Presentation and Significant Accounting Policies
 6 Months Ended
May 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted.
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly our consolidated financial position as of May 31, 2020, the results of our consolidated operations for the three months and six months ended May 31, 2020 and 2019, and our consolidated cash flows for the six months ended May 31, 2020 and 2019. The results of our consolidated operations for the three months and six months ended May 31, 2020 are not necessarily indicative of the results to be expected for the full year due to seasonal variations in operating results and other factors. The consolidated balance sheet at November 30, 2019 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2019, which are contained in our Annual Report on Form 10-K for that period.
Unless the context indicates otherwise, the terms “we,” “our,” and “us” used in this report refer to KB Home, a Delaware corporation, and its subsidiaries.
Impact of COVID-19 Pandemic on Consolidated Financial Statements. The outbreak of the 2019 coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread (“COVID-19 control responses”) severely impacted the global and national economies, the housing market and our business during the 2020 second quarter. With the health and well-being of our employees, customers and business partners, and their families, being a high priority, we temporarily closed our sales centers, model homes and design studios to the public in mid-March and shifted to virtual sales tools and then an appointment-only personalized home sales process in April, where permitted. Our construction operations were also restricted in many jurisdictions, and together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, we experienced home delivery delays during most of the quarter. In addition, our order pace moderated significantly and home purchase cancellations increased considerably. In the latter part of May, conditions started to improve in conjunction with state and local governments relaxing their COVID-19 control responses, and we began the process of more broadly opening our communities to the public while also expanding construction and warranty service activities to the extent permitted by local authorities. Following a low point in April 2020, we experienced steady and significant improvements in our order trends and cancellation rate beginning in May, which have extended through the date of this report. Given the prolonged, and ongoing, COVID-19-related impacts, we focused on generating cash inflows from our business and preserving cash and liquidity by proceeding in a carefully targeted manner with land acquisition and land development and curtailing overhead expenditures, partly through workforce realignment and reductions. As a result, we recorded severance charges of $6.7 million within our selling, general and administrative expenses for the 2020 second quarter. Our consolidated financial statements and the notes thereto in this report reflect the foregoing course of unprecedented events and the actions we took during the 2020 second quarter.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses, and such differences may be material.
Cash and Cash Equivalents. We consider all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Our cash equivalents totaled $404.5 million at May 31, 2020 and $302.5 million at November 30, 2019. At May 31, 2020 and November 30, 2019, the majority of our cash and cash equivalents was invested in interest-bearing bank deposit accounts.
Comprehensive Income. Our comprehensive income was $52.0 million for the three months ended May 31, 2020 and $47.5 million for the three months ended May 31, 2019. For the six months ended May 31, 2020 and 2019, our comprehensive income was $111.7 million and $77.5 million, respectively. Our comprehensive income for each of the three-month and six-month periods ended May 31, 2020 and 2019 was equal to our net income for the respective periods.
Adoption of New Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires leases with original lease terms of more than 12 months to be recorded on the balance sheet. On December 1, 2019, we adopted ASU 2016-02 and its related amendments (collectively, “ASC 842”) using the modified retrospective method. Results for reporting periods beginning December 1, 2019 and after are presented under ASC 842, while results for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our original assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. We also elected the practical expedient that allows lessees the option to account for lease and non-lease components together as a single component for all classes of underlying assets. The adoption of ASC 842 resulted in our recording lease right-of-use assets and lease liabilities of $31.2 million on our consolidated balance sheet as of December 1, 2019. Lease right-of-use assets are classified within other assets on our consolidated balance sheet, and lease liabilities are classified within accrued expenses and other liabilities. At the December 1, 2019 adoption date, we also recorded a cumulative effect adjustment to increase beginning retained earnings by $1.5 million, net of tax, to recognize a previously deferred gain on our sale and leaseback of an office building in 2019. The adoption of ASC 842 did not materially impact our consolidated statements of operations or consolidated cash flows. Further information regarding our leases is provided in Note 13 – Leases.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (“TCJA”), and requires certain disclosures about stranded tax effects. We adopted ASU 2018-02 effective December 1, 2019 and elected to reclassify the income tax effects of the TCJA from accumulated other comprehensive loss to retained earnings, which resulted in an increase of $1.6 million to both retained earnings and accumulated other comprehensive loss, with no impact on total stockholders’ equity. Amounts for prior reporting periods have not been adjusted and continue to be presented under the accounting guidance in effect for those periods.
Recent Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments from an incurred loss approach to a new expected credit loss methodology. ASU 2016-13 is effective for us beginning December 1, 2020, with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities.  ASU 2019-12 is effective for us beginning December 1, 2021, with early adoption permitted. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.  We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.