EX-99.1 3 d205931dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

LOGO

Sean M. Connolly

President and Chief Executive Officer

                    , 2016

Dear Fellow ConAgra Stockholder:

We are pleased to inform you that ConAgra Foods, Inc.’s board of directors has approved a plan to pursue a separation of the company’s frozen potato products business from ConAgra Foods, Inc. through a spinoff of its frozen potato products business. The frozen potato products business will be transferred to Lamb Weston Holdings, Inc., or Lamb Weston, a newly created Delaware corporation, and its shares will be distributed as a dividend to stockholders of ConAgra Foods, Inc. on November 9, 2016. At the time of the spinoff, we expect that Lamb Weston, a leading global producer, provider, and marketer of value-added frozen potato products, will have its common stock listed on the New York Stock Exchange under the symbol “LW.”

As a current stockholder of ConAgra Foods, Inc., you will receive one share of Lamb Weston common stock for every three shares of ConAgra Foods, Inc. common stock that you own and hold as of the record date, as further described in the enclosed information statement. Stockholder approval of the distribution is not required, nor are you required to take any action to receive your shares of Lamb Weston common stock.

Following completion of the spinoff, ConAgra Foods, Inc. will be renamed Conagra Brands, Inc., or Conagra Brands, and shares of Conagra Brands common stock will continue to trade on the New York Stock Exchange under the symbol “CAG.” Following completion of the spinoff, Conagra Brands will be comprised primarily of the operations currently reported as ConAgra Foods, Inc.’s Consumer Foods segment.

We invite you to learn more about Lamb Weston by reviewing the enclosed information statement, which describes the spinoff and Lamb Weston in detail and contains important information about Lamb Weston, including historical combined financial statements.

Thank you for your continued support of ConAgra Foods, Inc. and your future support of Lamb Weston.

Sincerely,

Sean M. Connolly

President and Chief Executive Officer

Enclosure

ConAgra Foods, Inc.

222 W. Merchandise Mart Plaza, Suite 1300

Chicago, IL 60654

United States


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

Subject to Completion, dated October 17, 2016

INFORMATION STATEMENT

Lamb Weston

Shares of Common Stock

 

 

ConAgra Foods, Inc., or ConAgra, is sending this information statement to its stockholders in connection with the distribution by ConAgra of all the outstanding shares of Lamb Weston common stock to holders of ConAgra’s common stock. As of the date of this information statement, ConAgra owns all of Lamb Weston’s outstanding common stock.

On November 17, 2015, ConAgra’s board of directors approved a plan to pursue a separation of its frozen potato products business from ConAgra through a spinoff, which will result in the distribution of 100% of ConAgra’s interest in Lamb Weston to holders of ConAgra’s common stock. Holders of ConAgra’s common stock will be entitled to receive one share of Lamb Weston common stock for every three shares of ConAgra common stock owned as of 5:00 p.m., New York City time, on the record date, November 1, 2016. The distribution date for the spinoff will be November 9, 2016. Immediately after the distribution is completed, Lamb Weston will be an independent, publicly traded company. ConAgra expects that, for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, in connection with the distribution, except to the extent of any cash you receive in lieu of fractional shares.

You will not be required to pay any cash or other consideration for the Lamb Weston common stock that will be distributed to you or to surrender or exchange your ConAgra common stock to receive Lamb Weston common stock in the spinoff. The distribution will not affect the number of shares of ConAgra common stock that you hold. No approval by ConAgra stockholders of the spinoff is required or being sought. You are not being asked for a proxy and you are requested not to send a proxy.

As discussed under “The Spinoff—Trading of ConAgra Common Stock After the Record Date and Prior to the Distribution,” if you sell your ConAgra common stock in the “regular way” market after the record date and before or on the distribution date, you will be selling your right to receive Lamb Weston common stock in connection with the spinoff. You are encouraged to consult with your financial advisor regarding the specific implications of selling your ConAgra common stock before or on the distribution date.

There is no current trading market for Lamb Weston common stock. However, we expect that a limited market, commonly known as a “when-issued” trading market, for Lamb Weston common stock will begin prior to the distribution date on or about October 28, 2016, and we expect that “regular way” trading of Lamb Weston common stock will begin the first day of trading after the distribution date. We have applied to list Lamb Weston common stock on the New York Stock Exchange under the symbol “LW.”

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 14 of this information statement.

Neither the Securities and Exchange Commission, or SEC, nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

ConAgra first mailed this information statement to its stockholders on or about                     , 2016.

The date of this information statement is                     , 2016.


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TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

QUESTIONS AND ANSWERS ABOUT THE SPINOFF

     8   

RISK FACTORS

     14   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     30   

THE SPINOFF

     31   

CAPITALIZATION

     42   

DIVIDEND POLICY

     43   

SELECTED HISTORICAL CONDENSED COMBINED FINANCIAL DATA

     44   

UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

     47   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     52   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     73   

BUSINESS

     74   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     80   

RELATIONSHIP WITH CONAGRA AFTER THE SPINOFF

     81   

MANAGEMENT

     86   

COMPENSATION DISCUSSION AND ANALYSIS

     91   

EXECUTIVE COMPENSATION

     112   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     128   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     130   

DESCRIPTION OF CAPITAL STOCK

     134   

INDEMNIFICATION OF DIRECTORS AND OFFICERS

     137   

WHERE YOU CAN FIND MORE INFORMATION

     138   

INDEX TO COMBINED FINANCIAL STATEMENTS

     F-1   

 

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Unless we otherwise state or the context otherwise indicates, all references in this information statement to “Lamb Weston,” “us,” “our,” or “we” mean Lamb Weston and its subsidiaries, and all references to “ConAgra” mean ConAgra Foods, Inc. and its subsidiaries, other than, for all periods following the spinoff, Lamb Weston.

The transaction in which Lamb Weston will be separated from ConAgra and become an independent, publicly traded company is referred to in this information statement alternatively as the “distribution” or the “spinoff.”

This information statement is being sent solely to provide information to ConAgra stockholders who will receive Lamb Weston common stock in connection with the spinoff. It is not provided as an inducement or encouragement to buy or sell any securities. You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information contained in this information statement, unless we are so required by applicable securities laws.

 

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SUMMARY

The following is a summary of some of the information contained in this information statement. It does not contain all the details concerning Lamb Weston or the spinoff transaction, including information that may be important to you. We urge you to read this entire document carefully, including “Risk Factors,” “Selected Historical Condensed Combined Financial Data” and “Unaudited Pro Forma Combined Financial Data” and the combined financial statements and the notes to those financial statements included elsewhere in this information statement.

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement assumes the completion of the separation of Lamb Weston from ConAgra and the related distribution of our common stock.

Lamb Weston

Lamb Weston, along with its joint venture partners, is a leading global producer, provider, and marketer of value-added frozen potato products. We, along with our joint venture partners, are the number one supplier of value-added frozen potato products by market share in North America—the largest market for frozen potato products in the world. We, along with our joint venture partners, are also a leading supplier of value-added frozen potato products globally, with a growing presence in high-growth emerging markets. We, along with our joint venture partners, offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our value-added frozen potato product portfolio.

The highly-experienced Lamb Weston team has deep expertise in processing potatoes into value-added products and delivering innovative customer solutions. As an independent public company, we will continue to focus on driving sustainable, profitable growth by offering innovative products and customer-centric solutions that leverage our advantaged manufacturing and processing footprint, while also maintaining a balanced capital allocation strategy.

In fiscal 2016, our net sales totaled $3.0 billion, our net income attributable to Lamb Weston totaled $285.3 million, our Adjusted EBITDA totaled $593.4 million and we generated operating cash flows of $382.3 million. For a reconciliation of Adjusted EBITDA to its most directly comparable financial measure under U.S. generally accepted accounting principles, or U.S. GAAP, and the reasons why we believe the presentation of Adjusted EBITDA is useful to investors, see “Selected Historical Condensed Combined Financial Data.”

Key Business Strengths

We believe the frozen potato category is highly attractive, and we have several business strategies that differentiate us from our competitors and contribute to our ongoing success:

We, along with our joint venture partners, are a leader in the growing global value-added frozen potato category, which we believe enjoys favorable domestic and international business dynamics

The frozen potato category is attractive domestically, with significant scale and strong growth opportunities. According to the U.S. Department of Agriculture, or USDA, Economic Research Service, as of 2014, more than 50% of domestic food spending occurred away-from-home. At the same time, French fries are widely available on restaurant menus, with approximately 60% of restaurants in the United States featuring French fries. The United States represents the largest portion of global frozen potato volume, accounting for approximately 34% of global volume in 2015.

 



 

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Internationally, the opportunity to expand consumption of frozen potato products is significant. According to Euromonitor, by 2020, the frozen processed potato category is forecasted to grow by 2.7 billion pounds, representing a 2% compound annual growth rate, or CAGR, overall. Global unit expansion by quick service restaurants coupled with increasing per-capita consumption of value-added potatoes contribute to the growth opportunity in our product categories. Industry-wide, the export volume of frozen potato products to South America, Russia, the Middle East and China has grown at high single or double digits in recent years.

As the number one producer in North America and with a strong and growing international presence, we believe we are uniquely positioned to capture category growth.

As one of the few industry participants with national and global reach and capabilities, we believe Lamb Weston is uniquely positioned to capitalize on the attractive growth prospects of the frozen potato category. Based on our estimates, Lamb Weston, along with its joint venture partners, is the North American frozen potato category leader by volume, providing a diverse portfolio of value-added frozen potato products. Outside of the United States, we, along with our joint venture partners, are the second largest supplier of frozen potato products, by volume, with a presence across over 100 countries and a growing position in high-growth emerging markets.

We intend to use a strong pipeline of strategic initiatives and strong customer relationships, combined with our acquisition and alliance expertise, to maintain our share leadership in North America, and capture increasing share in the highest-growth international markets. For example, we recently acquired a factory in Shangdu, Inner Mongolia, China, creating a platform that provides in-country production to further service the growing Asia market. In addition, we recently announced our participation in a joint venture in Russia, where frozen potato product volumes have grown at a high compounded rate in recent years.

We believe we have strong, long-standing and collaborative customer relationships.

We believe we benefit from strong relationships with a diverse set of customers. We sell our products across a variety of food channels, and have deep and long-tenured relationships with leading quick service and fast casual restaurants, global foodservice distributors and large grocery retailers. We believe we have developed customer intimacy with our key accounts over time through a focus on world-class customer service and customer-focused innovation. We have also made investments in developing cutting-edge research and innovation capabilities that enable customer-focused solutions. We recently opened what we believe to be a state-of-the-art global research and innovation center in Richland, Washington to enhance these efforts.

We believe our integrated value delivery system provides scale and cost advantages.

Over our 50-year history as a potato processor, we have built an integrated value delivery system that we believe provides us scale and cost advantages. First, we have positioned Lamb Weston to have access to high-quality potatoes on an annual basis. We have built long-term relationships with potato growers, developed deep agronomic expertise and, to a modest extent, vertically integrated our operations. Second, we have developed highly-efficient processing capabilities. Our potato processing facilities are located in regions that together account for approximately 90% of global potato production. This sourcing and production footprint provides access to cost-advantaged potatoes and an export-cost advantage to key international markets. In addition, we have continued to invest in our facilities. From fiscal 2014 to 2016, we completed significant strategic capital investments for capacity expansion that we believe position Lamb Weston to capture both North American and international growth opportunities.

Our experienced management team has a proven track record of consistently delivering strong free cash flow conversion.

We believe we have a deep bench of talented management, and have developed an organizational culture that values and has delivered a continuous improvement mindset. As a result, we have a successful track record

 



 

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of delivering top-line growth and attractive margins. In fiscal years 2016, 2015 and 2014, we delivered net sales, net income attributable to Lamb Weston and Adjusted EBITDA as follows:

 

($ in millions)

   Net Sales      Net Income
Attributable to Lamb
Weston
     Adjusted EBITDA  

2016

   $ 2,993.8       $ 285.3       $ 593.4   

2015

   $ 2,925.0       $ 268.3       $ 526.1   

2014

   $ 2,815.2       $ 260.9       $ 502.5   

Our management team expects to continue to deliver topline growth and pursue margin expansion through cost reduction initiatives and productivity improvements. Upon our separation from ConAgra, we believe we will be able to generate attractive long-term stockholder value by utilizing cash flow generation to support our growth initiatives, reduce indebtedness, and return capital to stockholders.

Key Business Strategies

We are pursuing the following strategies to achieve sustainable, profitable growth:

Expand our market-leading position in value-added frozen potato products in North America.

We are focused on expanding and enhancing our relationships with our diverse North American customer base, in the restaurant, distributor/operator and retail channels. We intend to continue our focus on customer intimacy through research, innovation and service initiatives. We also expect to continue to invest in our advantaged sourcing, production and supply chain footprint.

Further optimize our global footprint and capabilities to capture emerging-market growth.

To capture the meaningful opportunities in the frozen potato category abroad, we plan to continue to invest in our growing export business. We also expect to augment our domestic sourcing and processing capacity in targeted international markets through a disciplined approach of acquisitions, joint ventures, and alliances. We also intend to enhance our international customer relationships through the continued development of value-added, market-appropriate solutions and products.

Domestically and abroad, drive growth through our customer partnerships.

We anticipate building on our 50-year history of partnerships with customers to support their North American and international growth plans. Customer-focused innovation will help us to develop new forms of premium, value-added potato products, expand menu offerings and occasions, and enhance preparation processes, taste and quality. We also expect to continue to distinguish Lamb Weston from the competition with superior end-to-end customer service.

Relentlessly pursue effectiveness and efficiency along our integrated value delivery system.

We expect to enhance the quality and yield of our potato inputs, and optimize our overall input costs, by maintaining an advantaged sourcing strategy and manufacturing footprint, and continuously improving our manufacturing efficiency. We will continue to optimize total delivered costs utilizing our global supply chain network.

Create value for stockholders through growth and balanced capital allocation.

Following the spinoff, we believe that our growth profile and strong free cash flow generation will enable us to deliver attractive long-term stockholder value and pursue a balanced approach to capital allocation. We intend

 



 

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to drive growth while also strengthening our balance sheet through debt reduction and returning capital to stockholders.

Other Information

Although the history of the Lamb Weston brand dates to 1950, Lamb Weston Holdings, Inc. was incorporated as a Delaware corporation on July 5, 2016 as a wholly owned subsidiary of ConAgra. On November 18, 2015, ConAgra announced its plans to separate into two public companies, Lamb Weston and Conagra Brands. The transaction is expected to be structured as a spinoff of the Lamb Weston business to the stockholders of ConAgra and to be tax-free to ConAgra and its stockholders for U.S. federal income tax purposes, except to the extent of any cash received in lieu of fractional shares. Upon conclusion of the spinoff, our principal executive offices will be located at 599 S. Rivershore Lane, Eagle, Idaho 83616. Our telephone number is (208) 938-1047. Our Web site address is lambweston.com. Information contained on, or connected to, our Web site or ConAgra’s Web site does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is a part.

Summary of the Spinoff

The following is a brief summary of the terms of the spinoff. Please see “The Spinoff” for a more detailed description of the matters described below.

 

Distributing company

ConAgra, which is the parent company of Lamb Weston. After the distribution, ConAgra will not retain any shares of Lamb Weston’s common stock.

 

Distributed company

Lamb Weston, which is currently a wholly owned subsidiary of ConAgra. After the distribution, Lamb Weston will be an independent, publicly traded company.

 

Shares to be distributed

Approximately 146.0 million shares of Lamb Weston common stock. Our common stock to be distributed will constitute all of our outstanding common stock immediately after the spinoff.

 

Distribution ratio

Each holder of ConAgra common stock will receive one share of Lamb Weston common stock for every three shares of ConAgra common stock owned by such holder on the record date.

 

Fractional shares

The transfer agent identified below will aggregate fractional shares into whole shares and sell them on behalf of stockholders in the open market, when, how and through which broker-dealers as determined in its sole discretion without any influence by ConAgra or us, at prevailing market prices and distribute the proceeds pro rata to each ConAgra stockholder who would otherwise have been entitled to receive a fractional share in the spinoff. You will not be entitled to any interest on the amount of payment made to you in lieu of a fractional share. The transfer agent is not an affiliate of ConAgra or us. See “The Spinoff—Treatment of Fractional Shares.”

 

Distribution procedures

On or about the distribution date, the distribution agent identified below will distribute our common stock by crediting those shares to

 



 

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book-entry accounts established by the transfer agent for persons who were stockholders of ConAgra as of 5:00 p.m., New York City time, on the record date. You will not be required to make any payment or surrender or exchange your ConAgra common stock or take any other action to receive our common stock. However, as discussed below, if you sell ConAgra common stock in the “regular way” market between the record date and the distribution date, you will be selling your right to receive the associated Lamb Weston common stock in the distribution. Registered stockholders will receive additional information from the transfer agent shortly after the distribution date. Beneficial stockholders will receive information from their brokerage firms.

 

Distribution agent, transfer agent and registrar for our common stock

Wells Fargo Shareowner Services.

 

Record date

5:00 p.m., New York City time, on November 1, 2016.

 

Distribution date

November 9, 2016

 

Trading before or on the distribution date

It is anticipated that, beginning shortly before the record date, ConAgra common stock will trade in two markets on the NYSE, a “regular way” market and an “ex-distribution” market. Investors will be able to purchase ConAgra common stock without the right to receive shares of Lamb Weston common stock in the ex-distribution market for ConAgra common stock. Any holder of ConAgra common stock who sells ConAgra common stock in the “regular way” market on or before the distribution date will be selling the right to receive shares of Lamb Weston common stock in the spinoff. You are encouraged to consult with your financial advisor regarding the specific implications of selling ConAgra common stock before or on the distribution date.

 

Assets and liabilities transferred to the distributed company

Before the distribution date, we and ConAgra will enter into a separation and distribution agreement that will contain key provisions relating to the separation of our business from ConAgra, the transfer of our business to Lamb Weston and the distribution of our common stock. The separation and distribution agreement will identify the assets to be transferred, liabilities to be assumed and contracts to be assigned to us by ConAgra in the spinoff and describe when and how these transfers, assumptions and assignments will occur. See “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Separation and Distribution Agreement.”

 

Relationship with ConAgra after the spinoff

Before the distribution date, we and ConAgra will enter into several agreements to govern our relationship following the distribution, including a tax matters agreement, an employee matters agreement, a

 



 

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transition services agreement and other agreements governing ongoing commercial relationships, such as intellectual property arrangements. See “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us.”

 

Indemnities

The separation and distribution agreement to be entered into in connection with the spinoff will provide for cross-indemnification between ConAgra and us. Please see “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Separation and Distribution Agreement.” In addition, we will indemnify ConAgra under the tax matters agreement that we will enter into in connection with the spinoff for certain tax matters, including for actions taken by us that cause the spinoff to become taxable to ConAgra. Please see “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff” and “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Tax Matters Agreement.”

 

Material U.S. federal income tax consequences

A condition to the closing of this spinoff is ConAgra’s receipt of an opinion of counsel to the effect that the distribution of all of the shares of Lamb Weston common stock owned by ConAgra to the stockholders of ConAgra will qualify under the Internal Revenue Code of 1986, as amended, which we refer to as the Code, as a transaction that is tax-free to ConAgra and to its stockholders, except with respect to any cash received in lieu of fractional shares. You should review the section entitled “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff” for a discussion of the material U.S. federal income tax consequences of the spinoff.

 

Conditions to the spinoff

We expect that the spinoff will be completed on November 9, 2016, provided that the ConAgra board of directors, in its sole and absolute discretion, has determined that the conditions set forth under the caption “The Spinoff—Spinoff Conditions and Termination” have been satisfied.

 

Reasons for the spinoff

ConAgra’s board of directors and management believe that our separation from ConAgra will provide the following benefits: (i) enhanced management focus given the distinctiveness of our business from that of ConAgra’s branded food business; (ii) increased flexibility, agility and resources to capitalize on our long-term opportunities and growth strategies, which are different than those of ConAgra’s branded food business; (iii) a tailored capital structure and financial policy appropriate for our unique business profile; and (iv) the ability for investors to value the two companies based on their particular operational and financial characteristics and invest accordingly. For more information, see “The Spinoff—Reasons for the Spinoff.”

 

Stock exchange listing

Currently there is no public market for our common stock. We have applied for listing of our common stock on the NYSE under the

 



 

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symbol “LW.” We anticipate that trading will commence on a “when-issued” basis approximately two trading days before the record date. When-issued trading refers to a transaction made conditionally because the security has been authorized but not yet issued. Generally, common shares may trade on the NYSE on a when-issued basis after they have been authorized but not yet formally issued, which is often initiated by the NYSE prior to the record date relating to the issuance of such common shares. When-issued transactions are settled after our shares of common stock have been issued to ConAgra stockholders. On the first trading day following the distribution date, when-issued trading in respect of our common stock will end and regular way trading will begin. “Regular way” trading refers to trading after a security has been issued. We cannot predict the trading price for our shares of common stock following the spinoff. In addition, following the spinoff, ConAgra common stock will remain outstanding and will continue to trade on the NYSE under the symbol “CAG.”

 

Dividend policy

We expect to pay dividends on our common stock at the discretion of our board of directors and dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Risk factors

You should review the risks relating to the spinoff, our industry and our business, and ownership of our common stock described in “Risk Factors.”

 



 

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QUESTIONS AND ANSWERS ABOUT THE SPINOFF

 

Q: What is the spinoff?

 

A: The spinoff is the method by which Lamb Weston will separate from ConAgra. To complete the spinoff, ConAgra will distribute as a dividend to its stockholders all of the shares of Lamb Weston common stock that it owns. Following the spinoff, we will be an independent, publicly traded company, and ConAgra will not retain any ownership interest in us. You do not have to pay any consideration or give up any portion of your ConAgra common stock to receive our common stock in the spinoff.

 

Q: What is the expected date for the completion of the spinoff?

 

A: The completion and timing of the spinoff are dependent on a number of conditions, but if the conditions are timely met, we expect the spinoff to be completed on November 9, 2016. See “The Spinoff—Spinoff Conditions and Termination.”

 

Q: What are the reasons for and benefits of separating from ConAgra?

 

A: ConAgra’s board of directors and management believe that our separation from ConAgra will provide the following benefits: (i) enhanced management focus given the distinctiveness of our business from that of ConAgra’s branded food business; (ii) increased flexibility, agility and resources to capitalize on our long-term opportunities and growth strategies, which are different than those of ConAgra’s branded food business; (iii) a tailored capital structure and financial policy appropriate for our unique business profile; and (iv) the ability for investors to value the two companies based on their particular operational and financial characteristics and invest accordingly. For more information, see “The Spinoff—Reasons for the Spinoff.”

Based on our audited combined financial statements included elsewhere in this information statement: for the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014, Lamb Weston’s net sales as a percent of ConAgra’s total net sales was 25.7%, 24.5% and 23.8%, respectively; total assets attributable to Lamb Weston as a percent of ConAgra’s total assets was 16.1% and 11.8% as of May 29, 2016 and May 31, 2015, respectively; and total liabilities attributable to Lamb Weston as a percent of ConAgra’s total liabilities was 7.9% and 5.4% as of May 29, 2016 and May 31, 2015, respectively. See “The Spinoff—Reasons for the Spinoff.”

 

Q: What is the Company?

 

A: The Company is a Delaware corporation that was formed on July 5, 2016 for the purpose of holding the Lamb Weston businesses following the spinoff. Prior to the transfer by ConAgra to us of these businesses, which will occur in connection with the spinoff, we will have had no operations other than those incidental to our formation or undertaken in preparation for the spinoff.

 

Q: Who will manage Lamb Weston after the separation?

 

A: We will benefit from an experienced leadership team after the separation. Mr. Timothy R. McLevish, a current independent director of ConAgra, proven consumer packaged goods leader and experienced professional with deep expertise in working with public markets, will serve as Executive Chairman of our board of directors. Mr. Thomas P. Werner, a 15+ year veteran of ConAgra and its current President, Commercial Foods, overseeing the Lamb Weston business, will be our President and Chief Executive Officer. He will also serve as a director. Mr. John F. Gehring, the former Executive Vice President and Chief Financial Officer of ConAgra, who has over 30 years of accounting and finance experience, will be our Vice President and interim Chief Financial Officer. Mr. Eryk J. Spytek, who has extensive experience counseling public company boards and management teams, has joined us from Winston & Strawn LLP and will serve as our General Counsel and Corporate Secretary. Ms. Micheline C. Carter, who has strong experience in the consumer packaged goods industry, has joined us from The Kraft Heinz Company and will serve as our Chief Human Resources Officer. The balance of our management team is expected to be comprised of a mix of leaders, individuals both with deep Lamb Weston experience and new to the organization. We will also benefit from the knowledge, experience and skills of our full board of directors. For more information regarding Mr. McLevish, Mr. Werner, Mr. Gehring, Mr. Spytek, Ms. Carter and the balance of our management team and our board of directors following the separation, see “Management.”

 

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Q: What is being distributed in the spinoff?

 

A: ConAgra will distribute one share of Lamb Weston common stock for every three shares of ConAgra common stock outstanding as of the record date for the spinoff. The number of ConAgra shares you own and your proportionate interest in ConAgra will not change as a result of the spinoff. Immediately following the spinoff, your proportionate interest in Lamb Weston will be identical to your proportionate interest in ConAgra (as adjusted for any fractional shares).

 

Q: What is the record date for the spinoff, and when will the spinoff occur?

 

A: The record date is November 1, 2016, and ownership is determined as of 5:00 p.m., New York City time, on that date. Lamb Weston common stock will be distributed on November 9, 2016, which we refer to as the distribution date.

 

Q: Can ConAgra decide to cancel the spinoff even if all the conditions have been met?

 

A: Yes. The spinoff is subject to the satisfaction or waiver by ConAgra, at the direction of its board of directors, of certain conditions, including, among others, approval of the ConAgra board of directors, declaration of the effectiveness of our registration statement on Form 10 of which this information statement is a part, and receipt of an opinion from our tax counsel to the effect that the distribution of all of the shares of Lamb Weston common stock owned by ConAgra to the stockholders of ConAgra will qualify under the Code as a transaction that is tax-free to ConAgra and to its stockholders, except with respect to any cash received in lieu of fractional shares. See “The Spinoff—Spinoff Conditions and Termination.” Even if all the conditions are met, ConAgra has the right not to complete the spinoff if, at any time prior to the distribution, the board of directors of ConAgra determines, in its sole and absolute discretion, that the spinoff is not in the best interests of ConAgra or its stockholders, that a sale or other alternative is in the best interests of ConAgra or its stockholders, or that market conditions or other circumstances are such that it is not advisable to separate the Lamb Weston business from ConAgra at that time. In the event ConAgra, at the direction of its board of directors, waives a material condition or amends, modifies or abandons the spinoff, ConAgra will notify its stockholders in a manner reasonably calculated to inform them of such modifications with a press release, Current Report on Form 8-K or other similar means.

 

Q: As a holder of ConAgra common stock as of the record date, what do I have to do to participate in the spinoff?

 

A: You are not required to take any action to participate in the spinoff, although you are urged to read this entire document carefully. You will receive one share of Lamb Weston common stock for every three shares of ConAgra common stock held as of the record date and retained through the distribution date. You may also participate in the spinoff if you purchase ConAgra common stock in the “regular way” market after the record date and retain your ConAgra common stock through the distribution date. See “The Spinoff—Trading of ConAgra Common Stock After the Record Date and Prior to the Distribution.”

 

Q: If I sell my shares of ConAgra common stock before or on the distribution date, will I still be entitled to receive shares of Lamb Weston common stock in the spinoff?

 

A: If you own shares of ConAgra common stock on the record date and hold such shares through the distribution date, you will receive shares of Lamb Weston common stock. However, if you sell your shares of ConAgra common stock after the record date and before or on the distribution date, you may also be selling your right to receive shares of Lamb Weston common stock. See “The Spinoff—Trading of ConAgra Common Stock After the Record Date and Prior to the Distribution.” You are encouraged to consult with your financial advisor regarding the specific implications of selling your ConAgra common stock before or on the distribution date.

 

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Q: How will fractional shares be treated in the spinoff?

 

A: Any fractional shares of common stock otherwise issuable to you will be sold on your behalf, and you will receive a cash payment with respect to that fractional share. For an explanation of how the cash payments for fractional shares will be determined, see “The Spinoff—Treatment of Fractional Shares.”

 

Q: Will the spinoff affect the trading price of my ConAgra common stock?

 

A: Yes, the trading price of ConAgra common stock immediately following the spinoff is expected to be lower than immediately prior to the spinoff because the trading price of ConAgra’s common stock will no longer reflect the value of the combined businesses. However, we cannot provide you with any guarantees as to the prices at which the ConAgra common stock or Lamb Weston common stock will trade following the spinoff.

 

Q: Will my ConAgra common stock continue to trade on a stock market?

 

A: Yes, ConAgra common stock will continue to be listed on the NYSE under the symbol “CAG.”

 

Q: What are the U.S. federal income tax consequences to me of the distribution of shares of Lamb Weston common stock pursuant to the spinoff?

 

A: The spinoff is conditioned upon the receipt by ConAgra of an opinion of counsel to the effect that the distribution of all of the shares of Lamb Weston common stock owned by ConAgra to the stockholders of ConAgra will qualify under the Code as a transaction that is tax-free to ConAgra and to its stockholders, except with respect to any cash received in lieu of fractional shares. On the basis that the distribution so qualifies, for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income in connection with the distribution, except with respect to any cash received in lieu of fractional shares. See “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff.”

 

Q: When will I receive my shares of Lamb Weston common stock? Will I receive a stock certificate for my shares of Lamb Weston common stock distributed as a result of the spinoff?

 

A: Registered holders of ConAgra common stock who are entitled to participate in the spinoff will receive a book-entry account statement reflecting their ownership of Lamb Weston common stock. For additional information, registered stockholders in the United States, Canada or Puerto Rico should contact ConAgra’s transfer agent, Wells Fargo Shareowner Services, at 800-214-0349 or through its website at www.shareowneronline.com. Stockholders located outside the United States, Canada and Puerto Rico may call 651-450-4064. If you would like to receive physical certificates evidencing your shares of Lamb Weston common stock, please contact Lamb Weston’s transfer agent. See “The Spinoff—When and How You Will Receive Lamb Weston Shares.”

 

Q: What if I hold my shares of common stock through a broker, bank or other nominee?

 

A: ConAgra stockholders who hold their shares of common stock through a broker, bank or other nominee will have their brokerage account credited with shares of Lamb Weston common stock. For additional information, those stockholders should contact their broker or bank directly.

 

Q: What if I have stock certificates reflecting my shares of ConAgra common stock? Should I send them to the transfer agent or to ConAgra?

 

A: No, you should not send your stock certificates to the transfer agent or to ConAgra. You should retain your ConAgra stock certificates.

 

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Q: Will Lamb Weston incur any debt prior to or at the time of the spinoff?

 

A: As part of the spinoff, we expect to incur approximately $2.38 billion of new debt, which we expect to consist of $675.0 million aggregate principal amount of borrowings under a senior secured term loan facility, approximately $1.67 billion in aggregate principal amount of senior notes and approximately $38.5 million of borrowings under a $500.0 million revolving credit facility. See “Description of Certain Indebtedness.”

We expect that $1.54 billion aggregate principal amount of our senior notes will be issued to ConAgra in connection with the spinoff, and we expect to issue $125 million aggregate principal amount of senior notes for our own account. It is anticipated that, in advance of the spinoff, certain investment banks will purchase certain of ConAgra’s senior notes in the open market and that, following such purchase, ConAgra will enter into a debt exchange agreement pursuant to which such investment banks will agree to exchange all of the ConAgra senior notes purchased for our senior notes issued to ConAgra at a specified exchange ratio, which transaction we refer to as the debt-for-debt exchange. The terms of the debt exchange agreement would be determined in negotiations among ConAgra and the investment banks; however, there can be no assurance that the debt exchange agreement will be entered into or that the debt-for-debt exchange will occur.

 

Q: Are there risks to owning common stock of Lamb Weston?

 

A: Yes. Lamb Weston’s business is subject both to general and specific business risks relating to its operations. In addition, the spinoff presents risks relating to Lamb Weston being an independent, publicly traded company. See “Risk Factors.”

 

Q: Does Lamb Weston intend to pay cash dividends?

 

A: We expect to pay dividends on our common stock at the discretion of our board of directors and dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Q: Will Lamb Weston common stock trade on a stock market?

 

A: Yes. Currently, there is no public market for our common stock. We have applied to list our common stock on the NYSE under the symbol “LW.” We cannot predict the trading price for our common stock when such trading begins.

 

Q: What will happen to ConAgra stock options, restricted stock units and performance shares?

 

A:

In general, except as otherwise described in “Compensation Discussion and Analysis—Treatment of Outstanding ConAgra Equity Compensation in the Spinoff” with respect to Mr. Gehring’s outstanding ConAgra equity awards, it is currently anticipated that each outstanding ConAgra equity award held by a Lamb Weston employee or Lamb Weston director as of the spinoff will be adjusted or converted into an award with respect to Lamb Weston common stock and each other ConAgra equity award will also be adjusted or converted but will continue to relate to ConAgra common stock. In each case, the award will be equitably adjusted or converted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra equity award and, other than certain performance share awards, which are described in more detail below, the terms of the equity awards, such as vesting dates, will generally remain substantially the same. Outstanding ConAgra performance share awards for the fiscal 2015 to 2017 cycle, other than those intended to be “qualified performance-based compensation” under Section 162(m) of the Code, are expected to be adjusted or converted to vest solely based on their original service-based vesting criteria, with the number of shares subject to the award adjusted in a manner intended to preserve the aggregate intrinsic value of the

 

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  original award based on performance through the end of the last fiscal period ending prior to the distribution date. Outstanding ConAgra performance share awards for the fiscal 2015 to 2017 cycle intended to be “qualified performance-based compensation” under Section 162(m) of the Code are expected to remain subject to the achievement of the threshold earnings per share performance goal and negative discretion intended to result in payout levels comparable to those achieved for all other fiscal 2015 to 2017 performance share awards (in addition to their original service-based vesting criteria), with the number of shares subject to the awards adjusted in a manner intended to preserve the aggregate intrinsic value of the original awards. The number of shares subject to all other ConAgra performance share awards are expected to be equitably adjusted or converted in a manner intended to preserve the aggregate intrinsic value of the original award, with such awards intended to be “qualified performance-based compensation” under Section 162(m) of the Code remaining subject to the earnings per share performance goals associated with the original ConAgra award, and such awards not intended to be “qualified performance-based compensation” under Section 162(m) of the Code remaining subject to their applicable performance goals. For further information regarding the treatment of equity awards in the spinoff, see “The Spinoff—Stock-Based Plans.”

 

Q: What will the relationship between ConAgra and Lamb Weston be following the spinoff?

 

A: In connection with the spinoff, we and ConAgra will enter into a number of agreements that will govern our future relationship. As a result of these agreements, among other things, following the spinoff: (i) we and ConAgra will indemnify the other’s past and present directors, officers and employees, and each of their successors and assigns, against certain liabilities incurred in connection with the spinoff and our and ConAgra’s respective businesses; (ii) we and ConAgra will provide and/or make available various administrative services and assets to each other; and (iii) we and ConAgra will enter into several agreements to govern our relationship following the distribution, including a tax matters agreement, an employee matters agreement, a transition services agreement and other agreements governing ongoing commercial relationships, such as intellectual property arrangements. See “Relationship with ConAgra After the Spinoff—Agreements between ConAgra and Us.”

 

Q: Will I have appraisal rights in connection with the spinoff?

 

A: No. Holders of ConAgra common stock are not entitled to appraisal rights in connection with the spinoff.

 

Q: Who is the transfer agent for your shares of common stock?

 

A: Wells Fargo Shareowner Services.

 

Q: Who is the distribution agent for the spinoff?

 

A: Wells Fargo Shareowner Services.

 

Q: Whom can I contact for more information?

 

A: If you have questions relating to the mechanics of the distribution of Lamb Weston common stock, you should contact the distribution agent:

By Mail to:

Wells Fargo Shareowner Services

Corporate Actions Department

P.O. Box 64858

St. Paul, MN 55164-0858

 

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By Overnight Courier or Hand-Delivery to:

Wells Fargo Shareowner Services

1110 Centre Pointe Curve, Suite 101

Mendota Heights, MN 55120

Telephone: (800) 214-0349

Outside the United States, Canada and Puerto Rico: (651) 450-4064

Before the spinoff, if you have questions relating to the spinoff, you should contact ConAgra at:

ConAgra Foods, Inc.

222 W. Merchandise Mart Plaza, Suite 1300

Chicago, IL 60654

Attention: Corporate Secretary / ConAgra Food Shareholder Services

Telephone: (800) 214-0349

After the spinoff, if you have questions relating to Lamb Weston, you should contact Lamb Weston at:

Lamb Weston Holdings, Inc.

599 S. Rivershore Lane

Eagle, ID 83616

Attention: Corporate Secretary

Telephone: (208) 938-1047

 

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RISK FACTORS

The following are certain risk factors that could affect our business, financial condition and results of operations. The risks that are highlighted below are not the only ones that we face. You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of these risks relate principally to our spinoff from ConAgra, while others relate principally to our business and the industry in which we operate or to the securities markets generally and ownership of our common stock. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.

Risks Relating to the Spinoff

We may not realize the potential benefits from the spinoff.

We may not realize the potential benefits that we expect from our spinoff from ConAgra. We have described those anticipated benefits elsewhere in this information statement. See “The Spinoff—Reasons for the Spinoff.” In addition, as described below, we will likely incur additional costs related to our separation from ConAgra. We expect to incur one-time transaction and related costs of approximately $5 million to $10 million related to the spinoff after it is completed (ConAgra is expected to bear approximately $75 million to $80 million of estimated one-time transaction and related costs to effectuate the spinoff, as mentioned elsewhere in this information statement). We also expect to incur additional ongoing costs related to operating as an independent public company and replacing the services previously provided by ConAgra. We currently estimate those additional costs will range from approximately $15 million to $25 million in excess of our fiscal 2016 reported selling, general and administrative expenses, excluding items impacting comparability. Our estimate of ongoing costs takes into consideration the benefit that we will receive from the elimination of cost allocations from ConAgra after the spinoff is completed.

We have no history operating as an independent public company. We will incur additional expenses to create the corporate infrastructure necessary to operate as an independent public company and we will experience increased ongoing costs in connection with being an independent public company.

Our business has historically used ConAgra’s corporate infrastructure and services to support our business functions. The expenses related to establishing and maintaining this infrastructure have been spread across all of ConAgra’s businesses and charged to us on a cost-allocation basis. Except as described under the caption “Relationship with ConAgra After the Spinoff,” after the distribution date we will no longer have access to ConAgra’s infrastructure or services, and we will need to establish our own. The services historically provided to us by ConAgra have included treasury and cash management, procurement, information technology, general accounting and finance, payroll and human resources, legal and communications, real estate and facilities, and other general and administrative stewardship. Following the spinoff, ConAgra will continue to provide some of these services to us on a transitional basis pursuant to a transition services agreement. For more information regarding the transition services agreement, see “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Transition Services Agreement.” However, we cannot assure you that all these functions will be successfully executed by ConAgra during the transition period or that we will not have to expend significant efforts or costs materially in excess of those estimated in the transition services agreement. Any interruption in these services could have a material adverse effect on our financial condition, results of operation and cash flows. In addition, at the end of this transition period, we will need to perform these functions ourselves or hire third parties to perform these functions on our behalf.

It is currently estimated that the additional ongoing costs to be incurred after the spinoff related to operating as an independent public company and replacing the services previously provided by ConAgra will range from approximately $15 million to $25 million in excess of fiscal 2016 reported selling, general and administrative expenses, excluding items impacting comparability. Our estimate takes into consideration the benefit that we will receive from the elimination of cost allocations from ConAgra after the spinoff is completed. The costs associated with performing or outsourcing these functions may exceed these amounts. A significant increase in the costs of performing or outsourcing these functions could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

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Our historical combined and pro forma financial information are not necessarily indicative of our future financial condition, results of operations or cash flows nor do they reflect what our financial condition, results of operations or cash flows would have been as an independent public company during the periods presented.

The historical combined financial information we have included in this information statement does not reflect what our financial condition, results of operations or cash flows would have been as an independent public company during the periods presented and is not necessarily indicative of our future financial condition, future results of operations or future cash flows. This is primarily a result of the following factors:

 

    our historical combined financial results reflect allocations of expenses for services historically provided by ConAgra, and may not fully reflect the increased costs associated with being an independent public company, including significant changes that will occur in our cost structure, management, financing arrangements and business operations as a result of our spinoff from ConAgra;

 

    our working capital requirements and capital expenditures historically have been satisfied as part of ConAgra’s corporate-wide capital access, capital allocation and cash management programs; our debt structure and cost of debt and other capital may be significantly different from that reflected in our historical combined financial statements; and

 

    the historical combined financial information may not fully reflect the effects of certain liabilities that will be incurred or assumed by us and may not fully reflect the effects of certain assets that will be transferred to, and liabilities that will be assumed by, ConAgra.

The pro forma adjustments are based on available information and assumptions that we believe are reasonable; however, our assumptions may prove not to be accurate. In addition, our unaudited pro forma combined financial information may not give effect to various ongoing additional costs that we may incur in connection with being an independent public company. Accordingly, our unaudited pro forma combined financial information does not reflect what our financial condition, results of operations or cash flows would have been as an independent public company and are not necessarily indicative of our future financial condition, future results of operations or future cash flows. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Combined Financial Data” and our combined financial statements and corresponding notes included elsewhere in this information statement.

If the spinoff, together with certain related transactions, does not qualify as a transaction that is tax-free for U.S. federal income tax purposes, ConAgra and holders of ConAgra common stock could be subject to significant tax liability.

As described under “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff,” it is intended that the spinoff, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code. The consummation of the spinoff and the related transactions is conditioned upon the receipt of an opinion of tax counsel to the effect that such transactions will qualify for their intended tax treatment. An opinion of tax counsel does not preclude the Internal Revenue Service, or IRS, or the courts from adopting a contrary position. The tax opinion will rely on certain representations, covenants and assumptions, including those relating to our and ConAgra’s past and future conduct; if any of those representations, covenants or assumptions is inaccurate, tax counsel may not be able to provide the required tax opinion or the tax consequences of the spinoff could differ from the intended tax treatment. If the spinoff and/or certain related transactions fail to qualify for tax-free treatment, for any reason, ConAgra and/or holders of ConAgra common stock would be subject to tax as a result of the spinoff and certain related transactions. See “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff.”

 

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If the spinoff is taxable to ConAgra as a result of a breach by us of any covenant or representation made by us in the tax matters agreement, we will generally be required to indemnify ConAgra; the obligation to make a payment on this indemnification obligation could have a material adverse effect on us.

As described above, it is intended that the spinoff, together with certain related transactions, will qualify as tax-free transactions to ConAgra and to holders of ConAgra common stock, except with respect to any cash received in lieu of fractional shares. If the spinoff and/or the related transactions are not so treated or are taxable to ConAgra (see “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff—The Spinoff”) due to a breach by us (or any of our subsidiaries) of any covenant or representation made by us in the tax matters agreement, we will generally be required to indemnify ConAgra for all tax-related losses suffered by ConAgra in connection with the spinoff. In addition, we will not control the resolution of any tax contest relating to taxes suffered by ConAgra in connection with the spinoff, and we may not control the resolution of tax contests relating to any other taxes for which we may ultimately have an indemnity obligation under the tax matters agreement. In the event that ConAgra suffers tax-related losses in connection with the spinoff that must be indemnified by us under the tax matters agreement, the indemnification liability could have a material adverse effect on us.

We may be affected by significant restrictions following the spinoff imposed on us under the tax matters agreement.

The tax matters agreement generally will prohibit us from taking certain actions that could cause the spinoff and certain related transactions to fail to qualify as tax-free transactions, including:

 

    during the two-year period following the distribution date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

 

    during the two-year period following the distribution date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

 

    during the two-year period following the distribution date, we may not sell or otherwise issue our common stock, other than pursuant to issuances that satisfy certain regulatory safe harbors set forth in Treasury regulations related to stock issued to employees and retirement plans;

 

    during the two-year period following the distribution date, we may not redeem or otherwise acquire any of our common stock, other than pursuant to certain open-market repurchases of less than 20% of our common stock (in the aggregate);

 

    during the two-year period following the distribution date, we may not amend our certificate of incorporation (or other organizational documents) or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of our common stock; and

 

    more generally, we may not take any action that could reasonably be expected to cause the spinoff and certain related transactions to fail to qualify as tax-free transactions under Section 368(a)(1)(D) and Section 355 of the Code.

If we take any of the actions above and such actions result in tax-related losses to ConAgra, we generally will be required to indemnify ConAgra for such tax-related losses under the tax matters agreement. See “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Tax Matters Agreement.” Due to these restrictions and indemnification obligations under the tax matters agreement, we may be limited in our ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in our best interests. Also, our potential indemnity obligation to ConAgra might discourage, delay or prevent a change of control that our stockholders may consider favorable.

 

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We will be subject to continuing contingent liabilities following the spinoff, including potential indemnification liabilities to ConAgra, and these liabilities could materially and adversely affect our business, financial condition, results of operations and cash flows.

We will enter into a separation and distribution agreement with ConAgra that will provide for, among other things, the principal corporate transactions required to effect the spinoff, certain conditions to the spinoff and provisions governing the relationship between our company and ConAgra with respect to and resulting from the spinoff. For a description of the separation and distribution agreement, see “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Separation and Distribution Agreement.” Among other things, the separation and distribution agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to the Lamb Weston business, whether incurred prior to or after the spinoff, and whether known or unknown at the time of the spinoff, as well as those obligations of ConAgra assumed by us pursuant to the separation and distribution agreement. If we are required to indemnify ConAgra under the circumstances set forth in the separation and distribution agreement, or meaningful unknown liabilities surface, we may be subject to substantial liabilities.

In addition, under the Code and applicable Treasury regulations, each corporation that was a member of the ConAgra consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the completion of the spinoff is jointly and severally liable for the federal income tax liability of the entire ConAgra consolidated tax reporting group for that taxable period. Similar rules may apply for state, local and non-U.S. tax purposes. In connection with the spinoff, we will enter into a tax matters agreement with ConAgra that will allocate the responsibility for prior period taxes of any ConAgra consolidated, combined, unitary or other tax reporting group between us and ConAgra. See “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Tax Matters Agreement.” However, if ConAgra is unable to pay any prior period taxes for which it is responsible under the tax matters agreement, we could be required to pay the entire amount of such taxes.

In connection with our separation from ConAgra, ConAgra will indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that ConAgra’s ability to satisfy its indemnification obligations will not be impaired in the future.

Pursuant to the separation and distribution agreement, ConAgra will agree to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that ConAgra has agreed to retain, and there can be no assurance that the indemnity from ConAgra will be sufficient to protect us against the full amount of such liabilities, or that ConAgra will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from ConAgra any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. If ConAgra is unable to satisfy its indemnification obligations, the underlying liabilities could have a material adverse effect on our business, financial condition, results of operations and cash flows.

After the spinoff, ConAgra’s insurers may deny coverage to us for liabilities associated with occurrences prior to the spinoff. Even if we ultimately succeed in recovering from such insurance providers, we may be required to temporarily bear such loss of coverage.

The terms of the distribution and the agreements we will enter into with ConAgra in connection with the spinoff were determined solely by ConAgra.

The agreements that we will enter into with ConAgra in connection with the spinoff— including a separation and distribution agreement, a tax matters agreement, an employee matters agreement, a transition services agreement and certain other agreements governing ongoing commercial relationships—were prepared in the context of the separation while our business was still operated by and part of ConAgra, and the terms were determined by ConAgra as our sole stockholder. Because these agreements were negotiated in the context of a

 

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parent-subsidiary relationship prior to the spinoff where actual or perceived conflicts of interest may have been present, the terms of these agreements may be more or less favorable to us than those that would have resulted from arm’s-length negotiations between unaffiliated third parties. See “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us.”

Our accounting, enterprise resource planning and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the spinoff. If we are unable to achieve and maintain effective internal controls, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Our financial results are currently included within the consolidated results of ConAgra, and we believe that our reporting and control systems are appropriate for a subsidiary of a public company. However, until the spinoff, we will not have been directly subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. As a result of the spinoff, we will be directly subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. These reporting and other obligations will place significant demands on our management and administrative and operational resources, including our accounting resources. To comply with these requirements, we anticipate that we will need to upgrade our systems, including information technology and enterprise resource planning systems, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. If we are unable to upgrade our financial and management controls, reporting systems, information technology and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, financial condition, results of operations and cash flows.

ConAgra, at the direction of its board of directors, may abandon the spinoff at any time, and ConAgra, at the direction of its board of directors, may determine to amend or modify any and all terms of the spinoff and the related transactions at any time prior to the distribution date.

No assurance can be given that the spinoff will occur or, if it occurs, that it will occur on the terms described in this information statement. In addition to the conditions to the spinoff described herein (certain of which may be waived by ConAgra, at the direction of its board of directors in its sole discretion), ConAgra, at the direction of its board of directors, may abandon the spinoff at any time before the distribution date for any reason or for no reason. In addition, ConAgra, at the direction of its board of directors, may amend or modify any and all terms of the spinoff and the related transactions at any time prior to the distribution date. If any condition to the spinoff is waived or if any material amendments or modifications are made to the terms of the spinoff or to the ancillary agreements thereto before the distribution date, ConAgra will notify its stockholders in a manner reasonably calculated to inform them of such modifications with a press release, Current Report on Form 8-K or other similar means.

Risks Relating to Our Industry and Our Business

Our business is subject to various risks and uncertainties. Any of the risks and uncertainties described below could materially adversely affect our business, financial condition and results of operations and should be considered in evaluating us. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, performance, or financial condition in the future.

Increased competition may result in reduced sales or profits.

Our business, value-added frozen potato products, is highly competitive. Our principal competitors have substantial financial, sales and marketing, and other resources. A strong competitive response from one or more

 

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of our competitors to our marketplace efforts could result in us reducing pricing, increasing promotional activity or losing share. Competitive pressures also may restrict our ability to increase prices, including in response to commodity and other input cost increases or additional improvements in product quality. Our profits could decrease if a reduction in prices or increased costs are not counterbalanced with increased sales volume.

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations, including foreign currency risks and trade barriers.

We conduct a substantial and growing amount of business with customers located outside the United States and Canada, including through our joint ventures. A primary growth strategy for our business is increasing our international sales and operations. During fiscal 2016, fiscal 2015 and fiscal 2014, net sales outside the United States and Canada primarily in Japan, China, Korea, Mexico and Taiwan, accounted for approximately 21%, 20% and 21% of our net sales, respectively. These amounts do not include any impact of unconsolidated net sales associated with our joint ventures.

Many factors relating to our international sales and operations, many of which factors are outside of our control, could have a material adverse impact on our business, financial condition and results of operations. In addition, the following risks specifically related to our international sales and operations could adversely impact our business and results of operations:

 

    foreign exchange rates, foreign currency exchange and transfer restrictions, which may unpredictably and adversely impact our combined operating results, our asset and liability balances and our cash flow in our combined financial statements, even if their value has not changed in their original currency; our combined financial statements are presented in U.S. dollars and we must translate the assets, liabilities, revenue and expenses into U.S. dollars for external reporting purposes;

 

    negative economic developments in economies around the world and the instability of governments, including the threat of war, terrorist attacks, epidemic or civil unrest;

 

    pandemics, such as the flu, which may adversely affect our workforce as well as our local suppliers and customers;

 

    earthquakes, tsunamis, floods or other major disasters that may limit the supply of raw materials that are purchased abroad for use in our international operations or domestically;

 

    trade barriers, including tariffs, quotas, and import or export licensing requirements imposed by governments;

 

    increased costs, disruptions in shipping or reduced availability of freight transportation;

 

    differing labor standards;

 

    differing levels of protection of intellectual property;

 

    difficulties and costs associated with complying with U.S. laws and regulations applicable to entities with overseas operations, including the Foreign Corrupt Practices Act;

 

    the threat that our operations or property could be subject to nationalization and expropriation;

 

    varying regulatory, tax, judicial and administrative practices in the jurisdictions where we operate;

 

    difficulties associated with operating under a wide variety of complex foreign laws, treaties and regulations; and

 

    potentially burdensome taxation.

Any of these factors could have an adverse effect on our business, financial condition and results of operations.

 

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Disruption of our access to export mechanisms could have an adverse impact on our business, financial condition and results of operations.

To serve our customers globally, we rely in part on our international joint venture partnerships, but also on exports from the United States. During fiscal 2016, export sales accounted for 19% of our total net sales. Circumstances beyond our control, such as a labor dispute at a port, which occurred on the West Coast during ConAgra’s fiscal 2015, could prevent us from exporting our products in sufficient quantities to meet customer opportunities. We have access to production overseas through our facility in China and joint venture in Europe, but we may be unsuccessful in mitigating any future disruption to export mechanisms. If this occurs, we may be unable to adequately supply all of our customer opportunities, which could adversely affect our business or financial results.

If we are unable to complete proposed acquisitions or integrate acquired businesses or execute on large capital projects, our financial results could be materially and adversely affected.

From time to time, we evaluate acquisition candidates that may strategically fit our business objectives. Our acquisition activities may present financial, managerial and operational risks. Those risks include: (i) diversion of management attention from existing businesses, (ii) difficulties integrating personnel and financial and other systems, (iii) difficulties implementing effective control environment processes, (iv) adverse effects on existing business relationships with suppliers and customers, (v) inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets, which would reduce future reported earnings, (vi) potential loss of customers or key employees of acquired businesses and (vii) indemnities and potential disputes with the sellers. If we are unable to complete acquisitions or to successfully integrate and develop acquired businesses, our financial results could be materially and adversely affected.

Our future debt may limit cash flow available to invest in the ongoing needs of our business and could prevent us from fulfilling our debt obligations.

As part of the spinoff, we expect to incur approximately $2.38 billion of new debt, which we expect to consist of $675.0 million aggregate principal amount of borrowings under a senior secured term loan facility, approximately $1.67 billion in aggregate principal amount of senior notes and approximately $38.5 million of borrowings under a $500.0 million revolving credit facility. Our level of debt could have important consequences. For example, it could:

 

    make it more difficult for us to make payments on our debt;

 

    require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

 

    increase our vulnerability to adverse economic or industry conditions;

 

    limit our ability to obtain additional financing in the future to enable us to react to changes in our business; or

 

    place us at a competitive disadvantage compared to businesses in our industry that have less debt.

We expect that $1.54 billion aggregate principal amount of our senior notes will be issued to ConAgra in connection with the spinoff, and we expect to issue $125.0 million aggregate principal amount of senior notes for our own account. Accordingly, we will not receive cash proceeds from the issuance of substantially all of our senior notes. We will also make a cash payment to ConAgra in the amount of $823.5 million. As a result of the debt we expect to incur in connection with the spinoff, the amount of leverage in our business will significantly increase. This will increase the riskiness of our business and of an investment in our common stock. For more information regarding the expected terms of our senior secured term loan, revolving credit facility and senior notes, see “Description of Certain Indebtedness.”

 

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We expect the agreements governing our future debt, including the agreement governing our term loan and revolving credit facility and the indenture governing our senior notes, will contain various covenants that impose restrictions on us that may affect our ability to operate our business.

The agreement that will govern our term loan and revolving credit facility and the indenture that will govern our senior notes are expected to contain covenants that, among other things, limit our ability to:

 

    borrow money or guarantee debt;

 

    create liens;

 

    pay dividends on or redeem or repurchase stock;

 

    make specified types of investments and acquisitions;

 

    enter into or permit to exist contractual limits on the ability of our subsidiaries to pay dividends to us;

 

    enter into transactions with affiliates; and

 

    sell assets or merge with other companies.

These restrictions on our ability to operate our business could harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities.

Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions.

A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations, including our obligations under the senior notes. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.

Additionally, any failure to meet required payments on our debt, or failure to comply with any covenants in the instruments governing our debt, could result in a downgrade to our credit ratings. A downgrade in our credit ratings would increase our borrowing costs.

Our business relies on a potato crop that has a concentrated growing region.

Ideal growing conditions for the potatoes necessary for our value-added products (e.g., French fries) are concentrated in a few geographic regions globally. In the United States, most of the potato crop used in value-added products is grown in Idaho, Oregon and Washington. European growing regions for the necessary potatoes are concentrated in the Netherlands, Belgium, Germany, France and the United Kingdom. Recent agronomic developments have opened new growing regions, but the capital intensive nature of our industry’s production processes has kept production highly concentrated in the historical growing regions. Unfavorable crop conditions in any one region could lead to significant demand on the other regions for production. Our inability to mitigate any such conditions by leveraging our production capabilities in other regions could negatively impact our ability to meet customer needs and could decrease our profitability.

Our business is affected by potato crop performance.

Our primary input is potatoes and every year, we must procure potatoes that meet the quality standards for processing into value-added products. Environmental and climate conditions, such as soil quality, moisture, and temperature, affect the quality of the potato crop on a year-to-year basis. As a result, we source potatoes from specific regions of the United States and specific countries abroad, including the Netherlands, Belgium,

 

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Germany, France and the United Kingdom, where we believe the optimal potato growing conditions exist. However, severe weather conditions during the planting and growing season in these regions can significantly affect potato crop performance. Potatoes are also susceptible to pest diseases and insects that can cause crop failure, decreased yields, and negatively affect the physical appearance of the potatoes. We have deep experience in agronomy and actively work to monitor and manage the potato crop. However, if a weather or pest-related event occurs in a particular crop year, and our agronomic programs are insufficient to mitigate the impacts thereof, we may have insufficient potatoes to meet our customer opportunities, and our competitiveness and our profitability could decrease. Alternatively, overly favorable growing conditions can lead to high per acre yields and over-supply. An increased supply of potatoes could lead to overproduction of finished goods or destruction of unused potatoes at a loss.

If we do not achieve the appropriate cost structure in the highly competitive value-added frozen potato product category, our profitability could decrease.

Our future success and earnings growth depend in part on our ability to maintain the appropriate cost structure and operate efficiently in the highly competitive value-added frozen potato product category. We continue to implement profit-enhancing initiatives that improve the efficiency of our supply chain and general and administrative functions. These initiatives are focused on cost-saving opportunities in procurement, manufacturing, logistics and customer service, as well as general and administrative overhead levels. However, gaining additional efficiencies may become more difficult over time. Our failure to reduce costs through productivity gains or the elimination of redundant costs could adversely affect our profitability and weaken our competitive position.

Changes in our relationships with our growers could adversely affect us.

We expend considerable resources to develop and maintain relationships with many potato growers. In some instances, we have entered into long-term agreements with growers; however, a portion of our potato needs are typically sourced on an annual basis. To the extent we are unable to maintain positive relationships with our long-term growers, contracted growers deliver less supply than we expect, or we are unable to secure sufficient potatoes from uncontracted growers in a given year, we may not have sufficient potato supply to satisfy our business opportunities. To obtain sufficient potato supply, we may be required to purchase potatoes at prices substantially higher than expected, or forgo sales to some market segments, which would reduce our profitability. If we forgo sales to such market segments, we may lose customers and may not be able to replace them later.

Changes in our relationships with significant customers could adversely affect us.

We maintain a diverse customer base across our four reporting segments. Customers include global, national and regional quick serve and fast casual restaurants as well as small, independently operated restaurants, multinational, broadline foodservice distributors as well as regional foodservice distributors, and major food retailers. Some of these customers independently represent a meaningful portion of our sales. While we contract annually or biannually with many of our foodservice customers, loss of a significant customer could materially impact the business. In addition, shelf space at food retailers is not guaranteed. During fiscal 2016, our largest customer, McDonald’s Corporation and its affiliates, accounted for approximately 11% of our net sales. Furthermore, our 10 largest customers represented 44% of Lamb Weston’s net sales for fiscal 2016. We must maintain a disciplined and agile sales and marketing operation and supply chain to serve our diverse customer group. There can be no assurance that our customers will continue to purchase our products in the same quantities or on the same terms as in the past.

The sophistication and buying power of some of our customers could have a negative impact on profits.

Some of our customers are large and sophisticated, with buying power and negotiating strength. These customers may be more capable of resisting price increases and more likely to demand lower pricing, increased

 

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promotional programs, or specialty tailored products. In addition, some of these customers (e.g., larger distributors and supermarkets) have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own brands. We continue to implement initiatives to counteract these pressures, including efficiency programs and investments in innovation and quality. However, if we are unable to counteract the negotiating strength of these customers, our profitability could decline.

We must identify changing consumer preferences and consumption trends and develop and offer food products to our customers that help meet those preferences.

Consumer preferences evolve over time and our success depends on our ability to identify the tastes and dietary habits of consumers and offer products that appeal to those preferences. We need to continue to respond to these changing consumer preferences, and support our customers in their efforts to evolve to meet those preferences. For example, as consumers focus on freshly prepared foods, some restaurants may choose to limit the frying capabilities of their kitchens; we must evolve our product offering to provide alternatives that work in such a preparation environment. In addition, our products contain carbohydrates, sodium, genetically modified ingredients, added sugars, saturated fats, and preservatives, the diet and health effects of which remain the subject of public scrutiny. We must continue to reformulate our products, introduce new products and create product extensions without a loss of the taste, texture and appearance that consumers demand in value-added potato products. All of these efforts require significant research and development and marketing investments. If our products fail to meet consumer preferences or customer requirements, or we fail to introduce new and improved products on a timely basis, then the return on those investments will be less than anticipated.

A portion of our business is, and several of our growth strategies will be, conducted through joint ventures that do not operate solely for our benefit.

We have built our company, in part, through the creation of joint ventures, some of which we do not control. In these relationships, we share ownership and management of a company that operates for the benefit of all owners, rather than our exclusive benefit. Through our extensive experience in operating our business through joint ventures, we understand that joint ventures often take additional resources and procedures for information sharing and decision-making. If our joint venture partners begin to take actions that have negative impacts on the joint venture, or begin to disagree with the strategies we have developed to grow these businesses, we may have limited ability to influence and mitigate those decisions and our ability to achieve our growth strategies may be negatively impacted.

New regulations imposed by the FDA or EFSA around acrylamide formation in French fried potato products could adversely affect us.

The regulation of food products, both within the United States and internationally, continues to be a focus for governmental activity. The presence and/or formation of acrylamide in French fried potato products has become a global regulatory issue as both the U.S. Food and Drug Administration, or FDA, and the European Food Safety Authority, or EFSA, have issued guidance to the food processing industry to work to reduce conditions that favor the formation of this naturally occurring compound. Acrylamide formation is the result of heat processing reactions that give “browned foods” their desirable flavor. Acrylamide formation occurs in many food types in the human diet, including but not limited to breads, toast, cookies, coffee, crackers, potatoes and olives. Currently, the regulatory approach to acrylamide has generally been to encourage industry to achieve as low as reasonably achievable content levels through process control (temperature) and material testing (low sugar and low asparagine). However, limits for acrylamide content have been established for some food types in the State of California, and point of sale consumer warnings are required if products exceed those limits. If the global regulatory approach to acrylamide changes and stringent legal limits established, our manufacturing costs could increase. In addition, if consumer perception regarding the safety of our products is negatively impacted due to regulation, sales of our products could possibly decrease.

 

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If we fail to comply with the many laws applicable to our business, we may face lawsuits or incur significant fines and penalties.

Our facilities and products are subject to many laws and regulations administered by the United States Department of Agriculture, the FDA, the Occupational Safety and Health Administration, and other federal, state, local, and foreign governmental agencies relating to the processing, packaging, storage, distribution, advertising, labeling, quality, and safety of food products, the health and safety of our employees, and the protection of the environment. Our failure to comply with applicable laws and regulations could subject us to lawsuits, administrative penalties, and civil remedies, including fines, injunctions, and recalls of our products.

Our operations are also subject to extensive and increasingly stringent regulations administered by the Environmental Protection Agency, and comparable state agencies, which pertain to the discharge of materials into the environment and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences, including civil and administrative penalties and negative publicity. Changes in applicable laws or regulations or evolving interpretations thereof, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, may result in increased compliance costs, capital expenditures and other financial obligations for us, which could affect our profitability or impede the production or distribution of our products, which could affect our net operating revenues.

Increases in commodity costs may have a negative impact on profits.

A significant portion of our cost of goods comes from commodities such as oil and energy. Commodities are subject to price volatility caused by commodity market fluctuations, supply and demand, currency fluctuations, external conditions such as weather and changes in governmental agricultural and energy policies and regulations. Commodity price increases will increase operating costs. We may not be able to increase our product prices and achieve cost savings that fully offset these increased costs; and increasing prices may result in reduced sales volume, reduced margins and profitability. We have experience in hedging against commodity price increases. There is currently no active derivatives market for potatoes, however, and we do not fully hedge against changes in potato prices. In addition, these practices and experience reduce, but do not eliminate, the risk of negative profit impacts from commodity price increases. As a result, the risk management procedures that we use may not always work as we intend.

We may be subject to product liability claims and product recalls, which could negatively impact our relationships with customers and profitability.

We sell food products for human consumption, which involves risks such as product contamination or spoilage, product tampering, other adulteration of food products, mislabeling and misbranding. We will voluntarily recall or withdraw products from the market in certain circumstances, which causes us to incur associated costs; those costs can be meaningful. We may also be subject to litigation, requests for indemnification from our customers, or liability if the consumption of any of our products causes injury, illness, or death. A significant product liability judgment or a widespread product recall may negatively impact our sales and profitability for a period of time depending on the costs of the recall, the destruction of product inventory, product availability, competitive reaction, customer reaction and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.

Additionally, as a manufacturer and marketer of food products, we are subject to extensive regulation by the FDA and other national, state and local government agencies. The Food, Drug & Cosmetic Act, or the FDCA, and the Food Safety Modernization Act and their respective regulations govern, among other things, the manufacturing, composition and ingredients, packaging and safety of food products. Some aspects of these laws

 

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use a strict liability standard for imposing sanctions on corporate behavior; meaning that no intent is required to be established. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls, or seizures, as well as criminal sanctions, any of which could have a material adverse effect on our business, financial condition, or results of operations.

Damage to our reputation as a trusted partner to customers and good corporate citizen could have a material adverse effect on our business, financial condition and results of operations.

Our customers rely on us to manufacture safe, high quality food products. Product contamination or tampering, the failure to maintain high standards for product quality, safety and integrity, or allegations of product quality issues, mislabeling or contamination, even if untrue, may damage the reputation of our customers, and ultimately our reputation as a trusted industry partner. A damage to either could reduce demand for our products or cause production and delivery disruptions.

Our reputation could also be adversely impacted by any of the following, or by adverse publicity (whether or not valid) relating thereto: the failure to maintain high ethical, social and environmental standards for all of our operations and activities; our research and development efforts; our environmental impact, including use of agricultural materials, packaging, energy use and waste management; our failure to comply with local laws and regulations; our failure to maintain an effective system of internal controls; or our failure to provide accurate and timely financial information. Damage to our reputation or loss of customer confidence in our products for any of these or other reasons could result in decreased demand for our products and could have a material adverse effect on our business, financial condition and results of operations, as well as require additional resources to rebuild our reputation.

Our results could be adversely impacted as a result of increased pension, labor and people-related expenses.

Inflationary pressures and any shortages in the labor market could increase labor costs, which could have a material adverse effect on our operating results or financial condition. Our labor costs include the cost of providing employee benefits in the United States and foreign jurisdictions, including pension, health and welfare and severance benefits. Changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns and the market value of plan assets can affect the funded status of our defined benefit plans and cause volatility in the future funding requirements of the plans. A significant increase in our obligations or future funding requirements could have a negative impact on our results of operations and cash flows from operations. Additionally, the annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargained wage and benefit agreements.

We anticipate upgrading our information technology infrastructure, and expect to implement a new enterprise resource planning system after working through the operational separation of ConAgra. Problems with the transition, design or implementation of this upgrade could interfere with our business and operations and adversely affect our financial condition.

We are currently investigating upgrade options for our information technology infrastructure, including a long-term plan to implement a new enterprise resource planning, or ERP, system and other complementary information technology systems after the operational separation from ConAgra, which we expect to implement in fiscal 2018 or 2019. We may experience difficulties as we transition to new upgraded systems and processes. These disruptions may include loss of data; difficulty in processing customer orders, shipping products, or providing services and support to our customers; difficulty in billing and tracking our orders; difficulty in completing financial reporting and file SEC reports in a timely manner; or challenges in otherwise running our business. We may also experience decreases in productivity as our personnel implement and become familiar with new systems. Any disruptions, delays or deficiencies in the transition, design and implementation of an upgraded information technology infrastructure, or a new ERP system, particularly any disruptions, delays or deficiencies that impact our operations, could have a material adverse effect on our business, results of

 

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operations and financial condition. Even if we do not encounter adverse effects, the transition, design and implementation of an upgraded information technology infrastructure, or new ERP system, may be much more costly than we anticipated.

If we are unable to attract and retain key personnel, our business could be materially adversely affected.

Our future success will depend on our ability to attract and retain personnel with professional and technical expertise, such as agricultural and food manufacturing experience, as well as finance, marketing and senior management professionals. The market for these employees is competitive, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting new high-quality employees, our business could be materially adversely affected.

The potential disruption from cyber attacks and information security problems present new risks.

We are increasingly dependent on information technology networks and systems, to process, transmit and store electronic and financial information, to manage and support a variety of business processes and activities, and to comply with regulatory, legal and tax requirements. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure and to maintain and protect the related automated and manual control processes, we could be subject to billing and collection errors, business disruptions, or damage resulting from security breaches. If any of our significant information technology systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected and we could experience delays in reporting our financial results. In addition, there is a risk of business interruption, litigation risks and reputational damage from leakage of confidential information.

Climate change, or legal, regulatory, or market measures to address climate change, may negatively affect our business and operations.

There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. In the event that climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as potatoes and oils. In addition, water is an important part of potato processing. We may be subjected to decreased availability or less favorable pricing for water, which could impact our manufacturing and distribution operations. The increasing concern over climate change also may result in more regional, federal and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases, as well as more stringent regulation of water rights. In the event that such regulation is enacted and is more aggressive than the sustainability measures that we are currently undertaking to monitor our emissions, improve our energy efficiency, and reduce and reuse water, we may experience significant increases in our costs of operation and delivery.

Deterioration of general economic conditions could harm our business and results of operations.

Our business and results of operations may be adversely affected by changes in national or global economic conditions, including interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges), and the effects of governmental initiatives to manage economic conditions.

Volatility in financial markets and deterioration of national and global economic conditions could impact our business and operations in a variety of ways, including as follows:

 

    decreased demand in the restaurant business, particularly fast food and casual dining, which may adversely affect our operations;

 

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    volatility in commodity and other input costs could substantially impact our result of operations;

 

    volatility in the equity markets or interest rates could substantially impact our pension costs and required pension contributions;

 

    it may become more costly or difficult to obtain debt or equity financing to fund operations or investment opportunities, or to refinance our debt in the future, in each case on terms and within a time period acceptable to us; and

 

    it may become more costly to access funds internationally.

Impairment in the carrying value of goodwill or other intangibles could result in the incurrence of impairment charges and negatively impact our net worth.

As of May 29, 2016, we had goodwill of $133.9 million and other intangibles of $39.6 million. The net carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date (or subsequent impairment date, if applicable). The net carrying value of other intangibles represents the fair value of trademarks, customer relationships and other acquired intangibles as of the acquisition date (or subsequent impairment date, if applicable), net of accumulated amortization. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by management at least annually for impairment. Amortized intangible assets are evaluated for impairment whenever events or changes in circumstance indicate that the carrying amounts of these assets may not be recoverable. Impairments to goodwill and other intangible assets may be caused by factors outside our control, such as increasing competitive pricing pressures, lower than expected revenue and profit growth rates, changes in industry EBITDA multiples, changes in discount rates based on changes in cost of capital (interest rates, etc.), or the bankruptcy of a significant customer and could result in the incurrence of impairment charges and negatively impact our net worth.

Risks Relating to Ownership of Our Common Stock

Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the spinoff.

Prior to the spinoff, there will have been no trading market for our common stock. We cannot assure you that an active trading market will develop or be sustained for our common stock after the spinoff, nor can we predict the price at which our common stock will trade after the spinoff. The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our control, including:

 

    fluctuations in our quarterly or annual earnings results or those of other companies in our industry;

 

    failures of our operating results to meet the estimates of securities analysts or the expectations of our stockholders, or changes by securities analysts in their estimates of our future earnings;

 

    announcements by us or our customers, suppliers or competitors;

 

    changes in laws or regulations which adversely affect our industry or us;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    general economic, industry and stock market conditions;

 

    future sales of our common stock by our stockholders;

 

    future issuances of our common stock by us;

 

    our ability to pay dividends in the future; and

 

    the other factors described in these “Risk Factors” and other parts of this information statement.

 

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A large number of shares of our common stock are or will be eligible for future sale, which may cause the market price for our common stock to decline.

Upon completion of the spinoff, we will have outstanding an aggregate of approximately 146.0 million shares of common stock. Virtually all of those shares will be freely tradable without restriction or registration under the Securities Act of 1933, as amended, which we refer to as the Securities Act. We are unable to predict whether large amounts of our common stock will be sold in the open market following the spinoff. We are also unable to predict whether a sufficient number of buyers would be in the market at that time. Certain ConAgra stockholders may be required to sell the shares of Lamb Weston common stock that they receive in the spinoff. For example, index funds currently holding ConAgra common stock may be required to sell the Lamb Weston common stock they receive in the spinoff. In addition, it is possible that other ConAgra stockholders will sell the shares of Lamb Weston common stock they receive in the spinoff for various reasons. For example, such stockholders may not believe that our business profile, capital structure or level of market capitalization as an independent company fits their investment objectives. We can provide no assurance that there will be sufficient new buying interest to offset the potential sale of common stock of Lamb Weston. Accordingly, our common stock could experience a high level of volatility immediately following the spinoff and, as a result, the price of our common stock could be adversely affected.

Provisions in our corporate documents and Delaware law could have the effect of delaying, deferring or preventing a change in control of us, even if that change may be considered beneficial by some of our stockholders.

The existence of some provisions of our certificate of incorporation or our bylaws or Delaware law could have the effect of delaying, deferring or preventing a change in control of us that a stockholder may consider favorable. These provisions include:

 

    providing that the number of members of our board is limited to a range fixed by our bylaws;

 

    establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

    authorizing the issuance of “blank check” preferred stock, which could be issued by our board of directors to issue securities with voting rights and thwart a takeover attempt.

As a Delaware corporation, we will also be subject to provisions of Delaware law, including Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some stockholders holding more than 15% of our voting stock from engaging in certain business combinations unless the business combination or the transaction that resulted in the stockholder becoming an interested stockholder was approved in advance by our board of directors, results in the stockholder holding more than 85% of our voting stock, subject to certain restrictions, or is approved at an annual or special meeting of stockholders by the holders of at least 66 2/3% of our voting stock not held by the stockholder engaging in the transaction.

Any provision of our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay, defer or prevent an acquisition that our board of directors determines is not in the best interests of our company and our stockholders.

 

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Our amended and restated bylaws will designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our amended and restated bylaws will provide that, unless our board of directors otherwise determines, the Court of Chancery in the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Lamb Weston, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Lamb Weston to Lamb Weston or Lamb Weston’s stockholders, any action asserting a claim arising pursuant to any provision of the General Corporation Law of the State of Delaware, or Lamb Weston’s certificate of incorporation or the bylaws, or any action asserting a claim governed by the internal affairs doctrine. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our amended and restated bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.

Your percentage of ownership in us may be diluted in the future.

Your percentage of ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including, without limitation, equity awards that we may grant to our directors, officers and employees in the future. In addition, except as otherwise described in “Compensation Discussion and Analysis—Treatment of Outstanding ConAgra Equity Compensation in the Spinoff” with respect to Mr. Gehring’s outstanding ConAgra equity awards, it is currently anticipated that each outstanding ConAgra equity award held by a Lamb Weston director or employee immediately prior to the spinoff will be adjusted or converted into an award with respect to Lamb Weston common stock in connection with the separation. The number of dilutive shares of common stock underlying Lamb Weston equity awards issued in connection with the adjustment of outstanding ConAgra stock-based awards will not be determined until the distribution date or shortly thereafter. See “Compensation Discussion and Analysis—Treatment of Outstanding ConAgra Equity Compensation in the Spinoff.” Such awards and other issuances may reduce your percentage of ownership in our company and have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

In addition, our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Capital Stock—Preferred Stock.”

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We undertake no responsibility for updating these statements. Readers of this information statement should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this information statement. These risks and uncertainties include, among other things: our ability to successfully complete the spinoff on a tax-free basis, within the expected time frame or at all; our ability to successfully execute our long-term value creation strategy; the competitive environment and related market conditions; political and economic conditions of the countries in which we conduct business and other factors related to our international operations; disruption of our access to export mechanisms; our ability to complete proposed acquisitions or integrate acquired businesses or execute on large capital projects; our future debt levels; the availability and prices of raw materials; changes in our relationships with our growers or significant customers; the success of our joint ventures; actions of governments and regulatory factors affecting our businesses; the ultimate outcome of litigation or any product recalls; increased pension, labor and people-related expenses; our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and other risks described in our reports filed from time to time with the SEC. We caution readers not to place undue reliance on any forward-looking statements included in this information statement, which speak only as of the date of this information statement.

 

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THE SPINOFF

General

The board of directors of ConAgra regularly reviews the various operations conducted by ConAgra to ensure that resources are deployed and activities are pursued in a manner believed to be in the best interests of its stockholders. On November 18, 2015, ConAgra announced that its board of directors had considered a variety of strategic alternatives and had authorized its management to pursue a distribution of our common stock to ConAgra’s stockholders in a spinoff. This authorization is subject to final approval by the ConAgra board of directors, which approval is subject to, among other things, the conditions described below under “Spinoff Conditions and Termination.”

Lamb Weston is currently a wholly owned subsidiary of ConAgra. Lamb Weston Holdings, Inc. was incorporated in Delaware on July 5, 2016, in conjunction with the spinoff. ConAgra will transfer to us all the assets and generally all the liabilities relating to the ConAgra frozen potato products business, which ConAgra intends to separate from its other operations.

We will be separated from ConAgra and will become an independent, publicly traded company through a spinoff, on November 9, 2016, the distribution date. As a result of the spinoff, each holder of ConAgra common stock as of 5:00 p.m., New York City time, on November 1, 2016, the record date, will be entitled to:

 

    receive one share of our common stock for every three shares of ConAgra common stock owned by such holder; and

 

    retain such holder’s shares of ConAgra common stock.

ConAgra stockholders will not be required to pay for shares of our common stock received in the spinoff or to surrender or exchange shares of ConAgra common stock in order to receive shares of our common stock or to take any other action in connection with the spinoff. No vote of ConAgra stockholders is required or sought in connection with the spinoff, and ConAgra stockholders have no appraisal rights in connection with the spinoff.

Reasons for the Spinoff

ConAgra’s board of directors believes that separating ConAgra into two independent, publicly traded companies is in the best interests of ConAgra and its stockholders, and has concluded that the spinoff will enable each company to sharpen its strategic focus and provide flexibility to capitalize on the unique growth opportunities in its respective market. Stockholders will gain direct exposure to more focused consumer and commercial foods businesses, each with distinct customer bases and investment profiles. This separation will best position each company to compete and win while creating compelling long-term value for stockholders and delivering benefits to employees, customers and other key stakeholders.

The two businesses operate in distinct markets and possess unique and compelling growth prospects and investment requirements. In addition, ConAgra believes that the separation will result in other material benefits to the standalone companies, including:

 

    enhanced management focus given the distinctiveness of our business from that of ConAgra’s branded food business;

 

    increased flexibility, agility and resources to capitalize on our long-term opportunities and growth strategies, which are different than those of ConAgra’s branded food business;

 

    a tailored capital structure and financial policy appropriate for our unique business profile; and

 

    the ability for investors to value the two companies based on their particular operational and financial characteristics and invest accordingly.

 

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Based on our audited combined financial statements included elsewhere in this information statement: for the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014, Lamb Weston’s net sales as a percent of ConAgra’s total net sales was 25.7%, 24.5% and 23.8%, respectively; total assets attributable to Lamb Weston as a percent of ConAgra’s total assets was 16.1% and 11.8% as of May 29, 2016 and May 31, 2015, respectively; and total liabilities attributable to Lamb Weston as a percent of ConAgra’s total liabilities was 7.9% and 5.4% as of May 29, 2016 and May 31, 2015, respectively. See “Reasons for the Spinoff.”

The ConAgra board of directors considered the probability of successful execution of the spinoff and the risks associated therewith, including the: potential loss of synergies from operating as a consolidated entity; potential disruptions to the businesses as a result of the spinoff, including employee stability; risk of being unable to achieve the benefits expected to be attained by the spinoff; risk that the spinoff might not be completed; and one-time costs of executing the spinoff. The ConAgra board of directors concluded that, notwithstanding these potentially negative factors, the spinoff would be in the best interests of its stockholders. For more information, see “Risk Factors—Risks Relating to the Spinoff.”

Results of the Spinoff

After the spinoff, we will be an independent, publicly traded company. Immediately after the distribution date, we expect that approximately 146.0 million shares of our common stock will be issued and outstanding, based on the distribution of one share of our common stock for every three shares of ConAgra common stock outstanding and the anticipated number of shares of ConAgra common stock outstanding as of the record date. The actual number of shares of our common stock to be distributed will be determined based on the number of shares of ConAgra common stock outstanding as of the record date.

We and ConAgra will be parties to a number of agreements that will govern the spinoff and our future relationship. For a more detailed description of these agreements, please see “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us.”

You will not be required to make any payment for the shares of Lamb Weston common stock you receive, nor will you be required to surrender or exchange your shares of ConAgra common stock or take any other action in order to receive the Lamb Weston common stock to which you are entitled. The spinoff will not affect the number of outstanding shares of ConAgra common stock or any rights of ConAgra stockholders, although it is expected to affect the market value of the outstanding shares of ConAgra common stock.

Manner of Effecting the Spinoff

The general terms and conditions relating to the spinoff will be set forth in a separation and distribution agreement between ConAgra and us. For a description of the terms of that agreement, see “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Separation and Distribution Agreement.” Under the separation and distribution agreement, the spinoff will occur on the distribution date. As a result of the spinoff, each holder of ConAgra common stock will be entitled to receive one share of our common stock for every three shares of ConAgra common stock owned by such holder as of 5:00 p.m., New York City time, on the record date. As discussed under “Trading of ConAgra Common Stock After the Record Date and Prior to the Distribution,” if a holder of record of ConAgra common stock sells those shares in the “regular way” market after the record date and before or on the distribution date, that stockholder will be selling the right to receive our common stock in the distribution. The distribution will be made in book-entry form. For registered ConAgra stockholders, our transfer agent will credit their shares of Lamb Weston common stock to book-entry accounts established to hold their Lamb Weston common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are issued. For stockholders who own ConAgra common stock through a bank or brokerage firm, their Lamb Weston common stock will be credited to their accounts by the bank or broker. See “When and How You Will Receive Lamb Weston Shares” below. Each Lamb Weston share of common stock that is distributed will be validly issued, fully paid and nonassessable.

 

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Holders of Lamb Weston common stock will not be entitled to preemptive rights. See “Description of Capital Stock.” Following the spinoff, stockholders whose shares are held in book-entry form may request the transfer of their Lamb Weston common stock to a brokerage or other account at any time, without charge.

When and How You Will Receive Lamb Weston Shares

On the distribution date, ConAgra will release its Lamb Weston common stock for distribution by Wells Fargo Shareowner Services, the distribution agent. The distribution agent will cause the shares of Lamb Weston common stock to which you are entitled to be registered in your name or in the “street name” of your bank or brokerage firm.

“Street Name” Holders. Many ConAgra stockholders have ConAgra common stock held in an account with a bank or brokerage firm. If this applies to you, that bank or brokerage firm is the registered holder that holds the shares on your behalf. For stockholders who hold their ConAgra common stock in an account with a bank or brokerage firm, shares of our common stock being distributed will be registered in the “street name” of your bank or broker, who in turn will electronically credit your account with the shares that you are entitled to receive in the distribution. We anticipate that banks and brokers will generally credit their customers’ accounts with shares of our common stock on or shortly after the distribution date. We encourage you to contact your bank or broker if you have any questions regarding the mechanics of having your shares credited to your account.

Registered Holders. If you are the registered holder of ConAgra common stock and hold your ConAgra common stock either in physical form or in book-entry form, the Lamb Weston common stock distributed to you will be registered in your name and you will become the holder of record of that number of shares of our common stock. Our distribution agent will send you a statement reflecting your ownership of our common stock.

Direct Registration System. As part of the spinoff, we will be adopting a direct registration system for book-entry share registration and transfer of our common stock. Our common stock to be distributed in the spinoff will be distributed as uncertificated shares registered in book-entry form through the direct registration system. No certificates representing your shares will be mailed to you in connection with the spinoff. Under the direct registration system, instead of receiving stock certificates, you will receive a statement reflecting your ownership interest in our shares. If at any time you want to receive a physical certificate evidencing your shares, you may do so by contacting our transfer agent and registrar. Contact information for our transfer agent and registrar is provided under “Description of Capital Stock—Transfer Agent and Registrar.” The distribution agent will begin mailing book-entry account statements reflecting your ownership of shares promptly after the distribution date. You can obtain more information regarding the direct registration system by contacting our transfer agent and registrar.

Treatment of Fractional Shares

The transfer agent will aggregate all fractional shares and sell them on behalf of those holders who otherwise would be entitled to receive a fractional share. The transfer agent will determine, in its sole discretion, when, how and through which broker-dealers such sales will be made without any influence by ConAgra or us. We anticipate that these sales will occur as soon as practicable after the distribution date. Those holders will then receive a cash payment in the form of a check in an amount equal to their pro rata share of the total net proceeds of those sales. If you physically hold ConAgra stock certificates, your check for any cash that you may be entitled to receive instead of fractional shares of our common stock will be mailed to you separately.

It is expected that all fractional shares held in street name will be aggregated and sold by brokers or other nominees according to their standard procedures. You should contact your broker or other nominee for additional details.

Neither ConAgra, nor we, nor the transfer agent will guarantee any minimum sale price for any fractional shares. Neither we nor ConAgra will pay any interest on the proceeds from the sale of fractional shares. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient stockholders for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences of the Spinoff.”

 

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Transferability of Shares You Receive

Our common stock distributed to ConAgra stockholders will be freely transferable, except for shares received by persons who may be deemed to be our “affiliates” under the Securities Act. Persons who may be deemed to be our affiliates after the spinoff generally include individuals or entities that control, are controlled by, or are under common control with us, and include our directors and certain of our officers. Our affiliates will be permitted to sell their Lamb Weston common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144.

Under Rule 144, an affiliate may not sell within any three-month period shares of Lamb Weston common stock in excess of the greater of:

 

    1% of the then outstanding number of shares of Lamb Weston common stock; and

 

    the average reported weekly trading volume of shares of Lamb Weston common stock on the NYSE during the four calendar weeks preceding the filing of a notice with the SEC on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and availability of current public information about us.

Stock-Based Plans

Treatment of Equity-Based Compensation

With respect to ConAgra equity incentive awards held by Lamb Weston employees, including Lamb Weston’s named executive officers (except for Mr. Gehring, whose ConAgra equity awards treatment is described in “Compensation Discussion and Analysis—Treatment of Outstanding ConAgra Equity Compensation in the Spinoff”), and Lamb Weston directors that are outstanding on the distribution date and for which the underlying security is shares of ConAgra’s common stock, it is currently anticipated that each outstanding ConAgra stock option, restricted stock unit and performance share award will be equitably adjusted or converted into an award with respect to Lamb Weston common stock. Each other ConAgra equity award will also be equitably adjusted or converted, but will continue to relate to ConAgra common stock. In each case, the award will be equitably adjusted or converted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra equity award, and will be subject to substantially the same terms and conditions after the spinoff as the terms and conditions applicable to the original ConAgra award prior to the distribution date, except:

 

    with respect to each adjusted or converted stock option award, the per-share exercise price for each ConAgra stock option and each Lamb Weston stock option will be adjusted or established, as applicable, so that each will retain, in the aggregate, the same intrinsic value that the original ConAgra stock option award had immediately prior to the distribution date (subject to rounding);

 

    with respect to each adjusted or converted award covering Lamb Weston common shares, the number of underlying shares subject to such award will be determined based on application of the ratio of ConAgra’s pre-spinoff stock price to our post-spinoff share price to the number of ConAgra common shares subject to the original ConAgra award prior to the distribution date;

 

    outstanding ConAgra performance share awards for the fiscal 2015 to 2017 cycle, other than those intended to be “qualified performance-based compensation” under Section 162(m) of the Code, are expected to be adjusted or converted to vest solely based on their original service-based vesting criteria, with the number of shares subject to the award equitably adjusted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra award based on actual performance achieved through the end of the last fiscal period ending prior to the distribution date;

 

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    outstanding ConAgra performance share awards for the fiscal 2015 to 2017 cycle intended to be “qualified performance-based compensation” under Section 162(m) of the Code are expected to remain subject to the achievement of the threshold earnings per share performance goal and negative discretion intended to result in payout levels comparable to those achieved for all other fiscal 2015 to 2017 performance share awards (in addition to their original service-based vesting criteria), with the number of shares subject to the awards equitably adjusted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra award; and

 

    the number of shares subject to all other ConAgra performance share awards are expected to be equitably adjusted or converted in a manner intended to preserve the aggregate intrinsic value of the original award, with such awards intended to be “qualified performance-based compensation” under Section 162(m) of the Code remaining subject to the earnings per share performance goals associated with the original ConAgra award, and such awards not intended to be “qualified performance-based compensation” under Section 162(m) of the Code remaining subject to their applicable performance goals.

To the extent that an affected employee is employed in a non-U.S. jurisdiction, and the adjustments or grants contemplated above could result in adverse tax consequences or other adverse regulatory consequences, ConAgra may determine that a different equitable adjustment or grant will apply in order to avoid any such adverse consequences.

We expect that the Compensation Committee of our board of directors will maintain a program to deliver long-term incentive awards to our executives and other employees that is appropriate for our business needs. However, the types of awards provided, the allocation of grant date values among the mix of awards and the performance measures to be used may differ from ConAgra’s past practice.

Lamb Weston Holdings, Inc. 2016 Stock Plan

We anticipate that we will adopt the Lamb Weston Holdings, Inc. 2016 Stock Plan, or the 2016 Stock Plan. The 2016 Stock Plan will generally be administered by the Lamb Weston Compensation Committee (or the Board in the case of non-employee director awards) and will generally enable the Lamb Weston Compensation Committee (or the Board, as applicable) to provide equity and incentive compensation to our officers, other key employees, our non-employee directors and eligible consultants. Pursuant to the 2016 Stock Plan, we may grant stock options (including “incentive stock options” as defined in Section 422 of the Code), stock appreciation rights, restricted stock, restricted stock units, performance shares, cash incentive awards, and certain other awards based on or related to our common stock, subject to certain share and dollar limitations as described in the 2016 Stock Plan. The 2016 Stock Plan will permit us to grant both awards that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Code and awards that are not intended to so qualify.

The 2016 Stock Plan will permit award agreements with respect to any awards under the 2016 Stock Plan to provide for accelerated (or continued) vesting or exercise, including in the event of the grantee’s retirement, death or disability, or in the event of a “change of control” (as defined in the 2016 Stock Plan), as provided for and described in the applicable award agreements. Further, it will require the Lamb Weston Compensation Committee to make equitable adjustments to outstanding awards and plan limits in the event of certain corporate transactions or changes in the capital structure of Lamb Weston.

The 2016 Stock Plan will authorize the grant of “adjusted awards” to certain current holders of ConAgra equity awards under the ConAgra equity compensation plans, as described above. In connection with the distribution of Lamb Weston common stock to ConAgra stockholders, the Lamb Weston Compensation Committee intends to authorize adjusted awards of Lamb Weston stock options, restricted stock units and performance shares under the 2016 Stock Plan to Lamb Weston employees who hold corresponding awards covering ConAgra equity (except that, in some instances, performance shares awards will be converted into restricted stock unit awards), as described above.

 

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Subject to adjustment as described in the 2016 Stock Plan, total awards under the 2016 Stock Plan will be limited to 10,000,000 shares of Lamb Weston common stock. These shares may be shares of original issuance or treasury shares or a combination of the foregoing.

The 2016 Stock Plan also provides that, subject to adjustment as described in the 2016 Stock Plan:

 

    the aggregate number of shares of common stock actually issued or transferred upon the exercise of incentive stock options will not exceed 10,000,000 shares of common stock;

 

    the maximum number of shares of common stock that may be subject to awards granted to any one participant in any fiscal year under the 2016 Stock Plan is 1,000,000;

 

    no participant in any fiscal year will receive other stock-based awards payable in cash that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Code, other than cash incentive awards, having an aggregate maximum value in excess of $6,000,000;

 

    no participant in any fiscal year will receive cash incentive awards that are intended to qualify as “qualified performance-based compensation” under Section 162(m) of the Code having an aggregate maximum value in excess of $6,000,000; and

 

    no non-employee director of Lamb Weston will be granted in any fiscal year awards under the 2016 Stock Plan having an aggregate maximum value, taken together with any cash fees payable to such non-employee director for such fiscal year, in excess of $600,000.

Common stock issued or transferred pursuant to awards granted under the 2016 Stock Plan in substitution for or in assumption or conversion of awards held by awardees of an entity engaging in a corporate acquisition or merger with us or any of our subsidiaries will not count against the share limits under the 2016 Stock Plan. Additionally, shares available under certain plans that we or our subsidiaries may assume in connection with corporate transactions from another entity may be available for certain awards under the 2016 Stock Plan, under circumstances further described in the 2016 Stock Plan, but will not count against the share limits under the 2016 Stock Plan.

Unless otherwise determined by the Lamb Weston Compensation Committee, awards granted under the 2016 Stock Plan are subject to the terms and conditions of any recoupment or clawback policy of ours in effect from time to time. If we do not have a recoupment or clawback policy in effect at a given time, an award (or stock issued pursuant to an award, or any other benefit related to an award) will be deemed subject to recoupment or clawback by us on the terms and conditions provided for under Section 10D of the Exchange Act.

Our board generally will be able to amend the 2016 Stock Plan, subject to stockholder approval in certain circumstances as described in the 2016 Stock Plan.

Cash-Based Incentive Program

We expect that we will adopt a short-term incentive program that will permit us to provide annual cash-based incentive awards to certain officers and other key employees based on performance against pre-established annual goals. Under the short-term incentive program, we expect that participants will have an annual target award opportunity established by the Lamb Weston Compensation Committee expressed as a percentage of participants’ base salary.

 

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Material U.S. Federal Income Tax Consequences of the Spinoff

The following is a discussion of the material U.S. federal income tax consequences of the spinoff to U.S. Holders (as defined below) of ConAgra common stock. This discussion is based on the Code, applicable Treasury regulations, administrative interpretations and court decisions as in effect as of the date of this information statement, all of which may change, possibly with retroactive effect. For purposes of this discussion, a “U.S. Holder” is a beneficial owner of ConAgra common stock that is for U.S. federal income tax purposes:

 

    a citizen or resident of the United States;

 

    a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or

 

    an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

This discussion addresses only the consequences of the spinoff to U.S. Holders that hold ConAgra common stock as a capital asset. It does not address all aspects of U.S. federal income taxation that may be important to a U.S. Holder in light of that stockholder’s particular circumstances or to a U.S. Holder subject to special rules, such as:

 

    a financial institution, regulated investment company or insurance company;

 

    a tax-exempt organization;

 

    a dealer or broker in securities, commodities or foreign currencies;

 

    a stockholder that holds ConAgra common stock as part of a hedge, appreciated financial position, straddle, conversion, or other risk reduction transaction;

 

    a stockholder that holds ConAgra common stock in a tax-deferred account, such as an individual retirement account; or

 

    a stockholder that acquired ConAgra common stock pursuant to the exercise of options or similar derivative securities or otherwise as compensation.

If a partnership, or any entity treated as a partnership for U.S. federal income tax purposes, holds ConAgra common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partners and the activities of the partnership. A partner in a partnership holding ConAgra common stock should consult its tax advisor.

This discussion of material U.S. federal income tax consequences is not a complete analysis or description of all potential U.S. federal income tax consequences of the spinoff. This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. In addition, it does not address any U.S. federal, estate, gift or other non-income tax or any non-U.S., state or local tax consequences of the spinoff. Accordingly, each holder of ConAgra common stock should consult his, her or its tax advisor to determine the particular U.S. federal, state or local or non-U.S. income or other tax consequences of the spinoff to such holder.

Tax Opinions

The consummation of the spinoff, along with certain related transactions, is conditioned upon the receipt of an opinion of tax counsel substantially to the effect that the distribution of all of the shares of Lamb Weston common stock owned by ConAgra to the stockholders of ConAgra, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, which we refer to as a “Tax Opinion.” In rendering the Tax Opinion to be given as of the closing of the spinoff, which we refer to as the Closing Tax Opinion, tax counsel will rely, on (i) customary representations and covenants made by us and ConAgra, including those contained in certificates of officers of us and ConAgra, and (ii) specified assumptions, including an assumption

 

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regarding the completion of the spinoff and certain related transactions in the manner contemplated by the transaction agreements. In addition, tax counsel’s ability to provide the Closing Tax Opinion will depend on the absence of changes in existing facts or law between the date of this registration statement and the closing date of the spinoff. If any of the representations, covenants or assumptions on which tax counsel will rely is inaccurate, tax counsel may not be able to provide the Closing Tax Opinion or the tax consequences of the spinoff could differ from those described below. An opinion of tax counsel does not preclude the IRS or the courts from adopting a contrary position. ConAgra does not intend to obtain a ruling from the IRS on the tax consequences of the spinoff or any of the related transactions.

The Spinoff

Assuming that the distribution of all of the shares of Lamb Weston common stock owned by ConAgra to the stockholders of ConAgra, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, in general, for U.S. federal income tax purposes:

 

    such distribution will not result in the recognition of income, gain or loss to ConAgra or us;

 

    no gain or loss will be recognized by, and no amount will be included in the income of, U.S. Holders of ConAgra common stock upon the receipt of our common stock;

 

    the aggregate tax basis of the shares of our common stock distributed in the spinoff to a U.S. Holder of ConAgra common stock will be determined by allocating the aggregate tax basis such U.S. Holder has in the shares of ConAgra common stock immediately before such spinoff between such ConAgra common stock and our common stock in proportion to the relative fair market value of each immediately following the spinoff;

 

    the holding period of any shares of our common stock received by a U.S. Holder of ConAgra common stock in the spinoff will include the holding period of the shares of ConAgra common stock held by a U.S. Holder prior to the spinoff; and

 

    a U.S. Holder of ConAgra common stock that receives cash in lieu of a fractional share of our common stock will recognize capital gain or loss, measured by the difference between the cash received for such fractional share and the U.S. Holder’s tax basis in that fractional share, determined as described above, and such gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period for such fractional share is more than one year as of the closing date of the spinoff.

In general, if the spinoff does not qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code, the spinoff will be treated as a taxable dividend to holders of ConAgra common stock in an amount equal to the fair market value of our common stock received, to the extent of such holder’s ratable share of ConAgra’s earnings and profits. In addition, if the spinoff does not qualify as a tax-free transaction under Sections 368(a)(1)(D) and 355 of the Code, ConAgra will recognize taxable gain, which could result in significant tax to ConAgra.

Even if the spinoff were otherwise to qualify as a tax-free transaction under Sections 368(a)(1)(D) and 355 of the Code, the spinoff will be taxable to ConAgra under Section 355(e) of the Code if 50% or more of either the total voting power or the total fair market value of the stock of ConAgra or our common stock is acquired as part of a plan or series of related transactions that includes the spinoff. If Section 355(e) applies as a result of such an acquisition, ConAgra would recognize taxable gain as described above, but the spinoff would generally be tax-free to you. Under some circumstances, the tax matters agreement would require us to indemnify ConAgra for the tax liability associated with the taxable gain. See ‘‘Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Tax Matters Agreement.”

 

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Under the tax matters agreement, we will generally be required to indemnify ConAgra for the resulting taxes in the event that the spinoff and/or related transactions fail to qualify for their intended tax treatment due to any action by us or any of our subsidiaries (see “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Tax Matters Agreement”). If the spinoff were to be taxable to ConAgra, the liability for payment of such tax by ConAgra or by us under the tax matters agreement could have a material adverse effect on ConAgra or us, as the case may be.

Information Reporting and Backup Withholding

U.S. Treasury regulations generally require holders who own at least five percent of the total outstanding stock of ConAgra (by vote or value) and who receive our common stock pursuant to the spinoff to attach to their U.S. federal income tax return for the year in which the spinoff occurs a detailed statement setting forth certain information relating to the tax-free nature of the spinoff. ConAgra and/or we will provide the appropriate information to each holder upon request, and each such holder is required to retain permanent records of this information. In addition, payments of cash to a U.S. Holder of ConAgra common stock in lieu of fractional shares of our common stock in the spinoff may be subject to information reporting, unless the U.S. Holder provides the withholding agent with proof of an applicable exemption. Such payments that are subject to information reporting may also be subject to backup withholding, unless such U.S. Holder provides the withholding agent with a correct taxpayer identification number and otherwise complies with the requirements of the backup withholding rules. Backup withholding does not constitute an additional tax, but merely an advance payment, which may be refunded or credited against a U.S. Holder’s U.S. federal income tax liability, provided the required information is timely supplied to the IRS.

Market for Our Common Stock

There is currently no public market for our common stock. We have applied to list our common stock on the NYSE under the symbol “LW.” We anticipate that trading of our common stock will commence on a “when-issued basis” approximately two trading days before the record date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. Generally, shares of common stock may trade on the NYSE on a when-issued basis after they have been authorized but not yet formally issued, which is often initiated by the NYSE prior to the record date relating to the issuance of such common stock. When-issued transactions are settled after shares of our common stock have been issued to ConAgra stockholders. On the first trading day following the distribution date, when-issued trading with respect to our common stock will end and regular way trading will begin. Regular way trading refers to trading after a security has been issued. We cannot predict what the trading price for our common stock will be before or after the distribution date. See “Risk Factors—Risks Relating to Ownership of Our Common Stock.” In addition, we cannot predict any change that may occur in the trading price of ConAgra’s common stock, which will continue to trade on the NYSE under the symbol “CAG,” as a result of the spinoff.

Trading of ConAgra Common Stock After the Record Date and Prior to the Distribution

Beginning on or shortly before the record date and through the distribution date, we anticipate that there will be two concurrent markets in which to trade shares of ConAgra common stock: a regular way market and an ex-distribution market. Shares of ConAgra common stock that trade in the regular way market will trade with an entitlement to our common stock distributed in connection with the spinoff. Shares that trade in the ex-distribution market will trade without an entitlement to our common stock distributed in connection with the spinoff. Therefore, if you owned ConAgra common stock at 5:00 p.m., New York City time, on the record date and sell those shares in the regular way market on or prior to the distribution date, you also will be selling your right to receive our common stock that would have been distributed to you in connection with the spinoff. If you sell those shares of ConAgra common stock in the ex-distribution market prior to or on the distribution date, you will still receive shares of our common stock that were to be distributed to you in connection with the spinoff as a result of your ownership of the ConAgra common stock. You are encouraged to consult with your financial advisor regarding the financial implications of selling your shares of ConAgra common stock before or on the distribution date.

 

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Spinoff Conditions and Termination

We expect that the spinoff will be completed on November 9, 2016, provided that, among other things:

 

    the reorganization as contemplated by the separation and distribution agreement will have been completed;

 

    the ConAgra board of directors will, in its sole and absolute discretion, have authorized and approved the separation and the distribution and will not have withdrawn that authorization and approval;

 

    the ConAgra board of directors will have declared the distribution of all of our outstanding shares of common stock to ConAgra stockholders;

 

    ConAgra and we will have executed and delivered the separation and distribution agreement, employee matters agreement, transition services agreements, tax matters agreement and all other ancillary agreements related to the spinoff;

 

    the SEC shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, with no stop order in effect with respect to the Form 10, and this information statement shall have been sent to ConAgra stockholders;

 

    no order, injunction or decree that would prevent the consummation of the distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of the distribution will be in effect, and no other event outside the control of ConAgra will have occurred or failed to occur that prevents the consummation of the distribution;

 

    our common stock shall have been approved for listing on the NYSE, subject to official notice of issuance;

 

    ConAgra will have received an opinion of counsel, reasonably satisfactory to ConAgra, to the effect that, for U.S. federal income tax purposes, the distribution of all of the shares of Lamb Weston common stock owned by ConAgra to the stockholders of ConAgra and certain related transactions will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code;

 

    immediately prior to the distribution, our restated certificate of incorporation and regulations, each in substantially the form filed as an exhibit to our registration statement on Form 10, of which this information statement is a part, will be in effect; and

 

    no other events or developments will have occurred that, in the judgment of the board of directors of ConAgra would result in the spinoff having a material adverse effect on ConAgra or its stockholders.

ConAgra may waive one or more of these conditions, at the direction of its board of directors in its sole and absolute discretion, and the determination by the ConAgra board of directors regarding the satisfaction of these conditions will be conclusive. The fulfillment of these conditions will not create any obligation on ConAgra’s part to effect the distribution, and ConAgra has reserved the right to amend, modify or abandon any and all terms of the distribution and the related transactions at any time prior to the distribution date, at the direction of its board of directors. ConAgra does not intend to notify its stockholders of any modifications to the terms or the conditions to the separation that, in the judgment of its board of directors, are not material. To the extent that the ConAgra board of directors determines that any such modifications materially change the terms and conditions of the distribution, ConAgra will notify its stockholders in a manner reasonably calculated to inform them of such modifications with a press release, Current Report on Form 8-K or other similar means.

 

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Financing Arrangements Related to the Spinoff

As part of the spinoff, we expect to incur approximately $2.38 billion of new debt, which we expect to consist of $675.0 million aggregate principal amount of borrowings under a senior secured term loan facility, approximately $1.67 billion in aggregate principal amount of senior notes and approximately $38.5 million of borrowings under a $500.0 million revolving credit facility. See “Description of Certain Indebtedness.”

We expect that $1.54 billion aggregate principal amount of our senior notes will be issued to ConAgra in connection with the spinoff, and we expect to issue $125.0 million aggregate principal amount of senior notes for our own account. It is anticipated that, in advance of the spinoff, certain investment banks will purchase certain of ConAgra’s senior notes in the open market and that, following such purchase, ConAgra will enter into a debt exchange agreement to effect a debt-for-debt exchange pursuant to which such investment banks will agree to exchange all of the ConAgra senior notes purchased for our senior notes issued to ConAgra at a specified exchange ratio. The terms of the debt exchange agreement would be determined in negotiations among ConAgra and the investment banks; however, there can be no assurance that the debt exchange agreement will be entered into or that the debt-for-debt exchange will occur.

Reason for Sending this Information Statement

This information statement is being sent solely to provide information to ConAgra stockholders who will receive Lamb Weston common stock in the spinoff. It is not to be construed as an inducement or encouragement to buy or sell any of our securities. We believe that the information contained in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither we nor ConAgra undertake any obligation to update the information, except to the extent so required by applicable securities laws.

 

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CAPITALIZATION

The following table sets forth Lamb Weston’s cash and cash equivalents and capitalization as of August 28, 2016 (i) on a historical basis and (ii) on an as adjusted basis to give effect to the pro forma adjustments included in Lamb Weston’s unaudited pro forma combined financial information included elsewhere in this information statement. The information below is not necessarily indicative of what Lamb Weston’s cash and cash equivalents and capitalization would have been had the spinoff been completed as of August 28, 2016. In addition, this information is not indicative of Lamb Weston’s future cash and cash equivalents and capitalization. This table should be read in conjunction with the sections entitled “Selected Historical Condensed Combined Financial Data,” “Unaudited Pro Forma Combined Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and corresponding notes included elsewhere in this information statement.

 

     As of August 28, 2016 (unaudited)
(dollars in millions)
 
     Historical      As Adjusted  

Cash and cash equivalents

   $ 72.4       $ 72.4   
  

 

 

    

 

 

 

Debt, including current and long-term:

     

Notes payable

   $ 24.5       $ 24.5   

Current installments of long-term debt

     14.1         47.9   

Senior secured term loan(1)

     —           636.0   

Revolving credit facility(1)

     —           34.6   

Senior notes(1)

     —           1,636.6   

Other long-term debt

     103.5         103.5   
  

 

 

    

 

 

 

Total debt

   $ 142.1       $ 2,483.1   
  

 

 

    

 

 

 

Equity:

     

Common Stock, par value $1.00

     —           146.0   

Additional paid-in capital (accumulated deficit)

     —           (1,013.3

Parent companies’ equity investment

     1,473.7         —     

Accumulated other comprehensive loss

     (10.3      (10.3
  

 

 

    

 

 

 

Total stockholders’ equity

     1,463.4         (877.6
  

 

 

    

 

 

 

Total capitalization

   $ 1,605.5       $ 1,605.5   
  

 

 

    

 

 

 

 

(1) As part of the spinoff, we expect to incur approximately $2.38 billion of new debt, which we expect to consist of $675.0 million aggregate principal amount of borrowings under a senior secured term loan facility, approximately $1.67 billion in aggregate principal amount of senior notes and approximately $38.5 million of borrowings under a $500.0 million revolving credit facility. The amounts in the table above reflect the inclusion of $33.8 million in current installments of long-term debt and a reduction for estimated debt issuance costs of $38.5 million. We expect that $1.54 billion aggregate principal amount of our senior notes will be issued to ConAgra in connection with the spinoff, and we expect to issue $125.0 million aggregate principal amount of senior notes for our own account. See “Description of Certain Indebtedness.”

 

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DIVIDEND POLICY

We expect to pay dividends on our common stock at the discretion of our board of directors and dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our board of directors may deem relevant. We expect that the terms of the agreement governing our senior secured term loan and revolving credit facility and the indenture governing our senior notes will contain covenants or other restrictions that, in certain circumstances, could limit the level of dividends that we are able to pay on our common stock. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends.

 

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SELECTED HISTORICAL CONDENSED COMBINED FINANCIAL DATA

The following table presents Lamb Weston’s selected historical condensed combined financial data. The selected historical condensed combined financial data as of May 29, 2016 and May 31, 2015, and for the years ended May 29, 2016, May 31, 2015 and May 25, 2014, are derived from Lamb Weston’s audited combined financial statements included elsewhere in this information statement. The selected historical condensed combined financial data as of May 25, 2014 are derived from Lamb Weston’s audited combined financial statements that are not included in this information statement. The selected historical condensed combined financial data as of May 26, 2013 and May 27, 2012 and for the years then ended are derived from Lamb Weston’s unaudited combined financial statements that are not included in this information statement.

The selected historical condensed combined financial data as of August 28, 2016 and for the thirteen weeks ended August 28, 2016 and August 30, 2015 are derived from Lamb Weston’s unaudited condensed combined financial statements included elsewhere in this information statement. The selected historical condensed combined financial data as of August 30, 2015 are derived from Lamb Weston’s unaudited condensed combined balance sheet that is not included in this information statement. In the opinion of our management, our unaudited condensed combined financial statements were prepared on the same basis as our audited combined financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of this information. Results of operations for the thirteen week period ended August 28, 2016 are not necessarily indicative of results of operations that may be expected for the full fiscal year.

The selected historical condensed combined financial data include certain expenses of ConAgra that were allocated to Lamb Weston for certain corporate functions including information technology, research and development, finance, legal, insurance, compliance and human resources activities. These costs may not be representative of the future costs Lamb Weston will incur as an independent, publicly traded company. In addition, Lamb Weston’s historical financial information does not reflect changes that Lamb Weston expects to experience in the future as a result of Lamb Weston’s separation and distribution from ConAgra, including changes in Lamb Weston’s cost structure, personnel needs, capital structure, financing and business operations. Lamb Weston’s combined financial statements also do not reflect the assignment of certain assets and liabilities between ConAgra and Lamb Weston as reflected under “Unaudited Pro Forma Combined Financial Data” included elsewhere in this information statement. Consequently, the financial information included here may not necessarily reflect what Lamb Weston’s financial position, results of operations and cash flows would have been had it been an independent, publicly traded company during the periods presented. Accordingly, these historical results should not be relied upon as an indicator of Lamb Weston’s future performance.

For a better understanding, this section should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Combined Financial Data” and corresponding notes and the combined financial statements and accompanying notes included elsewhere in this information statement.

 

    For the Thirteen
Weeks Ended
(Unaudited)
    For the Fiscal Year Ended May  

(dollars in millions)

  August 28,
2016
    August 30,
2015
    2016     2015     2014     2013
(Unaudited)
    2012
(Unaudited)
 

Net sales

  $ 776.3      $ 747.8      $ 2,993.8      $ 2,925.0      $ 2,815.2      $ 2,778.4      $ 2,651.0   

Income before income taxes and equity method investment earnings

  $ 123.5      $ 83.3      $ 367.4      $ 375.3      $ 358.4      $ 423.5      $ 253.9   

Provision for income taxes

  $ 51.0      $ 32.3      $ 144.5      $ 140.4      $ 117.7      $ 151.9      $ 93.8   

Net income attributable to Lamb Weston

  $ 79.6      $ 62.0      $ 285.3      $ 268.3      $ 260.9      $ 298.3      $ 194.9   

At Period End

             

Total assets

  $ 2,213.7      $ 2,007.2      $ 2,158.3      $ 2,055.9      $ 1,930.0      $ 1,866.5      $ 1,767.5   

Senior long-term debt (noncurrent)

  $ 103.5      $ 85.9      $ 104.6      $ 86.5      $ 124.3      $ 120.5      $ 121.4   

Non-GAAP financial information

             

EBITDA(1)

  $ 162.2      $ 123.5      $ 531.6      $ 511.2      $ 463.1       

Adjusted EBITDA(1)

  $ 171.9      $ 123.6      $ 593.4      $ 526.1      $ 502.5       

 

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(1) We define “EBITDA” as net income attributable to Lamb Weston before income taxes, interest expense, depreciation and amortization expense. We define “Adjusted EBITDA” as EBITDA before the effect of items impacting comparability such as gains or losses associated with pension plan settlements, expense allocations from ConAgra reflecting Lamb Weston’s portion of year-end write-offs of actuarial gains or losses in excess of 10% of ConAgra’s pension liability, severance-related charges, certain impairment charges, gains or losses from the sale of assets and charges related to our restructuring activities, plus (minus) our proportionate share (our joint venture partner’s proportionate share) of interest, taxes and depreciation and amortization of our unconsolidated joint ventures (consolidated joint venture). We exclude items impacting comparability to provide a better understanding of our core operating results given the significant impact these items have on the comparability of our operating results when comparing periods. We include (exclude) our proportionate share (our joint venture partner’s share) of interest, taxes and depreciation and amortization of our unconsolidated joint ventures (consolidated joint venture) given that we conduct meaningful business through these joint ventures and they provide us with significant access to cash through distributions. EBITDA and Adjusted EBITDA are non-GAAP financial measures used by management to enhance the understanding of our operating results. EBITDA and Adjusted EBITDA are key measures we use to evaluate our operational performance. We provide EBITDA and Adjusted EBITDA because we believe that investors and securities analysts will find EBITDA and Adjusted EBITDA to be useful measures for evaluating our operating performance and comparing our operating performance with that of similar companies that have different capital structures and for evaluating our ability to meet our future debt service, capital expenditures, and working capital requirements. However, EBITDA and Adjusted EBITDA should not be considered as alternatives to net income as a measure of operating results or as alternatives to cash flows from operating activities as a measure of liquidity in accordance with U.S. GAAP.

EBITDA and Adjusted EBITDA are not calculated or presented in accordance with U.S. GAAP, and other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures. As a result, these financial measures have limitations as analytical and comparative tools, and you should not consider these items in isolation, or as a substitute for analysis of our results and cash flows as reported under GAAP. Some of these limitations are:

 

    they do not reflect all of our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

    they do not reflect certain impairments and adjustments for purchase accounting;

 

    they do not reflect changes in, or cash requirements for, working capital needs;

 

    they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on debt;

 

    they do not reflect income tax expense or the cash requirements to pay taxes;

 

    they do not take into account that our unconsolidated joint ventures may not distribute cash to us because of other required uses of cash such as principal and interest payments on debt, working capital requirements, contractual or legal restrictions or negative tax consequences; and

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

 

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The following is a reconciliation of our net income attributable to Lamb Weston to EBITDA and Adjusted EBITDA:

 

     For the Thirteen Weeks Ended  
(dollars in millions)    August 28, 2016
(Unaudited)
     August 30, 2015
(Unaudited)
 

Net income attributable to Lamb Weston

   $ 79.6       $ 62.0   

Interest expense

     1.5         1.3   

Income tax expense

     51.0         32.3   

Depreciation and amortization

     25.5         23.8   

Interest expense, income tax expense and depreciation and amortization included in equity method earnings from unconsolidated affiliates

     5.5         5.0   

Interest expense, income tax expense and depreciation and amortization included in net income from consolidated affiliate

     (0.9      (0.9
  

 

 

    

 

 

 

Earnings before interest expense, income tax expense and depreciation and amortization (EBITDA)

   $ 162.2       $ 123.5   

Items impacting comparability:

     

Expenses related to Lamb Weston spinoff

     9.7         —     

Expense related to SCAE Plan

     —           0.1   
  

 

 

    

 

 

 

Adjusted earnings before interest expense, income tax expense and depreciation and amortization (Adjusted EBITDA)

   $ 171.9       $ 123.6   

 

     For the Fiscal Year Ended May  
(dollars in millions)    2016      2015      2014  

Net income attributable to Lamb Weston

   $ 285.3       $ 268.3       $ 260.9   

Interest expense

     5.9         6.1         5.3   

Income tax expense

     144.5         140.4         117.7   

Depreciation and amortization

     95.9         96.4         79.2   

Interest expense, income tax expense and depreciation and amortization included in equity method earnings from unconsolidated affiliates

     18.2         17.6         19.6   

Interest expense, income tax expense and depreciation and amortization included in net income from consolidated affiliate

     (3.6      (3.4      (3.4
  

 

 

    

 

 

    

 

 

 

Earnings before interest expense, income tax expense and depreciation and amortization (EBITDA)

   $ 546.2       $ 525.4       $ 479.3   

Items impacting comparability:

        

Expense related to year-end write-off of actuarial losses in excess of 10% of related pension liability

     59.5         —          3.4   

Gain related to the settlement of a pension plan of an international joint venture

     (17.7      —          —    

Expense related to the impairment of a previously idled production facility

     —          —          13.9   

Expense related to the impairment of certain assets received in connection with the bankruptcy of an onion products supplier

     —          —          8.9   

Expenses related to the spinoff

     5.3         —          —    

Gain related to the sale of land received in connection with the bankruptcy of an onion products supplier

     —          —          (5.1

Expense related to SCAE Plan

     0.1         0.7         2.1   
  

 

 

    

 

 

    

 

 

 

Adjusted earnings before interest expense, income tax expense and depreciation and amortization (Adjusted EBITDA)

   $ 593.4       $ 526.1       $ 502.5   

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The Unaudited Pro Forma Combined Financial Data of Lamb Weston consist of unaudited pro forma combined statements of income for the year ended May 29, 2016 and for the thirteen weeks ended August 28, 2016, and an unaudited pro forma combined balance sheet as of August 28, 2016. The Unaudited Pro Forma Combined Financial Data reported below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Selected Historical Condensed Combined Financial Data” and the combined financial statements and corresponding notes included elsewhere in this information statement.

The following Unaudited Pro Forma Combined Financial Data are subject to assumptions and adjustments described in the accompanying notes. Lamb Weston’s management believes these assumptions and adjustments are reasonable under the circumstances and given the information available at this time. However, these adjustments are subject to change as ConAgra and Lamb Weston finalize the terms of the spinoff, including the separation and distribution agreement and related transaction agreements. The Unaudited Pro Forma Combined Financial Data do not purport to represent what Lamb Weston’s financial position and results of operations actually would have been had the spinoff occurred on the dates indicated, or to project Lamb Weston’s financial performance for any future period following the spinoff.

The unaudited pro forma combined statements of income give effect to the spinoff as if it had occurred on June 1, 2015 for the year ended May 29, 2016 and the thirteen weeks ended August 28, 2016, respectively. The unaudited pro forma combined balance sheet as of August 28, 2016 gives effect to the spinoff as if it had occurred on August 28, 2016. These Unaudited Pro Forma Combined Financial Data include adjustments to reflect the following:

 

    the contribution by ConAgra to Lamb Weston, pursuant to the separation and distribution agreement, of all the assets and liabilities that comprise our business;

 

    the inclusion of $2.38 billion aggregate principal amount of debt at a weighted average interest rate of 4.4%;

 

    a cash distribution of approximately $823.5 million to ConAgra;

 

    the pro-rata distribution of approximately 146.0 million common shares of Lamb Weston to ConAgra stockholders; and

 

    the impact of the separation and distribution agreement, tax matters agreement, employee matters agreement and other commercial agreements between Lamb Weston and ConAgra, as more fully described in “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us.”

ConAgra expects to incur approximately $75 million to $80 million of non-recurring costs in connection with the separation and spinoff. These amounts are expected to cover matters such as investment advisory, recruiting, consulting, legal, auditing and information technology related services incurred to complete the spinoff. Lamb Weston expects to incur additional non-recurring costs of approximately $5 million to $10 million related to the spinoff after it is completed. These amounts exclude costs related to Lamb Weston’s issuance of debt as part of the spinoff, which have been incorporated in the accompanying Unaudited Pro Forma Combined Financial Data.

Lamb Weston’s combined financial statements include expense allocations for certain support functions that are currently provided on a centralized basis within ConAgra, such as expenses for business shared services, and other selling, general and administrative expenses that benefit Lamb Weston. We expect to incur additional ongoing costs after the spinoff related to operating as an independent public company and replacing the services previously provided by ConAgra. We currently estimate those additional costs will range from approximately $15 million to $25 million in excess of our fiscal 2016 reported selling, general and administrative expenses, excluding items impacting comparability. Our estimate takes into consideration the benefit that we will receive from the elimination of cost allocations from ConAgra after the spinoff is completed. The estimated additional costs are not reflected in the accompanying Unaudited Pro Forma Combined Financial Data.

Due to the scope and complexity of these activities, the amount of the above-described costs could increase or decrease materially from those as currently estimated.

 

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Unaudited Pro Forma Consolidated Balance Sheet

As of August 28, 2016

(in millions)

 

     Historical     Pro Forma
Adjustments
    Pro
Forma
 

Current assets

      

Cash and cash equivalents

   $ 72.4      $ —   (A)    $ 72.4   

Receivables, less allowance for doubtful accounts

     210.5          210.5   

Inventories

     474.3        —          474.3   

Prepaid expenses and other current assets

     37.6        —          37.6   
  

 

 

   

 

 

   

 

 

 

Total current assets

     794.8        —         794.8   
  

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     1,083.5        —          1,083.5   

Goodwill

     133.6        —          133.6   

Brands, trademarks and other intangibles, net

     38.9        —          38.9   

Other assets

     162.9        —          162.9   
  

 

 

   

 

 

   

 

 

 
   $ 2,213.7      $  —        $ 2,213.7   
  

 

 

   

 

 

   

 

 

 

Current liabilities

      

Notes payable

   $ 24.5      $  —        $ 24.5   

Current installments of long-term debt

     14.1        33.8 (B)      47.9   

Revolving credit facility borrowings

     —          34.6 (B)      34.6   

Accounts payable

     259.8        —          259.8   

Accrued payroll

     24.9        —          24.9   

Other accrued liabilities

     75.7        —          75.7   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     399.0        68.4        467.4   
  

 

 

   

 

 

   

 

 

 

Senior long-term debt, excluding current installments

     103.5        2,272.6 (B)      2,376.1   

Other noncurrent liabilities

     247.8        —          247.8   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     750.3        2,341.0        3,091.3   
  

 

 

   

 

 

   

 

 

 

Stockholders’ Equity

      

Parent Companies’ invested equity

     1,473.7        (1,473.7 )(C)      —     

Common stock $1.00 par value

     —          146.0 (C)      146.0   

Accumulated deficit

     —          (1,013.3 )(C)(A)      (1,013.3

Accumulated other comprehensive income (loss)

     (10.3     —          (10.3
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     1,463.4        (2,341.0     (877.6
  

 

 

   

 

 

   

 

 

 
   $ 2,213.7      $  —        $ 2,213.7   
  

 

 

   

 

 

   

 

 

 

 

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Unaudited Pro Forma Consolidated Statement of Income

For the Year Ended May 29, 2016

(in millions, except per share data)

 

     Historical      Pro Forma
Adjustment
    Pro
Forma
 

Net sales

   $ 2,993.8       $  —        $ 2,993.8   

Costs and expenses:

       

Cost of goods sold

     2,326.4       $  —          2,326.4   

Selling, general and administrative expenses

     294.1         (10.6 )(D)      283.5   

Interest expense, net

     5.9         109.1 (E)      115.0   
  

 

 

    

 

 

   

 

 

 

Income before income taxes and equity method investment earnings

     367.4         (98.5     268.9   

Income tax expense

     144.5         (36.2 )(F)      108.3   

Equity method investment earnings

     71.7         —          71.7   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 294.6       $ (62.3   $ 232.3   
  

 

 

    

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

     9.3         —          9.3   
  

 

 

    

 

 

   

 

 

 

Net income attributable to Lamb Weston

   $ 285.3       $ (62.3   $ 223.0   
  

 

 

    

 

 

   

 

 

 

Per share amounts:

       

Basic

        $ 1.51 (G) 

Diluted

        $ 1.51 (G) 

Weighted average shares outstanding:

       

Basic

          144.8 (H) 

Diluted

          144.9 (I) 

Unaudited Pro Forma Consolidated Statement of Income

For the Thirteen Weeks Ended August 28, 2016

(in millions, except per share data)

 

     Historical      Pro Forma
Adjustment
    Pro
Forma
 

Net sales

   $ 776.3       $  —        $ 776.3   

Costs and expenses:

       

Cost of goods sold

     595.7       $  —          595.7   

Selling, general and administrative expenses

     55.6         (9.8 )(D)      45.8   

Interest expense, net

     1.5         27.5 (E)      29.0   
  

 

 

    

 

 

   

 

 

 

Income before income taxes and equity method investment earnings

     123.5         (17.7     105.8   

Income tax expense

     51.0         (9.9 )(F)      41.1   

Equity method investment earnings

     10.6         —          10.6   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 83.1       $ (7.8   $ 75.3   
  

 

 

    

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

     3.5         —          3.5   
  

 

 

    

 

 

   

 

 

 

Net income attributable to Lamb Weston

   $ 79.6       $ (7.8   $ 71.8   
  

 

 

    

 

 

   

 

 

 

Per share amounts:

       

Basic

        $ 0.48 (G) 

Diluted

        $ 0.48 (G) 

Weighted average shares outstanding:

       

Basic

          146.3 (H) 

Diluted

          146.4 (I) 

 

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Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

The following items resulted in adjustments reflected in the unaudited pro forma condensed consolidated financial information:

 

  A. Reflects an $823.5 million distribution to ConAgra Foods, Inc. prior to the spinoff based on the assumed net proceeds of the debt described in Note (B). As part of the spinoff, Lamb Weston expects to issue approximately $1.54 billion aggregate principal amount of senior notes to ConAgra Foods, Inc., and we expect to issue $125.0 million aggregate principal amount of senior notes for our own account. The amount of cash proceeds received from debt incurred prior to the spinoff, and thus the amount of cash distributed to ConAgra Foods, Inc., will depend on market conditions at the time we incur the debt, which is not certain at this time.

 

  B. Reflects indebtedness totaling $2.38 billion to be incurred by Lamb Weston, in conjunction with the spinoff, consisting of $1.67 billion in aggregate principal amount of senior notes, $675.0 million in aggregate principal amount of borrowings under a term loan facility and approximately $38.5 million of borrowings under a $500.0 million revolving credit facility, reduced by $38.5 million for estimated debt issuance costs that will be recognized as a component of interest expense over the life of the various debt instruments.

 

  C. Reflects the pro forma recapitalization of our equity. As of the distribution date, ConAgra Foods, Inc.’s net investment in our business will be exchanged to reflect the distribution of our common shares to ConAgra Foods, Inc. stockholders. ConAgra Foods, Inc. stockholders will receive common shares based on an expected distribution ratio of one Lamb Weston common share for every three ConAgra Foods, Inc. common shares.

 

  D. Reflects the cessation of accruals of further benefits under the ConAgra Foods Salaried Pension Plan for certain employees of Lamb Weston (i.e., the service cost component of pension expense for salaried employees of Lamb Weston), partially offset by the estimated impact of increased employer contributions to a planned defined contribution plan of Lamb Weston to be established concurrent with the close of the spinoff. The planned changes to employee benefit plans result in a net reduction in expenses of $5.3 million and $0.1 million for the year ended May 29, 2016 and the thirteen weeks ended August 28, 2016, respectively. This pro forma adjustment also reflects the elimination of $5.3 million and $9.7 million for the year ended May 29, 2016 and the thirteen weeks ended August 28, 2016, respectively, of expenses related to the spinoff included in the historical financial statements.

 

  E. Represents adjustments to interest expense and amortization of debt issuance costs related to approximately $2.38 billion of debt that we expect to incur as described in Note (B). We expect the weighted-average interest rate on the debt to be approximately 4.4%. Interest expense may be higher or lower if our actual interest rate or credit ratings change. A 25 basis point increase/decrease in the weighted-average interest rate would increase/decrease annual interest expense by approximately $5.9 million.

 

  F. Reflects the tax effects of the pro forma adjustments at the applicable statutory income tax rate of 36.8% and, in the case of the thirteen weeks ended August 28, 2016, that substantially all of the spinoff related costs are assumed to be non-deductible for tax purposes. The effective tax rate could be different (either higher or lower) depending on activities subsequent to the spinoff.

 

  G. For purposes of determining basic and diluted earnings per share, the net income attributable to Lamb Weston has been reduced by $4.8 million and $1.5 million for the year ended May 29, 2016 and the thirteen weeks ended August 28, 2016, respectively, to reflect the amount by which the redemption value of the noncontrolling interest in Lamb Weston BSW increased during the period.

 

  H.

The number of Lamb Weston common shares used to compute basic earnings per share is based on the weighted average number of ConAgra Foods, Inc. common shares outstanding for the year ended May 29, 2016 and the thirteen weeks ended August 28, 2016, assuming a distribution ratio of one

 

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  Lamb Weston common share for every three ConAgra Foods, Inc. common shares, which distribution ratio is subject to change.

 

  I. The unaudited pro forma diluted earnings per common share and pro forma weighted-average diluted shares outstanding give effect to the potential dilution from common shares related to stock-based awards granted to Lamb Weston employees under the ConAgra Foods, Inc. stock-based compensation programs. This calculation may not be indicative of the dilutive effect that will actually result from the Lamb Weston, Inc. stock-based awards issued in connection with the adjustment of outstanding ConAgra Foods, Inc. stock-based awards or the grant of new stock-based awards. The number of dilutive shares of common stock underlying Lamb Weston, Inc. stock-based awards issued in connection with the adjustment of outstanding ConAgra Foods, Inc. stock-based awards will not be determined until the distribution date or shortly thereafter. For the purposes of preparing the unaudited pro forma diluted earnings per common share and pro forma weighted-average diluted shares, we believe an estimate based on applying the distribution ratio of one common share of Lamb Weston for every three ConAgra Foods, Inc. common shares, to the weighted-average ConAgra Foods, Inc. diluted shares outstanding for the year ended May 29, 2016 and for the thirteen weeks ended August 28, 2016, respectively, provides a reasonable approximation of the potential dilutive effect of the stock-based awards. Outstanding options and restricted stock awards will be converted in a manner designed to reflect the intrinsic value of such awards at the time of separation, which may result in additional expense incurred by Lamb Weston to the extent the conversion results in a change in fair value of the stock-based awards. The conversion of existing ConAgra Foods, Inc. awards to Lamb Weston awards will not be known until the distribution date or shortly thereafter, therefore we do not believe we can establish a reasonable estimate of the potential additional expense that may be incurred until such time. A portion of any incremental expense will be recognized on the date of the modification for the vested portions of awards, and the remainder will be amortized over the remaining vesting period.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide a summary of significant factors relevant to the financial performance and condition of the Lamb Weston business, which we refer to in this discussion and analysis as “Lamb Weston,” of ConAgra Foods, Inc., which we refer to in this discussion and analysis as “ConAgra” or “Parent.” The discussion and analysis should be read together with Lamb Weston’s audited annual combined financial statements and related notes for the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014 and the unaudited interim combined financial statements and related notes for the thirteen weeks ended August 28, 2016 and August 30, 2015. Results for the fiscal year ended May 29, 2016 and the thirteen-week period ended August 28, 2016 are not necessarily indicative of results that may be attained in the future.

Executive Overview

Lamb Weston

Lamb Weston, along with its joint venture partners, is a leading global producer, provider, and marketer of value-added frozen potato products. We, along with our joint venture partners, are the number one supplier of value-added frozen potato products by market share in North America—the largest market for frozen potato products in the world. We, along with our joint venture partners, are also a leading supplier of value-added frozen potato products globally, with a growing presence in high-growth emerging markets. We, along with our joint venture partners, offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our value-added frozen potato product portfolio.

The highly-experienced Lamb Weston team has deep expertise in processing potatoes into value-added products and delivering innovative customer solutions. As an independent public company, we will continue to focus on driving sustainable, profitable growth by offering innovative products and customer-centric solutions that leverage our advantaged manufacturing and processing footprint, while also maintaining a balanced capital allocation strategy.

In the first quarter of fiscal 2017, our net sales totaled $776.3 million, our net income attributable to Lamb Weston totaled $79.6 million, and we generated operating cash flows of $115.0 million.

In fiscal 2016, our net sales totaled $3.0 billion, our net income attributable to Lamb Weston totaled $285.3 million, and we generated operating cash flows of $382.3 million.

Factors Affecting Our Business and Results of Operations

Key factors that have influenced our results of operations and may do so in the future include:

Competitive Dynamics

Our business, value-added frozen potato products, is highly competitive. Our principal competitors have substantial financial, sales and marketing, and other resources. A strong competitive response from one or more of our competitors to our marketplace efforts could result in reduced prices, increased promotional activity, loss of significant customers or reduced overall market share. However, as one of the few industry participants with national and global reach and capabilities, we believe Lamb Weston is well-positioned to capitalize on the attractive growth prospects of our industry.

Crop Performance

The primary input to our products is potatoes. Every year, we must procure large volumes of potatoes that meet the quality standards for processing into value-added products. Over our 50-year history as a potato

 

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processor, we have positioned Lamb Weston to have access to high-quality potatoes on an annual basis by building long-term relationships with potato growers. However, our inability to obtain the necessary quantities of potatoes that meet our quality standards at reasonable costs in a given year, as a result of factors such as adverse weather conditions in the applicable growing regions or increased competition for the available supply of potatoes, could negatively impact our ability to meet customer needs and could decrease our profitability.

Customer Relationships

We benefit from strong relationships with a diverse set of customers. We sell our products across a variety of food channels, and have deep and long-tenured relationships with leading quick service and fast casual restaurants, global foodservice distributors and large grocery retailers. However, some of our customers independently represent a meaningful portion of our sales and loss of one or more of these customers could negatively affect our results of operations. For example, in fiscal 2014, we lost a significant portion of our business with a key distributor, resulting in a more challenging business environment for our Foodservice segment.

Acquisitions

From time to time, we will use acquisitions to reach new markets, expand internationally, and grow our sales and profits. In July 2014, Lamb Weston acquired Tai Mei Potato Industry Limited, a potato processor in China, for $92.2 million, consisting of $74.9 million in cash, net of cash acquired, plus assumed liabilities. The purchase included property and equipment associated with making frozen potato products. The purchase provides Lamb Weston the ability to make our value-added frozen potato products in China, closer to our expanding customer base, and meet the growing demand for frozen potato products in Asia. If we are unable to complete additional acquisitions in the future, or to successfully integrate and develop acquired businesses, our financial results could be materially and adversely affected.

Restructuring Plans

Lamb Weston is committed to driving efficiencies throughout its operations to improve profitability. For example, in fiscal 2014, ConAgra launched an initiative to improve selling, general and administrative effectiveness and efficiencies, and to create efficiencies throughout its supply chain. This initiative is referred to as the Supply Chain and Administrative Efficiency Plan, or the SCAE Plan.

Lamb Weston has participated in the SCAE Plan and incurred costs in connection therewith. Lamb Weston did not recognize severance-related expenses in the first quarter of fiscal 2017 and recognized $0.1 million for the SCAE Plan in the first quarter of fiscal 2016. Our failure to continue to reduce costs through productivity gains or the elimination of redundant costs could adversely affect our profitability and weaken our competitive position.

Joint Venture Relationships

We conduct meaningful business through two unconsolidated joint ventures and include our share of the earnings of these affiliates in our own financial statements based on our economic ownership interest in them. Our two most significant affiliates produce and market value-added frozen potato products for retail and foodservice customers:

 

    We hold a fifty percent ownership interest in Lamb-Weston/Meijer v.o.f., or Lamb-Weston Meijer, a Netherlands joint venture with Meijer Frozen Foods B.V., headquartered in the Netherlands, that manufactures and sells frozen potato products principally in Europe. We and our partner are jointly and severally liable for all legal liabilities of Lamb-Weston Meijer.

 

    We hold a fifty percent ownership interest in Lamb-Weston/RDO Frozen, or Lamb-Weston RDO, a potato processing venture with RDO Frozen Co. We provide all sales and marketing services to Lamb-Weston RDO. We receive a fee for these services based on a percentage of the net sales of the venture.

 

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The results of these joint ventures are included as equity method investment earnings in our combined financial statements. We have strong relationships with our joint venture partners. However, if our partners begin to take actions that have negative impacts on the joint venture, or begin to disagree with the strategies we have developed to grow these businesses, our ability to achieve our growth strategies may be negatively impacted.

Export Dynamics

To capture the meaningful opportunities in the frozen potato category abroad, we plan to continue to invest in our growing export business. During fiscal 2016, export sales accounted for 19% of our total net sales. However, circumstances beyond our control could prevent us from exporting our products in sufficient quantities to meet customer opportunities. For example, during fiscal 2015, a labor dispute at ports along the West Coast led to a six-month slowdown in the export and import of goods and services across industry. This event, which we refer to as the West Coast port labor dispute, had a negative impact on Lamb Weston’s international sales and profits in fiscal 2015. The dispute was resolved toward the end of the third quarter of fiscal 2015. If we are unsuccessful in mitigating any future disruption to export mechanisms, we may be unable to adequately supply all of our customer needs, which could adversely affect our business or financial results.

Debt Structure

In connection with the completion of the spinoff, we expect that we will incur a substantial amount of debt. Our level of debt could have important consequences. For example, it could:

 

    make it more difficult for us to make payments on our debt;

 

    require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

 

    increase our vulnerability to adverse economic or industry conditions;

 

    limit our ability to obtain additional financing in the future to enable us to react to changes in our business; or

 

    place us at a competitive disadvantage compared to businesses in our industry that have less debt.

For more information regarding the expected terms of our senior secured term loan, revolving credit facility and senior notes, see “Description of Certain Indebtedness.”

Items Impacting Comparability

Several significant items have affected the comparability of our year-over-year results of continuing operations in recent years.

Items of note impacting comparability for the first quarter of fiscal 2017 included charges of $9.7 million ($9.5 million after-tax) related to the spinoff, classified within selling, general and administrative expenses.

Items of note impacting comparability for the first quarter of fiscal 2016 included charges of $0.1 million in connection with the SCAE Plan.

Other items of note impacting comparability for fiscal 2016 included:

 

    a gain of $17.7 million ($13.3 million after-tax) related to the settlement of a pension plan of an international potato venture, classified within equity method investment earnings;

 

    a charge of $59.5 million ($37.6 million after-tax) reflecting an allocation to Lamb Weston of a portion of the year-end write-off of actuarial losses in excess of 10% of ConAgra’s pension liability, classified within selling, general and administrative expenses; and

 

    charges of $5.3 million for costs incurred related to the spinoff, classified within selling, general and administrative expenses.

 

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Lamb Weston’s fiscal 2015 net sales benefited by approximately 2% as a result of the fiscal year including 53 weeks. Lamb Weston also recognized severance-related charges of $0.7 million in fiscal 2015 classified within selling, general and administrative expenses. There were no other items of note impacting comparability for fiscal 2015.

Items of note impacting comparability for fiscal 2014 included:

 

    a charge of $13.9 million ($9.4 million after-tax) in connection with the impairment of a previously idled small production facility, classified within selling, general and administrative expenses;

 

    a charge of $8.9 million ($5.6 million after-tax) in connection with the impairment of certain assets received in connection with the bankruptcy of an onion products supplier, classified within selling, general and administrative expenses;

 

    a gain of $5.1 million ($3.2 million after-tax) in connection with the sale of land received in connection with the bankruptcy of an onion products supplier, classified within selling, general and administrative expenses;

 

    a charge of $3.4 million ($2.6 million after-tax) reflecting the write-off of Lamb Weston’s share of actuarial losses in excess of 10% of the pension liability for Lamb-Weston Meijer, classified within equity method investment earnings; and

 

    charges of $2.1 million related to the SCAE Plan, classified within selling, general and administrative expenses.

Business Review

Lamb Weston

Lamb Weston reports operations in four reporting segments: Global, Foodservice, Retail, and Other. Lamb Weston and our joint venture partners combine to sell our branded and private label specialty frozen potato products around the world. We have defined our operating segments by customer type and geography.

Global

The Global reporting segment includes results of operations associated with Lamb Weston’s business with very large chain restaurant customers, whether those results are generated in the United States or abroad, as well as results of operations associated with retail and foodservice customers located outside of the United States and Canada. Sales to large restaurant chains account for the vast majority of Global segment sales. We have included non-U.S. and non-Canadian retail and foodservice customers in the Global segment due to the efficiency benefits of coordinating sales to all customer types within specific markets, as well as due to these customers’ smaller scale and dependence on local economic conditions. The segment’s product portfolio includes frozen potatoes, frozen sweet potatoes and frozen appetizers. Products are sold under the Lamb Weston® brand, as well as many customer labels.

Foodservice

The Foodservice reporting segment includes sales to broad line foodservice distribution customers in the United States and Canada. Sales to these customers account for the vast majority of this segment’s sales. The ultimate purchasers of our products (i.e., customers of the broad line foodservice customers) include businesses, primary, secondary and post-secondary educational institutions, independent restaurants, regional chain restaurants, and convenience stores.

The segment’s product portfolio includes frozen potatoes, frozen sweet potatoes and frozen appetizer items. Products are sold under the Lamb Weston brand, as well as customer labels.

 

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Retail

The Retail reporting segment includes sales to grocery, mass, club, and specialty retailers primarily in the United States.

The segment’s products are sold in the freezer section, and are also found in the prepared foods (i.e., Deli) section of many retailers. The segment’s product portfolio includes consumer facing frozen specialty potato and frozen sweet potato items that are sold under the retailer’s own brands and licensed equities such as Alexia®, the leading natural and organic frozen potato brand, which is licensed from ConAgra, and the brand names of major North American restaurant chains.

Other

The Other segment includes equity method earnings from Lamb Weston’s unconsolidated joint ventures, Lamb-Weston Meijer and Lamb-Weston RDO. The segment also includes the consolidated results of operations from Lamb Weston’s frozen vegetable business and dairy business.

Results of Operations

Product Contribution Margin

For each period presented, we have reported product contribution margin by segment. Product contribution margin is the primary measure reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. We define product contribution margin as net sales less cost of the goods sold and advertising and promotion expenses.

Presentation of Derivative Gains (Losses) from Economic Hedges of Forecasted Cash Flows in Results

Derivatives used to manage commodity price risk and foreign currency risk are not designated for hedge accounting treatment. Lamb Weston believes these derivatives provide economic hedges of certain forecasted transactions. As such, these derivatives are generally recognized at fair market value with realized and unrealized gains and losses recognized in the operating results. Lamb Weston recognized a gain of $0.5 million and a charge of $3.3 million in the first quarter of fiscal 2017 and 2016, respectively, and charges of $4.6 million, $10.3 million and $2.5 million for fiscal 2016, 2015 and 2014, respectively, in relation to the use of derivatives.

Thirteen Weeks Ended August 28, 2016 compared to Thirteen Weeks Ended August 30, 2015

Net Sales

 

(dollars in millions)

   Thirteen
Weeks
Ended
August 28,
2016
     Thirteen
Weeks
Ended
August 30,
2015
     % Inc
(Dec)
 

Global

   $ 399.2       $ 382.8         4

Foodservice

     260.2         246.3         6

Retail

     89.6         87.6         2

All Other

     27.3         31.1         (12 )% 
  

 

 

    

 

 

    

 

 

 

Total

   $ 776.3       $ 747.8         4
  

 

 

    

 

 

    

 

 

 

Lamb Weston’s net sales for the first quarter of fiscal 2017 were $776.3 million, an increase of $28.5 million, or 4%, as compared to the first quarter of fiscal 2016. Results for the first quarter of fiscal 2017 for all segments reflected increased volumes of 1% due to organic growth and a 3% increase in price/mix.

 

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Global net sales increased $16.4 million, or 4%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016. Results for the first quarter of fiscal 2017 reflect 3% growth due to strong volume growth in international markets lapping soft first quarter of fiscal 2016 volumes, including strong volume growth in both Japan and Australia. Additionally, results for the first quarter of fiscal 2017 reflect a 1% increase in price associated with domestic pricing actions.

Foodservice net sales increased $13.9 million, or 6%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016. Results for the first quarter of fiscal 2017 primarily reflect growth due to pricing actions.

Retail net sales increased $2.0 million, or 2%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016. Results for the first quarter of fiscal 2017 reflect 7% growth due to increased pricing in our deli and private label portfolios. The increase was partially offset by volume decreases of 5% due to pricing actions.

Other net sales decreased $3.8 million, or 12%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016. Results for the first quarter of fiscal 2017 reflect a decrease in volume of 5% due to a lag in sales orders and 7% due to product returns/disposals under the voluntary recall of certain packages of frozen vegetables in the fourth quarter of fiscal 2016 and the first quarter of fiscal 2017. The voluntary action was taken by Lamb Weston because the recalled products contain vegetables that were part of a third party frozen food recall.

Product Contribution Margin (Net sales less cost of goods sold and advertising and promotion expenses)

 

(dollars in millions)

   Thirteen
Weeks
Ended
August 28,
2016
     Thirteen
Weeks
Ended
August 30,

2015
     % Inc
(Dec)
 

Global

   $ 73.7       $ 55.3         33

Foodservice

     79.4         60.3         32

Retail

     19.6         13.1         49

Other

     3.2         6.7         (51 )% 
  

 

 

    

 

 

    

 

 

 

Global product contribution margin increased $18.4 million, or 33%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016, as a result of higher net sales, discussed above. Cost of goods sold was $1.3 million, or 1%, lower in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016 driven by lower fuel costs, lower ocean rates and favorable product mix partially offset by an increase from higher volume. Advertising and promotion spending was $0.7 million lower in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016, driven by higher costs in the first quarter of fiscal 2016 related to our global rebranding.

Foodservice product contribution margin increased $19.1 million, or 32%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016, due to higher net sales, as discussed above. Cost of goods sold was $4.9 million, or 3%, lower in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016 driven by favorable sales mix and fuel costs. Advertising and promotion spending was $0.3 million lower in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016, driven by higher costs in the first quarter of fiscal 2016 related to our global rebranding.

Retail product contribution margin increased $6.5 million, or 49%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016, due to the increase in net sales, as discussed above, as well as lower commodity input and transportation costs. Cost of goods sold was $4.1 million, or 6%, lower in the first quarter

 

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of fiscal 2017 as compared to the first quarter of fiscal 2016 driven primarily by a decrease in sales volume combined with lower fuel costs. Advertising and promotion spending was $0.4 million lower in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016, driven by higher costs in the first quarter of fiscal 2016 related to our global rebranding.

Other product contribution margin decreased $3.5 million, or 51%, in the first quarter of fiscal 2017 as compared to the first quarter of fiscal 2016, due to the decrease in net sales, as discussed above, somewhat offset by a decrease of $0.3 million, or 2%, in cost of goods sold.

Selling, General and Administrative, or SG&A, Expenses (Includes general corporate expenses)

SG&A expenses totaled $55.6 million for the first quarter of fiscal 2017, a decrease of $1.1 million compared to the first quarter of fiscal 2016.

SG&A expenses for the first quarter of fiscal 2017 reflected charges of $13.2 million in connection with expense allocations from ConAgra and $9.7 million in connection with spinoff related costs.

SG&A expenses for the first quarter of fiscal 2016 included charges of $25.4 million in connection with expense allocations from ConAgra and charges totaling $0.1 million in connection with the SCAE Plan.

Lower overall expense allocations from ConAgra in the first quarter of fiscal 2017 were driven by lower corporate overhead, resulting from ConAgra’s cost reduction initiatives, and certain departmental charges, which were previously allocated, which are now being directly absorbed by Lamb Weston.

Interest Expense, Net

Net interest expense was $1.5 million and $1.3 million for the first quarter of fiscal 2017 and 2016, respectively.

Income Taxes

Lamb Weston’s income tax expense was $51.0 million and $32.3 million in the first quarter of fiscal 2017 and 2016, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income including equity method earnings) was 37% and 34% for the first quarter of fiscal 2017 and 2016, respectively. The higher effective tax rate in the first quarter of fiscal 2017 was largely the result of non-deductible costs related to the spinoff.

We expect our effective tax rate for fiscal 2017, exclusive of any unusual transactions or tax events, to be approximately 33%-34%.

Equity Method Investment Earnings

Lamb Weston includes its share of the earnings of certain affiliates based on its economic ownership interest in the affiliates. Significant affiliates produce and market potato products for retail and foodservice customers. Lamb Weston’s share of earnings from its equity method investments was $10.6 million and $12.5 million for the first quarter of fiscal 2017 and 2016, respectively. The decrease in earnings from equity method investments is the result of lower margins primarily driven by higher raw inventory costs at Lamb-Weston Meijer partially offset by higher sales volume and pricing at Lamb-Weston RDO. The equity method investment earnings are reported in the Other segment.

 

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Fiscal Year Ended May 29, 2016 compared to Fiscal Year Ended May 31, 2015

Net Sales

 

(dollars in millions)

   Fiscal 2016
Net Sales
     Fiscal 2015
Net Sales
     % Inc
(Dec)
 

Global

   $ 1,549.4       $ 1,512.9         2

Foodservice

     946.0         929.0         2

Retail

     372.1         355.6         5

Other

     126.3         127.5         (1 )% 
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,993.8       $ 2,925.0         2
  

 

 

    

 

 

    

 

 

 

Lamb Weston’s net sales for fiscal 2016 were $3.0 billion, an increase of $68.8 million, or 2%, compared to fiscal 2015. Results for fiscal 2016 for all segments reflected increased volumes of 5% due to organic growth, partially offset by a decrease of approximately 2% due to the inclusion of an additional week in fiscal 2015, and a 1% decrease in price/mix.

Global net sales increased $36.5 million, or 2%, in fiscal 2016 as compared to fiscal 2015. Results for fiscal 2016 reflect 6% growth due to strong volume growth in international markets due to the lapping of the West Coast port labor dispute in the prior fiscal year, the full-year impact of fiscal 2015 new business, additional new channel penetration in Mexico, and organic and ramp-up growth in China. The increase was partially offset by selling price decreases of 2% associated with (i) negative mix impacts of lower Japan business, (ii) pricing concessions with a major customer in Japan to maintain our share, (iii) lower net sales prices on new chain business, and (iv) domestic price concessions in connection with strategic decisions to maintain exclusivity or increase share. The increase was also partially offset by a decrease of approximately 2% due to the inclusion of an additional week in fiscal 2015.

Foodservice net sales increased $17.0 million, or 2%, in fiscal 2016 as compared to fiscal 2015. Results for fiscal 2016 reflect 5% growth due to organic volume growth and increased demand for frozen potato products with our key distributors. The increase was partially offset by a decrease of approximately 2% due to the inclusion of an additional week in fiscal 2015, and a 1% decrease in price/mix.

Retail net sales increased $16.5 million, or 5%, in fiscal 2016 as compared to fiscal 2015. Results for fiscal 2016 reflect 7% growth due to increased volume and pricing in our branded and private label portfolios, and increased deli business. The increase was partially offset by a decrease of approximately 2% due to the inclusion of an additional week in fiscal 2015.

Other net sales decreased $1.2 million, or 1%, in fiscal 2016 as compared to fiscal 2015. Results for fiscal 2016 primarily reflected a reduction due to the inclusion of an additional week in fiscal 2015.

Product Contribution Margin (Net sales less cost of goods sold and advertising and promotion spending)

 

(dollars in millions)

   Fiscal 2016      Fiscal 2015      % Inc
(Dec)
 

Global

   $ 296.5       $ 253.7         17

Foodservice

     254.7         246.0         4

Retail

     69.6         47.6         46

Other

     21.0         20.6         2

Global product contribution margin increased $42.8 million, or 17%, in fiscal 2016 as compared to fiscal 2015, as a result of higher net sales, discussed above, lower commodity input, transportation, and conversion costs, as well as the lapping of costs associated with the West Coast port labor dispute in the prior fiscal year. Cost of goods sold was $8.8 million, or 1%, lower in fiscal 2016 as compared to fiscal 2015 driven by a decrease

 

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in commodity input, transportation and conversion costs partially offset by an increase from higher volume. Advertising and promotion spending was $2.4 million higher in fiscal 2016 as compared to fiscal 2015, driven by costs related to our global rebranding.

Foodservice product contribution margin increased $8.7 million, or 4%, in fiscal 2016 as compared to fiscal 2015, due to higher net sales, discussed above, as well as lower commodity input, transportation, and conversion costs. Cost of goods sold was $6.2 million, or 1%, higher in fiscal 2016 as compared to fiscal 2015 driven by an increase from higher volume partially offset by a decrease in commodity input, transportation and conversion costs. Advertising and promotion spending was $2.1 million higher in fiscal 2016 as compared to fiscal 2015, driven by costs related to our global rebranding.

Retail product contribution margin increased $22.0 million, or 46%, in fiscal 2016 as compared to fiscal 2015, due to the increase in net sales, as discussed above, as well as lower commodity input, transportation, and conversion costs. Cost of goods sold was $7.2 million, or 2%, lower in fiscal 2016 as compared to fiscal 2015 driven by a decrease in commodity input, transportation and conversion costs partially offset by an increase from higher volume. Advertising and promotion spending was $1.6 million higher in fiscal 2016 as compared to fiscal 2015, driven by additional marketing and promotional spending related to our Alexia brand.

Other product contribution margin increased $0.4 million, or 2%, in fiscal 2016 as compared to fiscal 2015, as the decrease in net sales, as discussed above, was more than offset by a $1.5 million, or 1%, decrease in cost of goods sold.

SG&A Expenses (Includes allocated general corporate expenses)

SG&A expenses totaled $294.1 million for fiscal 2016, an increase of $88.2 million compared to fiscal 2015.

SG&A expenses for fiscal 2016 reflected the following:

 

    charges of $161.5 million in connection with expense allocations from ConAgra (including a charge of $59.5 million reflecting Lamb Weston’s portion of the year-end write-off of actuarial losses in excess of 10% of ConAgra’s pension liability for ConAgra company sponsored plans),

 

    advertising and promotion spending of $25.6 million,

 

    expenses of $5.3 million incurred related to the spinoff, and

 

    expenses of $0.1 million in connection with the SCAE Plan.

SG&A expenses for fiscal 2015 reflected the following:

 

    charges of $78.9 million in connection with expense allocations from ConAgra,

 

    advertising and promotion spending of $19.4 million, and

 

    expenses of $0.7 million in connection with the SCAE Plan.

In addition to the fiscal 2016 charge associated with pensions described above, the remaining increase in the fiscal 2016 expense allocation from ConAgra was largely attributable to higher incentive costs as compared to fiscal 2015.

Interest Expense, Net

Net interest expense was $5.9 million and $6.1 million for fiscal 2016 and 2015, respectively.

Income Taxes

Lamb Weston’s income tax expense was $144.5 million and $140.4 million in fiscal 2016 and 2015, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income including equity method earnings) was 33% and 34% in fiscal 2016 and fiscal 2015, respectively.

 

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Equity Method Investment Earnings

Equity method investment earnings were $71.7 million and $42.7 million in fiscal 2016 and 2015, respectively. Equity method investment earnings for fiscal 2016 included a gain of $17.7 million related to the settlement of a pension plan of Lamb-Weston Meijer. The equity method investment earnings are reported in the Other segment. The increase in fiscal 2016 compared to fiscal 2015 also reflects higher profits for Lamb-Weston Meijer.

Fiscal Year Ended May 31, 2015 compared to Fiscal Year Ended May 25, 2014

Net Sales

 

(dollars in millions)

   Fiscal 2015
Net Sales
     Fiscal 2014
Net Sales
     % Inc
(Dec)
 

Global

   $ 1,512.9       $ 1,493.2         1

Foodservice

     929.0         865.7         7

Retail

     355.6         333.0         7

Other

     127.5         123.3         3
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,925.0       $ 2,815.2         4
  

 

 

    

 

 

    

 

 

 

Lamb Weston’s net sales for fiscal 2015 were $2.9 billion, an increase of $109.8 million, or 4%, compared to fiscal 2014. Results for fiscal 2015 for all segments reflected increased volumes of 2% due to organic growth and approximately 2% due to the inclusion of an additional week in fiscal 2015.

Global net sales increased $19.7 million, or 1%, in fiscal 2015 compared to fiscal 2014. Results for fiscal 2015 reflected strong organic volume growth of 4% in North America and a 2% increase due to the inclusion of an additional week in fiscal 2015. Increases in the segment were primarily offset by a 4% decrease in exports due in large part to the West Coast port labor dispute, and a 1% decrease in price/mix.

Foodservice net sales increased $63.3 million, or 7%, in fiscal 2015 as compared to fiscal 2014. Results for fiscal 2015 reflected strong volume growth of 5% in the United States, driven by diversification of business with new and existing distributors following the loss of a significant portion of our business with a key distributor in fiscal 2014. The inclusion of an additional week in fiscal 2015 contributed approximately 2% growth in net sales.

Retail net sales increased $22.6 million, or 7%, in fiscal 2015 as compared to fiscal 2014. Results for fiscal 2015 reflected strong volume growth of 5% driven by the launch of new products and distribution gains on licensed brand products. The inclusion of an additional week in fiscal 2015 contributed approximately 2% growth in net sales.

Other net sales increased $4.2 million, or 3%, in fiscal 2015 as compared to fiscal 2014. Results for fiscal 2015 primarily reflected an increase due to the inclusion of an additional week in fiscal 2015.

Product Contribution Margin

 

(dollars in millions)

   Fiscal 2015      Fiscal 2014      % Inc
(Dec)
 

Global

   $ 253.7       $ 279.5         (9 )% 

Foodservice

     246.0         216.3         14

Retail

     47.6         49.8         (4 )% 

Other

     20.6         18.4         12

 

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Global product contribution margin decreased $25.8 million, or 9%, in fiscal 2015 as compared to fiscal 2014. Benefits from net sales growth, discussed above, as well as lower commodity input costs, were more than offset by increased costs resulting from the West Coast port labor dispute. The West Coast port labor dispute was resolved toward the end of the third quarter of fiscal 2015. Cost of goods sold was $45.5 million, or 4%, higher in fiscal 2015 as compared to fiscal 2014 driven by an increase from higher volume and an increase in warehousing and transportation costs due to the West Coast port labor dispute more than offsetting lower commodity input costs.

Foodservice product contribution margin increased $29.7 million, or 14%, in fiscal 2015 as compared to fiscal 2014, due to net sales growth, discussed above, as well as lower commodity input costs and conversion costs due to increased production volume. Cost of goods sold was $36.9 million, or 6%, higher in fiscal 2015 as compared to fiscal 2014 driven by an increase from higher volume partially offset by a decrease due to lower commodity input and conversion costs. Advertising and promotion spending was $3.3 million lower in fiscal 2015 as compared to fiscal 2014, driven by reduced promotional spending with distributors.

Retail product contribution margin decreased $2.2 million, or 4%, in fiscal 2015 as compared to fiscal 2014. An overall increase in net sales growth, discussed above, as well as lower commodity input costs, were more than offset by increased advertising and promotion costs to support the business growth and increased transportation and warehousing costs resulting from the West Coast port labor dispute. Cost of goods sold was $23.7 million, or 9%, higher in fiscal 2015 as compared to fiscal 2014 driven by an increase from higher volume and an increase in cost resulting from increased transportation and warehousing costs from the West Coast port labor dispute more than offsetting lower commodity input costs. Advertising and promotion spending was $1.1 million higher in fiscal 2015 as compared to fiscal 2014, driven by additional marketing and promotional spending related to our Alexia brand.

Other product contribution margin increased $2.2 million, or 12%, in fiscal 2015 as compared to fiscal 2014. Results for fiscal 2015 primarily reflected increased volumes and operating efficiencies.

SG&A Expenses (Includes allocated general corporate expenses)

SG&A expenses totaled $205.9 million for fiscal 2015, a decrease of $16.1 million compared to fiscal 2014.

SG&A expenses for fiscal 2015 reflected the following:

 

    charges of $78.9 million in connection with expense allocations from ConAgra,

 

    advertising and promotion spending of $19.4 million, and

 

    expenses of $0.7 million in connection with the SCAE Plan.

SG&A expenses for fiscal 2014 included:

 

    charges of $68.3 million in connection with expense allocations from ConAgra,

 

    advertising and promotion spending of $21.8 million,

 

    a charge of $13.9 million in connection with the impairment of a small, previously idled production facility,

 

    a charge of $8.9 million in connection with the impairment of certain assets received in connection with the bankruptcy of an onion products supplier,

 

    a benefit of $5.1 million in connection with the sale of land received in connection with the bankruptcy of an onion products supplier, and

 

    expenses of $2.1 million in connection with the SCAE Plan.

 

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Interest Expense, Net

Net interest expense was $6.1 million and $5.3 million for fiscal 2015 and 2014, respectively.

Income Taxes

Lamb Weston’s income tax expense was $140.4 million and $117.7 million in fiscal 2015 and 2014, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income including equity method earnings) was 34% and 30% in fiscal 2015 and fiscal 2014, respectively. The fiscal 2014 effective tax rate included a benefit from a change in estimate related to tax methods used for certain international sales.

Equity Method Investment Earnings

Equity method investment earnings were $42.7 million and $29.6 million in fiscal 2015 and 2014, respectively. The equity method investment earnings are reported in the Other segment. The increase in fiscal 2015 compared to fiscal 2014 reflects higher profits for Lamb-Weston Meijer. In fiscal 2014, earnings also reflected a $3.4 million charge relating to the year-end write-off of actuarial losses in excess of 10% of the pension liability for Lamb-Weston Meijer.

Liquidity and Capital Resources

Sources of Liquidity and Capital

Lamb Weston’s liquidity needs are funded primarily by cash flows from its operations and, as needed, from the financial support of ConAgra.

Lamb Weston’s potato processing operations in China utilize a short-term credit facility of $38.0 million to finance operating requirements for working capital. Borrowings under the facilities bear interest at 85% of the Peoples Bank of China rate (4.35% at August 29, 2016) and may be prepaid without penalty. ConAgra guarantees the full amount of the subsidiary’s obligations to the financial institution up to the maximum amount of the credit facility. At August 28, 2016, the total amount borrowed under the facility was approximately $23.5 million.

As of May 31, 2015, ConAgra held a LIBOR plus 2.00% promissory note from Lamb Weston BSW, LLC, which we refer to as Lamb Weston BSW, a consolidated variable interest entity of Lamb Weston, with a balance of $36.1 million. In addition, ConAgra provided lines of credit of up to $15.0 million to Lamb Weston BSW. During the third quarter of fiscal 2016, Lamb Weston BSW fully repaid the promissory note plus accrued interest and the promissory note and lines of credit were terminated. This repayment was partially funded with the issuance of a $30.0 million installment note with a financial institution. The note includes a $23.0 million fixed rate loan segment with interest at 4.34% and a $7.0 million variable rate loan segment with interest at LIBOR plus an applicable margin ranging from 1.90% to 2.30%, payable in semi-annual installments through fiscal 2032. At August 28, 2016, the outstanding balance of the notes was $30.0 million.

Lamb Weston BSW also issued a $10 million revolving note with interest at LIBOR plus an applicable margin ranging from 1.75% to 2.00%. There was $1.0 million outstanding against this revolving note at August 28, 2016.

In connection with these Lamb Weston BSW financings, Lamb Weston has entered into an agreement with the financial institution that provides that in the event that Lamb Weston BSW fails to comply with certain financial covenants or repayment terms, Lamb Weston is required to either make certain additional equity contributions to Lamb Weston BSW or purchase the notes.

 

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Lamb Weston does not maintain other significant separate financing sources with third parties. Historically, ConAgra has had adequate sources of liquidity to provide necessary financial support to Lamb Weston.

Upon completion of the spinoff, our capital structure and sources of liquidity will change significantly from our historical capital structure. Our businesses will no longer participate in cash management and funding arrangements with ConAgra. As part of the spinoff, we expect to incur approximately $2.38 billion of new debt, which we expect to consist of $675.0 million aggregate principal amount of borrowings under a senior secured term loan facility, approximately $1.67 billion in aggregate principal amount of senior notes and approximately $38.5 million of borrowings under a $500.0 million revolving credit facility. For more information regarding the expected terms of our senior secured term loan, revolving credit facility and senior notes, see “Description of Certain Indebtedness.”

We expect that $1.54 billion aggregate principal amount of our senior notes will be issued to ConAgra in connection with the spinoff, and we expect to issue $125.0 million aggregate principal amount of senior notes for our own account. It is anticipated that, in advance of the spinoff, certain investment banks will purchase certain of ConAgra’s senior notes in the open market and that, following such purchase, ConAgra will enter into a debt exchange agreement to effect a debt-for-debt exchange pursuant to which such investment banks will agree to exchange all of the ConAgra senior notes purchased for our senior notes issued to ConAgra at a specified exchange ratio. The terms of the debt exchange agreement would be determined in negotiations among ConAgra and the investment banks; however, there can be no assurance that the debt exchange agreement will be entered into or that the debt-for-debt exchange will occur.

Our internally generated cash flow will be used to invest in new product development, fund capital expenditures and fund working capital requirements. We expect our cash flows from operations to be adequate to support these requirements as well as service our future debt, pay expected future dividends, fund any share repurchases and fund future acquisitions, if any. Our ability to fund these capital needs will depend on our ongoing ability to generate cash from operations and to access our borrowing facilities and capital markets. We believe that our future cash from operations, together with our access to funds on hand, or available through borrowing facilities and capital markets, will provide adequate resources to fund our operating and financing needs for at least the next twelve months.

Cash Flows

In the first quarter of fiscal 2017, Lamb Weston generated $115.0 million from operating activities, used $58.3 million for investing activities, used $21.4 million for financing activities, and had an increase of $0.7 million in cash and cash equivalents due to the effect of changes in foreign currency exchange rates.

In fiscal 2016, Lamb Weston generated $382.3 million from operating activities, used $144.3 million for investing activities, used $232.8 million for financing activities, and had an increase of $0.6 million in cash and cash equivalents due to the effect of changes in foreign currency exchange rates.

Cash generated from operating activities totaled $115.0 million in the first quarter of fiscal 2017, as compared to $135.3 million generated in the first quarter of fiscal 2016. Net income was higher during the first quarter of fiscal 2017, as compared to the first quarter of fiscal 2016. Also, the decrease in inventory balances during the first quarter of fiscal 2016 was greater than the first quarter of fiscal 2017, primarily due to maintaining higher finished goods inventory balances to accommodate plant maintenance projects. Also, the decrease in accrued salaries during the first quarter of fiscal 2017 was greater than the first quarter of fiscal 2016, primarily due to higher incentive compensation payouts as a result of higher company earnings.

Cash generated from operating activities totaled $382.3 million in fiscal 2016, as compared to $353.7 million generated in fiscal 2015 and $386.4 million generated in fiscal 2014. The increase for fiscal 2016 compared to fiscal 2015 is due in part to higher net income during fiscal 2016, as compared to fiscal 2015. Also, the increase in inventory balances during fiscal 2015 was greater than fiscal 2016, primarily due to lower

 

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volumes in international shipments due to the slowdown from the West Coast port labor dispute in fiscal 2015, as well as deflation in commodity inputs for fiscal 2016. The decrease for fiscal 2015 compared to fiscal 2014 is partially attributable to increases in inventory in fiscal 2015 resulting from lower volumes in international shipments due to the slowdown from the West Coast port labor dispute, expansion of potato manufacturing capacity in the United States and China, as well as larger potato harvests. Total dividends received from equity method investments in fiscal 2016, 2015, and 2014 were $37.9 million, $12.0 million, and $45.9 million, respectively.

Investing activities used $58.3 million in the first quarter of fiscal 2017 compared to $34.4 million in the first quarter of fiscal 2016. Investing activities in the first quarter of fiscal 2017 and 2016 consisted primarily of capital expenditures of $59.3 million and $36.5 million, respectively.

Investing activities used $144.3 million in fiscal 2016 compared to $171.2 million in fiscal 2015, and $173.2 million in fiscal 2014. Investing activities in fiscal 2016 consisted primarily of capital expenditures of $152.3 million. Investing activities in fiscal 2015 consisted primarily of capital expenditures of $114.7 million and the acquisition of a potato manufacturer in China totaling $74.9 million. Changes in capital expenditures are due to the nature and timing of significant plant expansions and improvements from year to year, and fiscal 2017 capital expenditures are expected to be higher than recent trends. Shortly following the end of fiscal 2016, Lamb Weston announced its intention to invest approximately $200 million in a new French fry processing line in the company’s Richland, Washington facility. A substantial portion of the capital required for this new project is expected to be funded during fiscal 2017 and, accordingly, we expect our capital expenditures for fiscal 2017 to total approximately $297 million.

Cash used for financing activities was $21.4 million in the first quarter of fiscal 2017 compared to cash used in financing activities of $109.5 million in the first quarter of fiscal 2016. Financing activities consisted primarily of net cash transfers to ConAgra of $17.9 million and $107.3 million in the first quarter of fiscal 2017 and 2016, respectively, and repayment of long-term debt of $0.6 million and 0.7 million in the first quarter of fiscal 2017 and 2016, respectively. The reduction in net transfers to ConAgra in the first quarter of fiscal 2017 was largely the result of the higher levels of cash retained in the business and increased capital expenditures. Cash distributions paid to the noncontrolling interest of Lamb Weston BSW for the first quarter of fiscal 2017 and 2016 totaled $2.5 million and $1.4 million, respectively.

Cash used for financing activities was $232.8 million in fiscal 2016 compared to $177.7 million in fiscal 2015 and $199.6 million in fiscal 2014. Financing activities in fiscal 2016 included the issuance of long-term debt totaling $30.0 million and the repayment of long-term debt totaling $39.1 million. Cash used for financing activities include net cash outflows from Lamb Weston to ConAgra totaling $236.8 million, $150.7 million, and $189.1 million, for fiscal 2016, 2015, and 2014, respectively. Cash distributions paid to the noncontrolling interest of Lamb Weston BSW for fiscal 2016, 2015, and 2014 totaled $8.3 million, $11.3 million, and $6.9 million, respectively. For fiscal 2016, there were net issuances of short-term borrowings totaling $21.4 million and for fiscal 2015 there were net repayments of short-term borrowings totaling $12.6 million.

Lamb Weston had cash and cash equivalents of $72.4 million at August 28, 2016 and $36.4 million at May 29, 2016, of which $37.2 million and $33.6 million, respectively, were held in foreign countries. Lamb Weston makes an assertion regarding the amount of earnings intended for permanent reinvestment outside the United States, with the balance available to be repatriated to the United States. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries’ operational activities and future foreign investments. No related tax liability has been accrued as of August 28, 2016. At August 28, 2016, management does not intend to permanently repatriate additional foreign cash. Any future decision to repatriate foreign cash could result in an adjustment to the deferred tax liability after considering available foreign tax credits and other tax attributes. It is not practicable to determine the amount of any such deferred tax liability at this time.

 

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Off-Balance Sheet Arrangements

Lamb Weston uses off-balance sheet arrangements (e.g., leases accounted for as operating leases) where sound business principles warrant their use. Lamb Weston may also periodically enter into guarantees and other similar arrangements as part of transactions in the ordinary course of business. These are described further in “Obligations and Commitments,” below.

Variable Interest Entities Not Consolidated

Lamb Weston has variable interests in certain entities that Lamb Weston has determined to be variable interest entities, but for which Lamb Weston is not the primary beneficiary. Lamb Weston does not consolidate the financial statements of these entities.

Lamb Weston holds a 50% interest in Lamb-Weston RDO, a potato processing venture with RDO Frozen Co. Lamb Weston provides all sales and marketing services to Lamb-Weston RDO. Lamb Weston receives a fee for these services based on a percentage of the net sales of the venture. Lamb Weston reflects the value of Lamb Weston’s ownership interest in this venture in other assets in Lamb Weston’s Combined Balance Sheets, based upon the equity method of accounting. The balance of our investment was $17.1 million and $16.9 million at August 28, 2016 and May 29, 2016, respectively, representing Lamb Weston’s maximum exposure to loss as a result of Lamb Weston’s involvement with this venture. The capital structure of Lamb-Weston RDO includes owners’ equity of $34.6 million and term borrowings from banks of $40.5 million as of August 28, 2016. Lamb Weston has determined that Lamb Weston does not have the power to direct the activities that most significantly impact the economic performance of this venture.

Obligations and Commitments

As part of Lamb Weston’s ongoing operations, it enters into arrangements that obligate it to make future payments under contracts such as lease agreements, debt agreements, potato supply agreements, and unconditional purchase obligations (i.e., obligations to transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as “take-or-pay” contracts). The unconditional purchase obligation arrangements are entered into in the normal course of business in order to ensure adequate levels of sourced product are available. Of these items, debt, notes payable, and capital lease obligations which totaled $142.1 million at August 28, 2016, were recognized as liabilities in Lamb Weston’s combined balance sheets. Operating lease obligations and unconditional purchase obligations, which totaled $490.9 million as of August 28, 2016, were not recognized as liabilities in Lamb Weston’s combined balance sheets, in accordance with generally accepted accounting principles.

A summary of Lamb Weston’s contractual obligations as of August 28, 2016 was as follows.

 

     Payments Due by Period
(in millions)
 

Contractual Obligations

   Total      Less than
1 Year
     1-3 Years      3-5 Years      After 5 Years  

Long-term debt

   $ 109.3       $ 12.6       $ 6.2       $ 6.9       $ 83.6   

Capital lease obligations

     8.3         1.4         1.9         0.6         4.4   

Operating lease obligations

     58.0         17.1         17.7         8.8         14.4   

Purchase obligations1

     432.9         91.5         55.3         36.3         249.8   

Notes payable

     24.5         24.5         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 633.0       $ 147.1       $ 81.1       $ 52.6       $ 352.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1

Amount includes open purchase orders and agreements, some of which are not legally binding and/or may be cancellable. Such agreements are generally settleable in the ordinary course of business in less than one year. Excludes purchase commitments under potato supply agreements due to uncertainty of pricing and quantity. Potato supply agreements have maximum contracted pricing with deductions for certain quality

 

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  attributes, and quantities purchased are determined by the yields produced on contracted acres. Total purchases under potato supply agreements were $123.1 million and $122.7 million in the first quarter of fiscal 2017 and 2016, respectively, and $571.0 million, $581.0 million and $541.9 million for fiscal 2016, 2015 and 2014, respectively.

Lamb Weston is also contractually obligated to pay interest on its long-term debt. The weighted average coupon interest rate of the long-term debt obligations outstanding as of August 28, 2016 was approximately 4.5%.

Lamb Weston holds a 49.99% interest in Lamb Weston BSW, a potato processing venture with Ochoa Ag Unlimited Foods, Inc., which we refer to as Ochoa. Lamb Weston provides all sales and marketing services to Lamb Weston BSW. Under certain circumstances, Lamb Weston could be required to compensate Ochoa for lost profits resulting from significant production shortfalls. Commencing on June 1, 2018, or on an earlier date under certain circumstances, Lamb Weston has a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa, which we refer to as the call option. Lamb Weston is currently subject to a contractual obligation to purchase all of Ochoa’s equity investment in Lamb Weston BSW at the option of Ochoa, which we refer to as the put option. The purchase prices under the call option and the put option, which we refer to as the options, are based on the book value of Ochoa’s equity interest at the date of exercise, as modified by an agreed-upon rate of return for the holding period of the investment balance. The agreed-upon rate of return varies depending on the circumstances under which any of the options are exercised. As of August 28, 2016, the price at which Ochoa had the right to put its equity interest to Lamb Weston was $48.9 million. This amount, which is presented within other noncurrent liabilities in Lamb Weston’s combined balance sheets, is not included in the “Contractual Obligations” table above as the payment is contingent upon the exercise of the put option by Ochoa, and the eventual occurrence and timing of such exercise is uncertain. During the third quarter of fiscal 2016, Lamb Weston BSW issued a $30.0 million promissory note to a financial institution. The note includes a $23.0 million fixed rate loan segment with interest at 4.34% and a $7.0 million variable rate loan segment with interest at LIBOR plus an applicable margin ranging from 1.90% to 2.30%, payable in semi-annual installments through fiscal 2032. Lamb Weston BSW also issued a $10.0 million revolving note with interest at LIBOR plus an applicable margin ranging from 1.75% to 2.00%. There was $1.0 million outstanding under this revolving note at August 28, 2016.

In connection with these Lamb Weston BSW financings, Lamb Weston has entered into an agreement with the financial institution which provides that in the event that Lamb Weston BSW fails to comply with certain financial covenants or repayment terms, Lamb Weston is required to either make certain additional equity contributions to Lamb Weston BSW or to purchase the underlying notes.

As part of Lamb Weston’s ongoing operations, Lamb Weston also enters into arrangements that obligate it to make future cash payments only upon the occurrence of a future event (e.g., guarantees of debt or lease payments of a third party should the third party be unable to perform). In accordance with generally accepted accounting principles, the following commercial commitments are not recognized as liabilities in Lamb Weston’s combined balance sheets. A summary of Lamb Weston’s commitments, including commitments associated with equity method investments, as of August 28, 2016 was as follows:

 

     Amount of Commitment Expiration Per Period
(in millions)
 

Other Commercial Commitments

   Total      Less than
1 Year
     1-3 Years      3-5 Years      After 5 Years  

Guarantees

   $ 96.4       $ 70.6       $ 5.4       $ 8.4       $ 10.2   

Lamb Weston is a party to various potato supply agreements. Under the terms of certain such potato supply agreements, Lamb Weston has guaranteed repayment of short-term bank loans of the potato suppliers, under certain conditions. At August 28, 2016, the amount of supplier loans Lamb Weston has effectively guaranteed was $67.9 million, included in the table above. Lamb Weston has not established a liability for these guarantees, as Lamb Weston has determined that the likelihood of its required performance under the guarantees is remote.

 

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Lamb Weston holds a 50% interest in Lamb-Weston Meijer, a Netherlands joint venture with Meijer Frozen Foods B.V., headquartered in the Netherlands, that manufactures and sells frozen potato products principally in Europe. Lamb Weston and its partner are jointly and severally liable for all legal liabilities of Lamb-Weston Meijer. As of August 28, 2016, the total liabilities of Lamb-Weston Meijer were $198.6 million. Lamb-Weston Meijer is well capitalized, with partners’ equity of $285.9 million as of August 28, 2016. Lamb Weston has not established a liability on its balance sheets for the obligations of Lamb-Weston Meijer, as Lamb Weston has determined the likelihood of any required payment to settle such liabilities of Lamb-Weston Meijer is remote.

The obligations and commitments tables above do not include any reserves for uncertainties in income taxes, as Lamb Weston is unable to reasonably estimate the ultimate amount or timing of settlement of its reserves for income taxes. The liability for gross unrecognized tax benefits at August 28, 2016 was $3.8 million. The net amount of unrecognized tax benefits at August 28, 2016, that, if recognized, would impact Lamb Weston’s effective tax rate was $2.3 million. Recognition of these tax benefits would have a favorable impact on its effective tax rate.

Critical Accounting Estimates

The process of preparing financial statements requires the use of estimates on the part of management. The estimates used by management are based on Lamb Weston’s historical experiences combined with management’s understanding of current facts and circumstances. Certain of Lamb Weston’s accounting estimates are considered critical as they are both important to the portrayal of its financial condition and results and require significant or complex judgment on the part of management. The following is a summary of certain accounting estimates considered critical by management.

Income Taxes

Lamb Weston’s income tax expense is based on Lamb Weston’s income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which it operates. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining Lamb Weston’s income tax expense and in evaluating its tax positions, including evaluating uncertainties. Lamb Weston reviews tax positions at least quarterly and adjusts the balances as new information becomes available. While the level of uncertain tax positions identified by management is currently not significant, the extent of such exposures could change in the future as the business grows and expands in new or existing tax jurisdictions. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the tax bases of assets and liabilities and their carrying amounts in Lamb Weston’s balance sheets, as well as from net operating loss and tax credit carryforwards. Lamb Weston evaluates the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These estimates of future taxable income inherently require significant judgment. Lamb Weston uses historical experience and short and long-range business forecasts to develop such estimates. Further, Lamb Weston employs various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the extent management does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. As of May 29, 2016, undistributed earnings of Lamb Weston’s foreign subsidiaries amounted to approximately $99.0 million. These earnings are considered to be indefinitely reinvested and, accordingly, no U.S. Federal income taxes have been provided thereon. Lamb Weston has not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and companies that Lamb Weston considers to be reinvested indefinitely. It is not practicable to estimate the amount of U.S. income taxes that would be incurred in the event that Lamb Weston were to repatriate the cumulative earnings of non-U.S. affiliates and associated companies. Deferred taxes are provided for earnings of non-U.S. affiliates and associated companies when Lamb Weston determines that such earnings are no longer indefinitely reinvested. While Lamb Weston has historically been very profitable and has had access to the capital through its parent, as a separate public company those considerations may change over time which could impact these assessments and related accounting considerations.

 

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Further information on income taxes is provided in Note 9 “Pre-tax Income and Income Taxes” to the combined audited financial statements.

Employment-Related Benefits

ConAgra offers plans that are shared amongst its businesses, including Lamb Weston. In these cases, the participation of employees in these plans is reflected in the combined financial statements as though Lamb Weston participates in a multiemployer plan with ConAgra. The pension service cost of company employees are included within selling, general and administrative expenses or cost of goods sold, depending upon the role of the applicable employee, in a manner similar to the manner in which expenses would be recognized under a multiemployer pension plan. The portion of pension expense comprised of expected return on plan assets, interest cost, amortization of prior service cost, and amortization of actuarial gains and/or losses applicable to company employees is included in the indirect pool of selling, general and administrative costs of the parent of the company, which were allocated to the company based on the methodology described in Cost Allocations, below.

One significant assumption for pension plan accounting is the discount rate. Historically, the parent of the company has selected a discount rate each year (as of its fiscal year-end measurement date) for its plans based upon a high-quality corporate bond yield curve for which the cash flows from coupons and maturities match the year-by-year projected benefit cash flows for its pension plans. The corporate bond yield curve is comprised of high-quality fixed income debt instruments (usually Moody’s Aa) available at the measurement date. At May 29, 2016, the parent company changed to use a spot-rate approach. This alternative approach focuses on measuring the service cost and interest cost components of net periodic benefit cost by using individual spot rates derived from a high-quality corporate bond yield curve and matched with separate cash flows for each future year instead of a single weighted-average discount rate approach.

Based on this information, the discount rate selected for determination of pension expense was 4.10%, 4.15%, and 4.05% for fiscal 2016, 2015, and 2014, respectively. With the adoption of the spot-rate approach in fiscal 2017, the discount rates selected for the service cost and interest cost components of pension expense were 4.14% and 3.15%, respectively.

The service cost included in the results of operations for the fiscal years ended May 29, 2016, May 31, 2015 and May 25, 2014 and the first quarter of fiscal 2017 was $14.2 million, $13.1 million, $12.2 million and $3.8 million, respectively. A 25 basis point decrease in our discount rate assumption for the first quarter of fiscal 2017 would increase service costs by $0.2 million. A 25 basis point increase in our discount rate assumption for the first quarter of fiscal 2017 would decrease service cost by $0.2 million.

Assets and liabilities of such plans are retained by ConAgra. Further information on the ConAgra plan is discussed in ConAgra’s Annual Report on Form 10-K for the year ended May 29, 2016.

Impairment of Long-Lived Assets (including property, plant and equipment), Identifiable Intangible Assets, and Goodwill

Lamb Weston reduces the carrying amounts of long-lived assets (including property, plant and equipment) to their fair values when their carrying amount is determined to not be recoverable. Upon identification of a triggering event requiring an impairment analysis, Lamb Weston generally compares undiscounted estimated future cash flows of an asset or asset group to the carrying values of the asset or asset group. If the undiscounted estimated future cash flows exceed the carrying values of the asset or asset group, no impairment is recognized. If the undiscounted estimated future cash flows are less than the carrying values of the asset or asset group, Lamb Weston writes-down the asset or assets to their estimated fair values. The estimates of fair value are generally in the form of appraisal, or by discounting estimated future cash flows of the asset or asset group.

 

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Determining the useful lives of intangible assets also requires management judgment. Certain brand intangibles are expected to have indefinite lives based on their history and Lamb Weston’s plans to continue to support and build the acquired brands, while other acquired intangible assets (e.g., customer relationships) are expected to have determinable useful lives. Lamb Weston’s estimates of the useful lives of definite-lived intangible assets are primarily based upon historical experience, the competitive and macroeconomic environment, and its operating plans. The costs of definite-lived intangibles are amortized to expense over their estimated life.

Lamb Weston reduces the carrying amounts of indefinite-lived intangible assets, and goodwill to their fair values when the fair value of such assets is determined to be less than their carrying amounts (i.e., assets are deemed to be impaired). Fair value is typically estimated using a discounted cash flow analysis, which requires Lamb Weston to estimate the future cash flows anticipated to be generated by the particular asset being tested for impairment as well as to select a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, Lamb Weston considers historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by management in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets and identifiable intangible assets.

In assessing other intangible assets not subject to amortization for impairment, Lamb Weston has the option to perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of such an intangible asset is less than its carrying amount. If Lamb Weston determines that it is not more likely than not that the fair value of such an intangible asset is less than its carrying amount, then Lamb Weston is not required to perform any additional tests for assessing intangible assets for impairment. However, if Lamb Weston concludes otherwise or elects not to perform the qualitative assessment, then Lamb Weston is required to perform a quantitative impairment test that involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

If Lamb Weston performs a quantitative impairment test in evaluating impairment of its indefinite lived brands/trademarks, Lamb Weston utilizes a “relief from royalty” methodology. The methodology determines the fair value of each brand through use of a discounted cash flow model that incorporates an estimated “royalty rate” Lamb Weston would be able to charge a third party for the use of the particular brand. When determining the future cash flow estimates, Lamb Weston must estimate future net sales and a fair market royalty rate for each applicable brand and an appropriate discount rate to measure the present value of the anticipated cash flows. Estimating future net sales requires significant judgment by management in such areas as future economic conditions, product pricing, and consumer trends. In determining an appropriate discount rate to apply to the estimated future cash flows, Lamb Weston considers the current interest rate environment and its estimated cost of capital.

In fiscal 2016, 2015 and 2014, Lamb Weston elected to perform a quantitative impairment test for indefinite lived intangibles. There were no impairment charges recognized in fiscal 2016, 2015 and 2014.

Goodwill is tested annually for impairment of value and whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, adverse changes in the markets in which an entity operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.

 

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In testing goodwill for impairment, Lamb Weston has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If Lamb Weston elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. Lamb Weston also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.

Under the goodwill qualitative assessment, various events and circumstances that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). Furthermore, management considers the results of the most recent two-step quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital between the current and prior years for each reporting unit.

Under the two-step quantitative impairment test, the first step of the evaluation involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Fair value is typically estimated using a discounted cash flow analysis, which requires Lamb Weston to estimate the future cash flows anticipated to be generated by the reporting unit being tested for impairment as well as to select a risk-adjusted discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, Lamb Weston considers historical results adjusted to reflect current and anticipated operating conditions. Lamb Weston estimates cash flows for the reporting unit over a discrete period (typically four or five years) and the terminal period (considering expected long term growth rates and trends). Estimating future cash flows requires significant judgment by management in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows or significant changes in risk-adjusted discounts rates due to changes in market conditions could produce substantially different estimates of the fair value of the reporting unit.

If the fair value of a reporting unit determined in the first step of the evaluation is lower than its carrying value, Lamb Weston proceeds to the second step, which compares the carrying value of goodwill to its implied fair value. In estimating the implied fair value of goodwill for a reporting unit, Lamb Weston must assign the fair value of the reporting unit (as determined in the first step) to the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination (i.e., Lamb Weston estimates the fair value of each asset and liability held in the reporting unit). The various assets and liabilities within the reporting unit are generally not adjusted to their new, estimated fair values (unless impairments of any individual assets are indicated). The implied goodwill is equal to the residual of the estimated fair value of the reporting unit over the estimated fair values of each identifiable asset and liability within the reporting unit. Any excess of the carrying value of goodwill of the reporting unit over its implied fair value is recorded as impairment. There were no impairment charges recognized in fiscal 2016, 2015 and 2014, and as of the most recent assessment, the estimated fair values of each of the reporting units significantly exceed its carrying value.

Cost Allocations

ConAgra provides a variety of services to Lamb Weston, such as treasury and cash management, procurement, information technology, general accounting and finance, payroll and human resources, legal and communications, real estate and facilities, and other general and administrative stewardship. To the extent that costs were not directly attributable to Lamb Weston (direct costs primarily include restructuring charges and employee benefits for Lamb Weston personnel which include certain stock-based compensation, pension and postretirement benefits, healthcare and workers’ compensation), ConAgra allocates certain selling, general and administrative costs to Lamb Weston based on specific metrics correlated with the cost of these services (e.g., employee headcount, net sales, square footage of office space, etc.).

The above allocations were consistent with historical allocations for Lamb Weston; however, ConAgra does not historically allocate certain other corporate costs to its various segments. For any remaining indirect corporate costs which support Lamb Weston, Lamb Weston has been allocated additional selling, general and

 

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administrative costs using an equal weighting between the Lamb Weston product contribution margin (net sales less cost of goods sold and advertising and promotion expenses) and Lamb Weston total assets relative to consolidated ConAgra product contribution margin and total assets.

Although it is not practicable to estimate what such costs would have been if Lamb Weston had operated as a separate entity, Lamb Weston considers such allocations to have been made on a reasonable basis. Further information on income taxes is provided in Note 2 “Transactions with Affiliated Companies” to the combined audited financial statements.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP. On July 9, 2015, the FASB deferred the effective date of the new revenue recognition standard by one year. Based on the FASB’s ASU, Lamb Weston will apply the new revenue standard in its fiscal year 2019. Early adoption in fiscal year 2018 is permitted. Lamb Weston is evaluating the effect that ASU 2014-09 will have on its combined financial statements and related disclosures. The standard permits the use of either the retrospective or cumulative effect transition method.

In July 2015, the FASB issued ASU 2015-11, Inventory, which requires an entity to measure inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The effective date for the standard is for fiscal years beginning after December 15, 2016. Early adoption is permitted. Lamb Weston does not expect this ASU to have a material impact to its combined audited financial statements. The standard is to be applied prospectively.

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification, or ASC, Topic 842, Leases, which requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018. Early adoption is permitted. Lamb Weston is evaluating the effect that ASC 842 will have on its consolidated financial statements and related disclosures. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for income taxes, among other changes, related to stock-based compensation. Lamb Weston early adopted ASU 2016-09 in the first quarter of 2017 with an effective date of May 30, 2016. The adoption of ASU 2016-09 did not have a material impact on our combined financial statements.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Following the spinoff, the risks related to our business will also include certain market risks that may affect our debt and other financial instruments. In particular, we will face the market risks associated with interest rate movements on our variable rate debt. Following the spinoff, we will be highly leveraged. We expect to incur approximately $2.38 billion of long-term debt in connection with the spinoff. Of this debt, $713.5 million is expected to bear interest at a variable rate, and we will consider entering into a fixed-to-floating interest rate swap with respect to some, or all, of our $1.67 billion principal amount of senior notes. Accordingly, a substantial portion of our long-term debt could be subject to an element of market risk from changes in interest rates. We expect to regularly assess market risks and to establish policies and business practices to protect against the adverse effects of these exposures.

 

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BUSINESS

Lamb Weston

Lamb Weston, along with its joint venture partners, is a leading global producer, provider, and marketer of value-added frozen potato products. We, along with our joint venture partners, are the number one supplier of value-added frozen potato products by market share in North America—the largest market for frozen potato products in the world. We, along with our joint venture partners, are also a leading supplier of value-added frozen potato products globally, with a growing presence in high-growth emerging markets. We, along with our joint venture partners, offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our value-added frozen potato product portfolio.

The highly-experienced Lamb Weston team has deep expertise in processing potatoes into value-added products and delivering innovative customer solutions. As an independent public company, we will continue to focus on driving sustainable, profitable growth by offering innovative products and customer-centric solutions that leverage our advantaged manufacturing and processing footprint, while also maintaining a balanced capital allocation strategy.

In fiscal 2016, our net sales totaled $3.0 billion, our net income attributable to Lamb Weston totaled $285.3 million, our Adjusted EBITDA totaled $593.4 million and we generated operating cash flows of $382.3 million. For a reconciliation of Adjusted EBITDA to its most directly comparable financial measure under U.S. GAAP and the reasons why we believe the presentation of Adjusted EBITDA is useful to investors, see “Selected Historical Condensed Combined Financial Data.”

Key Business Strengths

We believe the frozen potato category is highly attractive, and we have several business strategies that differentiate us from our competitors and contribute to our ongoing success:

We, along with our joint venture partners, are a leader in the growing global value-added frozen potato category, which we believe enjoys favorable domestic and international business dynamics

The frozen potato category is attractive domestically, with significant scale and strong growth opportunities. According to the USDA Economic Research Service, as of 2014, more than 50% of domestic food spending occurred away-from-home. At the same time, French fries are widely available on restaurant menus, with approximately 60% of restaurants in the United States featuring French fries. The United States represents the largest portion of global frozen potato volume, accounting for approximately 34% of global volume in 2015.

Internationally, the opportunity to expand consumption of frozen potato products is significant. According to Euromonitor, by 2020, the frozen processed potato category is forecasted to grow by 2.7 billion pounds, representing a 2% CAGR, overall. Global unit expansion by quick service restaurants coupled with increasing per-capita consumption of value-added potatoes contribute to the growth opportunity in our product categories. Industry-wide, the export volume of frozen potato products to South America, Russia, the Middle East and China has grown at high single or double digits in recent years.

As the number one producer in North America and with a strong and growing international presence, we believe we are uniquely positioned to capture category growth.

As one of the few industry participants with national and global reach and capabilities, we believe Lamb Weston is uniquely positioned to capitalize on the attractive growth prospects of the frozen potato category. Based on our estimates, Lamb Weston, along with its joint venture partners, is the North American frozen potato category leader by volume, providing a diverse portfolio of value-added frozen potato products. Outside of the United States, we, along with our joint venture partners, are the second largest supplier of frozen potato products, by volume, with a presence across over 100 countries and a growing position in high-growth emerging markets.

 

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We intend to use a strong pipeline of strategic initiatives and strong customer relationships, combined with our acquisition and alliance expertise, to maintain our share leadership in North America, and capture increasing share in the highest-growth international markets. For example, we recently acquired a factory in Shangdu, Inner Mongolia, China, creating a platform that provides in-country production to further service the growing Asia market. In addition, we recently announced our participation in a joint venture in Russia, where frozen potato product volumes have grown at a high compounded rate in recent years.

We believe we have strong, long-standing and collaborative customer relationships.

We believe we benefit from strong relationships with a diverse set of customers. We sell our products across a variety of food channels, and have deep and long-tenured relationships with leading quick service and fast casual restaurants, global foodservice distributors and large grocery retailers. We believe we have developed customer intimacy with our key accounts over time through a focus on world-class customer service and customer-focused innovation. We have also made investments in developing cutting-edge research and innovation capabilities that enable customer-focused solutions. We recently opened what we believe to be a state-of-the-art global research and innovation center in Richland, Washington to enhance these efforts.

We believe our integrated value delivery system provides scale and cost advantages.

Over our 50-year history as a potato processor, we have built an integrated value delivery system that we believe provides us scale and cost advantages. First, we have positioned Lamb Weston to have access to high-quality potatoes on an annual basis. We have built long-term relationships with potato growers, developed deep agronomic expertise and, to a modest extent, vertically integrated our operations. Second, we have developed highly-efficient processing capabilities. Our potato processing facilities are located in regions that together account for approximately 90% of global potato production. This sourcing and production footprint provides access to cost-advantaged potatoes and an export-cost advantage to key international markets. In addition, we have continued to invest in our facilities. From fiscal 2014 to 2016, we completed significant strategic capital investments for capacity expansion that we believe position Lamb Weston to capture both North American and international growth opportunities.

Our experienced management team has a proven track record of consistently delivering strong free cash flow conversion.

We believe we have a deep bench of talented management, and have developed an organizational culture that values and has delivered a continuous improvement mindset. As a result, we have a successful track record of delivering top-line growth and attractive margins. In fiscal years 2016, 2015 and 2014, we delivered net sales, net income attributable to Lamb Weston and Adjusted EBITDA as follows:

 

($ in millions)

   Net Sales      Net Income
Attributable to
Lamb Weston
     Adjusted
EBITDA
 

2016

   $ 2,993.8       $ 285.3       $ 593.4   

2015

   $ 2,925.0       $ 268.3       $ 526.1   

2014

   $ 2,815.2       $ 260.9       $ 502.5   

Our management team expects to continue to deliver topline growth and pursue margin expansion through cost reduction initiatives and productivity improvements. Upon our separation from ConAgra, we believe we will be able to generate attractive long-term stockholder value by utilizing cash flow generation to support our growth initiatives, reduce indebtedness, and return capital to stockholders.

 

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Key Business Strategies

We are pursuing the following strategies to achieve sustainable, profitable growth:

Expand our market-leading position in value-added frozen potato products in North America.

We are focused on expanding and enhancing our relationships with our diverse North American customer base, in the restaurant, distributor/operator and retail channels. We intend to continue our focus on customer intimacy through research, innovation and service initiatives. We also expect to continue to invest in our advantaged sourcing, production and supply chain footprint.

Further optimize our global footprint and capabilities to capture emerging-market growth.

To capture the meaningful opportunities in the frozen potato category abroad, we plan to continue to invest in our growing export business. We also expect to augment our domestic sourcing and processing capacity in targeted international markets through a disciplined approach of acquisitions, joint ventures, and alliances. We also intend to enhance our international customer relationships through the continued development of value-added, market-appropriate solutions and products.

Domestically and abroad, drive growth through our customer partnerships.

We anticipate building on our 50-year history of partnerships with customers to support their North American and international growth plans. Customer-focused innovation will help us to develop new forms of premium, value-added potato products, expand menu offerings and occasions, and enhance preparation processes, taste and quality. We also expect to continue to distinguish Lamb Weston from the competition with superior end-to-end customer service.

Relentlessly pursue effectiveness and efficiency along our integrated value delivery system.

We expect to enhance the quality and yield of our potato inputs, and optimize our overall input costs, by maintaining an advantaged sourcing strategy and manufacturing footprint, and continuously improving our manufacturing efficiency. We will continue to optimize total delivered costs utilizing our global supply chain network.

Create value for stockholders through growth and balanced capital allocation.

Following the spinoff, we believe that our growth profile and strong free cash flow generation will enable us to deliver attractive long-term stockholder value and pursue a balanced approach to capital allocation. We intend to drive growth while also strengthening our balance sheet through debt reduction and returning capital to stockholders.

Industry Segments and Geographical Financial Information

We report our operations in four reporting segments: Global, Foodservice, Retail and Other. The contributions of each reporting segment to net sales, operating profit and identifiable assets, as well as information regarding international operations, are set forth in Note 19 “Business Segments and Related Information” to the audited combined financial statements and Note 15 “Business Segments and Related Information” to the unaudited condensed combined financial statements.

Global

Our Global reporting segment, representing approximately $1.55 billion of fiscal 2016 net sales, includes frozen potatoes, frozen sweet potatoes, and frozen appetizers sold to restaurants, distributors, industrial manufacturers, retailers and cash and carry operators. Products are sold under the Lamb Weston® brand, as well

 

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as many customer labels. We serve the top 100 restaurant chain customers in North America (approximately 60% of our net sales) as well as global chains, distributors and independent operators across Latin America, Asia Pacific and the Middle East (approximately 40% of our net sales), utilizing our North American, European and Chinese sourcing bases in order to do so. The segment’s largest customer, McDonald’s Corporation and its affiliates, accounted for approximately 11%, 11% and 13% of Lamb Weston’s combined net sales for fiscal 2016, 2015 and 2014, respectively. The Global sales function is performed primarily by a direct sales force, and brought to market by strategic importer/distributor relationships. There is a high degree of annual contracting activity in the segment, with some contracts driven by multi-year agreements.

Foodservice

Our Foodservice reporting segment accounted for approximately $946 million of fiscal 2016 net sales and principally includes frozen potato products sold primarily to regional chain and independent restaurants, as well as food service distributors in the United States and Canada. Sales to these customers account for the vast majority of this segment’s sales. The ultimate purchasers of our products (i.e., customers of the broad line foodservice customers), include businesses, primary, secondary and post-secondary educational institutions, independent restaurants, regional chain restaurants, and convenience stores. The primary products for this reporting segment are frozen potatoes and frozen sweet potatoes. The segment’s results also include sales of frozen appetizers. Products are sold under the Lamb Weston brand, as well as customer labels.

Retail

Our Retail reporting segment accounted for approximately $372 million of fiscal 2016 net sales and principally includes private label and licensed branded frozen potato products and other frozen prepared products, sold primarily to retail customers in the United States. The segment’s products are sold in the freezer section, and are also found in the prepared foods (i.e., Deli) section of many retailers. The segment’s product portfolio includes consumer facing frozen specialty potato and frozen sweet potato items that are sold under the retailer’s own brands and licensed equities such as Alexia®, the leading natural and organic frozen potato brand, which is licensed from ConAgra, and the brand names of major North American restaurant chains.

Other

The Other segment accounted for approximately $126 million of fiscal 2016 net sales and primarily includes equity earnings from our joint ventures with Lamb-Weston Meijer and Lamb-Weston RDO. The segment also includes the results of operations from Lamb Weston’s frozen vegetable and dairy businesses.

Acquisitions

In July 2014, we acquired TaiMei Potato Industry Limited, a potato processor in China. The purchase included property and equipment associated with making frozen potato products. This business is included in the Global reporting segment.

General

The following comments pertain to all of our reporting segments.

Competition

We experience intense competition for sales of our products. In foodservice channels, we compete with other providers of value-added frozen potato products and customized food items. In retail channels, our products compete with widely advertised, well-known, branded food, as well as private labeled items. Significant competitors include the J.R. Simplot Company, McCain Foods, Cavendish Farms, and The Kraft Heinz Company. Some of our competitors are larger and have greater resources than we have. We compete primarily on the basis of quality, price, value and customer service, innovation, brand recognition and brand loyalty.

 

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We bill customers in U.S. dollars and, as a result, currency exchange rates may impact our competitive position with respect to international sales.

Backlog

We manufacture primarily to fill customer orders from finished goods inventories. While at any given time there may be some backlog of orders due to the seasonal nature of our manufacturing and inventory, such backlog is not material in respect to annual net sales, and the changes of backlog orders from time to time are not significant.

Raw Materials

Our primary raw materials are potatoes, edible oils, energy and packaging. We source the majority of our raw potatoes under both strategic, long-term grower relationships and shorter-term annual contracts. In the United States, most of the potato crop used in value-added products is grown in Idaho, Oregon and Washington. European growing regions for the necessary potatoes are concentrated in the Netherlands, Belgium, Germany, France and the United Kingdom. We believe that the grower network to which we have access provides a sufficient source of raw potato inputs year-to-year. We source edible oils through strategic relationships with key suppliers and we source energy and packaging materials through multiple suppliers under a variety of agreement types.

The prices paid for these raw materials, as well as other raw materials used in making our products, generally reflect factors such as weather, commodity market fluctuations, currency fluctuations, tariffs and the effects of governmental agricultural programs. Although the prices of raw materials can be expected to fluctuate as a result of these factors, we believe such raw materials to be in adequate supply.

From time to time, we have faced increased costs for our significant raw materials, packaging and energy inputs. We seek to mitigate higher input costs through hedging activities where an active market for an input exists, as well as through our productivity and pricing initiatives.

Research and Development

We leverage our research and development resources for both growth and efficiency initiatives. We drive growth through innovation by creating new products, enhancing the quality of existing products, and participating in joint menu planning exercises with foodservice customers. We also emphasize sustainability in our research and development activities, and continue to drive processing innovations aimed at reducing waste and water usage. Research and development expense was $6.7 million, $7.2 million and $7.6 million in fiscal 2016, 2015 and 2014, respectively.

Environmental and Regulatory Matters

Many of our facilities and the products we make are subject to various laws and regulations administered by the USDA, the FDA, the U.S. Occupational Safety and Health Administration and other federal, state, local and foreign governmental agencies relating to the food safety and quality, sanitation, safety and health matters, and environmental control. We believe that we comply with such laws and regulations in all material respects, and that continued compliance with such regulations will not have a material adverse effect upon our capital expenditures, earnings, or competitive position.

Legal Proceedings

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our combined financial position, results of operations or cash flows.

 

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From time to time, we may also be a party to lawsuits, claims or other proceedings related to environmental matters and/or receive notices of potential violations of environmental laws and regulations from the Environmental Protection Agency and similar state or local authorities. Since 2012, we have received notifications from the City of Twin Falls, Idaho alleging that wastewater discharges from our facility in Twin Falls have intermittently exceeded approved limits set forth in a wastewater discharge permit issued by the City of Twin Falls. We have disputed these allegations on the grounds that such exceedances are the result of poor performance of pre-treatment equipment owned by and operated on behalf of the City of Twin Falls. The City of Twin Falls has held the assessment of any fines in abeyance, pending a resolution of these equipment performance issues. In the second quarter of fiscal 2016, we determined that it was reasonably possible that resolution of this matter would result in fines of at least $100,000 and, although it is not possible to predict with certainty the outcome of this matter, in the opinion of our management, the ultimate disposition of this matter will not have a material adverse effect on our financial position, results of operations or cash flows.

Patents, Trademarks and Licenses

Our trademarks are of material importance to our business and are protected by registration or other means in the United States and most other geographic markets where the related food items are sold. Some of our food items are sold under brands, including the Alexia brand, that are licensed from others. We also actively develop and maintain a portfolio of patents, although no single patent is considered material to the business as a whole. We have proprietary trade secrets, technology, know-how, processes and other intellectual property rights that are not registered. See “Relationship with ConAgra After the Spinoff—Agreements Between ConAgra and Us—Trademark License Agreement.”

Employment

At May 29, 2016, Lamb Weston and its subsidiaries had approximately 6,400 employees, with approximately 5,700 based in the United States. Approximately 34% of our employees are parties to collective bargaining agreements. Of the employees subject to collective bargaining agreements, approximately 42% are parties to collective bargaining agreements scheduled to expire during fiscal 2017. We believe our relationships with employees and their representative organizations are good.

Properties

We are headquartered in Eagle, Idaho and have an additional office location in Kennewick, Washington. We also maintain a research and development facility in Richland, Washington.

The manufacturing assets of Lamb Weston are shared across all reporting segments. Output from these facilities used by each reporting segment can change from fiscal year to fiscal year. Therefore, it is impracticable to allocate those assets to the reporting segments, as well as disclose total assets by segment. We or our joint ventures own or lease potato processing facilities in the following locations: American Falls, Idaho; Twin Falls, Idaho; Delhi, Louisiana; Hermiston, Oregon; Boardman, Oregon; Connell, Washington; Richland, Washington; Paterson, Washington; Pasco, Washington; Warden, Washington; Quincy, Washington; Park Rapids, Minnesota; Taber, Alberta, Canada; Wisbech, United Kingdom; Kruiningen, the Netherlands; Oosterbierum, the Netherlands; Bergen op Zoom, the Netherlands; Hollabrunn, Austria; and Shangdu, Inner Mongolia, China.

In addition to these processing facilities, we and our joint ventures own or lease warehouses and distribution facilities in China, Holland, Canada, and the United States. We also own and lease over 20,000 acres of farmland in eastern Washington. We use this farm as a source of raw materials, to better understand the costs of growing potatoes and to deploy agronomic research.

Our facilities vary in age and condition, and each of them has an active maintenance program to ensure a safe operating environment and to keep the facilities in good condition. All our buildings are in satisfactory operating condition to conduct our business as intended.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We expect that our Audit Committee will adopt a written policy regarding the review, approval and ratification of related-party transactions. Under the policy, all related-party transactions must be pre-approved by the Audit Committee unless circumstances make pre-approval impracticable. In the latter case, management will be allowed to enter into the transaction, but the transaction remains subject to ratification by the Audit Committee at its next regular, in-person meeting. In determining whether to approve or ratify a related-party transaction, the Audit Committee will take into account, among other factors it deems appropriate, whether the transaction is fair and reasonable to us and the extent of the related-party’s interest in the transaction. No director is permitted to participate in any approval of a related-party transaction in which he or she is involved. On at least an annual basis, the Audit Committee will review and assess ongoing related-party transactions to determine whether the relationships remain appropriate. All related-party transactions will be disclosed to the full Board.

 

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RELATIONSHIP WITH CONAGRA AFTER THE SPINOFF

Historical Relationship with ConAgra

We are currently a wholly owned subsidiary of ConAgra. We were incorporated in Delaware on July 5, 2016. In conjunction with the spinoff, ConAgra will transfer to us all the assets and generally all the liabilities relating to ConAgra’s frozen potato products business, which ConAgra intends to separate from its other operations. As a result of the historical relationship between us and ConAgra, in the ordinary course of our business, we and our subsidiaries have received various services provided by ConAgra and some of its other subsidiaries, including treasury and cash management, procurement, information technology, general accounting and finance, payroll and human resources, legal and communications, real estate and facilities, and other general and administrative stewardship. Our audited combined financial statements include allocations by ConAgra of a portion of its overhead costs related to those services. These cost allocations have been determined on a basis that we and ConAgra consider to provide a reasonable reflection of the use of those services.

ConAgra’s Distribution of Our Shares

ConAgra will be our sole stockholder until completion of the spinoff. In the spinoff, ConAgra is distributing its entire equity interest in us to its stockholders as described in more detail in the section entitled “The Spinoff.” The spinoff will be subject to a number of conditions, some of which are more fully described above under “The Spinoff—Spinoff Conditions and Termination.”

Agreements Between ConAgra and Us

In the discussion that immediately follows, we have summarized the terms of material agreements that we intend to enter into with ConAgra in connection with the spinoff and to govern our ongoing relationship with ConAgra following the spinoff. The summaries of these agreements are not complete and are qualified by reference to the terms of the agreements, the forms of which will be included as exhibits to the registration statement on Form 10, of which this information statement is a part. We encourage you to read the full text of those agreements. The terms of those agreements have not yet been finalized; changes, some of which may be material, may be made prior to the spinoff.

Separation and Distribution Agreement

The separation and distribution agreement will contain the key provisions relating to the spinoff, including provisions relating to the principal intercompany transactions required to effect the spinoff, the conditions to the spinoff and provisions governing the relationships between ConAgra and us after the spinoff.

Transfer of Assets and Assumption of Liabilities. The separation and distribution agreement will provide for those transfers of assets and assumptions of liabilities that are necessary in advance of our separation from ConAgra so that each of Lamb Weston and ConAgra retains the assets necessary to operate its respective business and retains or assumes the liabilities allocated to it in accordance with the reorganization.

Representations and Warranties. In general, neither ConAgra nor we will make any representations or warranties regarding any assets or liabilities transferred or assumed, any consents or approvals that may be required in connection with these transfers or assumptions, the value or freedom from any lien or other security interest of any assets transferred, the absence of any defenses relating to any claim of either party or the legal sufficiency of any conveyance documents. Except as expressly set forth in the separation and distribution agreement, all assets will be transferred on an “as is,” “where is” basis.

The Distribution. The separation and distribution agreement will govern ConAgra’s and our respective rights and obligations regarding the proposed distribution. Prior to the distribution, ConAgra will deliver all of our issued and outstanding shares of common stock to the distribution agent. On the distribution date, ConAgra

 

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will instruct the distribution agent to electronically deliver shares of our common stock to ConAgra’s stockholders based on the distribution ratio. The ConAgra board of directors will have the sole and absolute discretion to determine the terms of, and whether to proceed with, the distribution.

Conditions. The separation and distribution agreement will also provide that several conditions must be satisfied or waived by ConAgra, at the direction of its board of directors in its sole and absolute discretion, before the distribution can occur. For further information about these conditions, see “The Spinoff—Spinoff Conditions and Termination.” The ConAgra board of directors may, in its sole and absolute discretion, determine the record date, the distribution date and the terms of the spinoff and may at any time prior to the completion of the spinoff decide to abandon or modify the spinoff.

Termination. ConAgra, at the direction of its board of directors in its sole and absolute discretion, may terminate the separation and distribution agreement at any time prior to the distribution.

Release of Claims. ConAgra and we will each agree to release the other and its affiliates, successors and assigns, and all persons that prior to the distribution have been the other’s stockholders, directors, officers, members, agents and employees, and their respective heirs, executors, administrators, successors and assigns, from any claims against any of them that arise out of or relate to events, circumstances or actions occurring or failing to occur or any conditions existing at or prior to the time of the distribution. These releases will be subject to exceptions set forth in the separation and distribution agreement.

Indemnification. ConAgra and we will each agree to indemnify the other and each of the other’s past and present directors, officers and employees, and each of their successors and assigns, against certain liabilities incurred in connection with the spinoff and our and ConAgra’s respective businesses. Neither ConAgra’s nor our indemnification obligations are subject to any cap. The amount of either ConAgra’s or our indemnification obligations will be reduced by any insurance proceeds the party being indemnified receives. The separation and distribution agreement will also specify procedures regarding claims subject to indemnification.

Tax Matters Agreement

In connection with the spinoff (together with certain related transactions), we and ConAgra will enter into a tax matters agreement that will govern the parties’ respective rights, responsibilities and obligations with respect to taxes, including taxes arising in the ordinary course of business, and taxes, if any, incurred as a result of any failure of the spinoff (or certain related transactions) to qualify as tax-free for U.S. federal income tax purposes. The tax matters agreement will also set forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters.

In general, the tax matters agreement will govern the rights and obligations that we and ConAgra have after the spinoff with respect to taxes for both pre- and post-closing periods. Under the tax matters agreement, ConAgra generally will be responsible for all of our pre-closing income taxes that are reported on combined tax returns with ConAgra or any of its affiliates. We will generally be responsible for all other income taxes and all non-income taxes primarily related to Lamb Weston that are due and payable after the spinoff.

The tax matters agreement will further provide that:

 

    Without duplication of our indemnification obligations described in the prior paragraph, we will generally indemnify ConAgra against (i) taxes arising in the ordinary course of business for which we are responsible (as described above) and (ii) any liability or damage resulting from a breach by us or any of our affiliates of a covenant or representation made in the tax matters agreement; and

 

    ConAgra will indemnify us against taxes for which ConAgra is responsible under the tax matters agreement (as described above).

 

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In addition to the indemnification obligations described above, the indemnifying party will generally be required to indemnify the indemnified party against any interest, penalties, additions to tax, losses, assessments, settlements or judgments arising out of or incident to the event giving rise to the indemnification obligation, along with costs incurred in any related contest or proceeding. Indemnification obligations of the parties under the tax matters agreement are not subject to any cap.

Further, the tax matters agreement generally will prohibit us and our affiliates from taking certain actions that could cause the spinoff and certain related transactions to fail to qualify for their intended tax treatment, including:

 

    during the two-year period following the distribution date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

 

    during the two-year period following the distribution date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

 

    during the two-year period following the distribution date, we may not sell or otherwise issue our common stock, other than pursuant to issuances that satisfy certain regulatory safe harbors set forth in Treasury regulations related to stock issued to employees and retirement plans;

 

    during the two-year period following the distribution date, we may not redeem or otherwise acquire any of our common stock, other than pursuant to certain open-market repurchases of less than 20% of our common stock (in the aggregate);

 

    during the two-year period following the distribution date, we may not amend our certificate of incorporation (or other organizational documents) or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of our common stock; and

 

    more generally, we may not take any action that could reasonably be expected to cause the spinoff and certain related transactions to fail to qualify as tax-free transactions under Section 368(a)(1)(D) and Section 355 of the Code.

In the event that the spinoff and certain related transactions fail to qualify for their intended tax treatment, in whole or in part, and ConAgra is subject to tax as a result of such failure, the tax matters agreement will determine whether ConAgra must be indemnified for any such tax by us. As a general matter, under the terms of the tax matters agreement, we are required to indemnify ConAgra for any tax-related losses in connection with the spinoff due to any action by us or any of our subsidiaries following the spinoff. Therefore, in the event that the spinoff and/or related transactions fail to qualify for their intended tax treatment due to any action by us or any of our subsidiaries, we will generally be required to indemnify ConAgra for the resulting taxes.

Employee Matters Agreement

In connection with the distribution and spinoff, we expect to enter into an employee matters agreement with ConAgra that will govern the respective rights, responsibilities and obligations of us and ConAgra after the spinoff with respect to transferred employees, collective bargaining agreements, incentive plans, group health and welfare plans, defined benefit pension plans, defined contribution plans, nonqualified retirement plans, equity-based awards and other employment, compensation and benefit-related matters.

Liabilities. In general, ConAgra will be responsible for all employment, compensation and employee benefit liabilities relating to employees of ConAgra and former employees of ConAgra and for all liabilities relating to ConAgra’s benefit plans, and Lamb Weston will be responsible for all employment, compensation and employee benefit liabilities relating to employees of Lamb Weston and former employees of the Lamb Weston business and for all liabilities relating to Lamb Weston’s benefit plans, subject to certain exceptions further described in the employee matters agreement.

 

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Employee Benefits. In general, our employees currently participate in various group health and welfare, retirement and other employee benefit and compensation plans maintained by ConAgra. Details relating to the benefit plans in which Lamb Weston employees and former employees of the Lamb Weston business will participate after the spinoff are still being discussed between us and ConAgra. However, other than in the case of certain exceptions further described in the employee matters agreement, and as otherwise provided in the transition services agreement, we expect that Lamb Weston will establish its own group health and welfare plans and retirement plans.

Equity Compensation. In general, except as otherwise described in “Compensation Discussion and Analysis—Treatment of Outstanding ConAgra Equity Compensation in the Spinoff” with respect to Mr. Gehring’s outstanding ConAgra equity awards, it is currently anticipated that each outstanding ConAgra equity award held by a Lamb Weston employee or Lamb Weston director as of the spinoff will be adjusted or converted into an award with respect to Lamb Weston common stock and each other ConAgra equity award will also be adjusted or converted but will continue to relate to ConAgra common stock. In each case, the award will be equitably adjusted or converted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra equity award and, other than regarding performance share awards, which are described in more detail below, the terms of the equity awards, such as vesting dates, will generally remain substantially the same.

Outstanding ConAgra performance share awards for the fiscal 2015 to 2017 cycle, other than those intended to be “qualified performance-based compensation” under Section 162(m) of the Code, are expected to be adjusted or converted to vest solely based on their original service-based vesting criteria, with the number of shares subject to the award equitably adjusted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra award based on actual performance achieved through the end of the last fiscal period ending prior to the distribution date. Outstanding ConAgra performance share awards for the fiscal 2015 to 2017 cycle intended to be “qualified performance-based compensation” under Section 162(m) of the Code are expected to remain subject to the achievement of the threshold earnings per share performance goal and negative discretion intended to result in payout levels comparable to those achieved for all other fiscal 2015 to 2017 performance share awards (in addition to their original service-based vesting criteria), with the number of shares subject to the awards equitably adjusted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra award. The number of shares subject to all other ConAgra performance share awards are expected to be equitably adjusted or converted in a manner intended to preserve the aggregate intrinsic value of the original award, with such awards intended to be “qualified performance-based compensation” under Section 162(m) of the Code remaining subject to the earnings per share performance goals associated with the original ConAgra award, and such awards not intended to be “qualified performance-based compensation” under Section 162(m) of the Code remaining subject to their applicable performance goals.

Transition Services Agreement

We and ConAgra will enter into a transition services agreement under which ConAgra will provide and/or make available various administrative services and assets to us. The services and assets to be provided to us by ConAgra primarily include:

 

    information technology and network, security and applications support;
    accounting and finance;
    operations, marketing and procurement;
    human resources, payroll and benefits;
    treasury;
    insurance accounting and claims processing;
    tax matters; and
    administrative services.

In consideration for such services, we will pay fees to ConAgra for the services provided, and those fees will be based on direct and indirect costs associated with rendering those services.

 

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The term of the transition services agreement is to be for a period of no more than 18 months beginning on the distribution date (inclusive of any extension period for any transition services).

The personnel performing services under the transition services agreement will be employees and/or independent contractors of ConAgra or its subsidiaries and will not be under our direction or control.

The transition services agreement will also contain customary mutual indemnification provisions, which are not subject to a cap.

Trademark License Agreement

We intend to enter into a trademark license agreement with ConAgra, under which ConAgra will license certain trademarks to us in connection with the operations of our business including, without limitation, the Alexia trademark. The license, subject to certain limitations and exceptions, will be perpetual, irrevocable, fully paid-up, royalty-free, and worldwide. The trademark license agreement will address the specific categories in which the trademark may be used.

 

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MANAGEMENT

Our Directors Following the Spinoff

The following table and biographies present information, as of September 30, 2016, concerning the individuals whom we expect to serve as our directors following the spinoff, including their respective business experience. The following also includes information about all public company directorships each individual currently holds or held during the past five years.

 

Name

           Age             

Position

W.G. Jurgensen

     65       Director

Timothy R. McLevish

     61       Executive Chairman

Andrew J. Schindler

     72       Director

Thomas P. Werner

     50       President, Chief Executive Officer and Director

Mr. McLevish will be our Executive Chairman upon our separation from ConAgra. He currently serves as a consultant to Walgreens Boots Alliance, Inc., formerly Walgreens Co. (the nation’s largest drugstore chain). In this capacity, Mr. McLevish provides advice and counsel to the Chief Executive Officer of Walgreens Boots Alliance, Inc. on matters relating to strategy, business development and M&A. Prior to this role, Mr. McLevish served as Chief Financial Officer of Walgreens Boots Alliance, Inc. from January 2015 to February 2015 and Executive Vice President and Chief Financial Officer of Walgreens Co. from August 2014 to December 2014. From October 2007 to April 2014, Mr. McLevish held various positions within Kraft Foods Group and Kraft Foods Inc. (a consumer packaged food company), including Executive Vice President and Chief Financial Officer. Before joining Kraft Foods, Mr. McLevish was the Senior Vice President and Chief Financial Officer of Ingersoll-Rand Company Limited (a diversified industrial company), from May 2002 to August 2007. Prior to that, he held a series of finance, administration and leadership roles for Mead Corporation (a forest products company), which he joined in 1987. His final role with Mead was Vice President and Chief Financial Officer. In addition, he is a certified public accountant. Mr. McLevish currently serves on the boards of directors for ConAgra Foods, Inc., where he is a member of the audit committee, Kennametal, Inc., where he is the chair of the audit committee and a member of the nominating/corporate governance committee, and US Foods Holding Corp., where he is a member of the audit committee, the compensation committee and the nominating and corporate governance committee, and RR Donnelley & Sons Co.

Summary of experiences, qualifications and skills considered in nominating Mr. McLevish:

 

    Financial Acumen and M&A Experience: Deep expertise in financial reporting and internal controls and procedures, and knowledge of financial and capital markets and M&A, from his extensive experience in public company finance at several large public companies;

 

    Risk & Compliance Oversight Experience: Valuable experience in risk management from his extensive experience in finance executive roles with large multi-national public companies; and

 

    International Experience: Significant international experience from his service at a multinational public company with global operations in a highly regulated field.

Mr. Werner will be our President and Chief Executive Officer and a member of our board of directors. He currently serves as President, Commercial Foods, for ConAgra. In this role, which he has held since May 2015, he leads the company’s Lamb Weston and Foodservice businesses, and led its Spicetec Flavors & Seasonings and J.M. Swank operations (both of which were divested in July 2016). Mr. Werner also served as interim President of ConAgra’s Private Brands from June 2015 through its divestiture in February 2016. Prior to his appointment as President, Commercial Foods, Mr. Werner served as Senior Vice President of Finance for ConAgra’s Private Brands and Commercial Foods operating segments from June 2013 to April 2015, and Senior Vice President of Finance for Lamb Weston from May 2011 until June 2013. Until recently, Mr. Werner was part of the governing committee representing Lamb Weston in the Lamb-Weston Meijer joint venture.

 

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Summary of experiences, qualifications and skills considered in nominating Mr. Werner:

 

    Commercial Foods Experience: Deep knowledge of strategy and business development, finance, marketing and commercial customer insights, supply chain management and sustainability;

 

    Financial Acumen and Experience: Deep expertise in finance from his extensive experience in public company finance at ConAgra and Lamb Weston; and

 

    Broad Leadership Experience: Strong leadership capabilities and insights, particularly with major commercial customers, acquired during his tenure as President of Commercial Foods for ConAgra.

Mr. Jurgensen will be a member of our board of directors. He served as Chief Executive Officer and a director of Nationwide Financial Insurance Services, Inc. (an insurance company) from 2000 until his retirement in 2009. He also served as Chief Executive Officer and a director of several other companies within the Nationwide enterprise, which is comprised of Nationwide Financial, Nationwide Mutual, Nationwide Mutual Fire and all of their respective subsidiaries and affiliates. Before joining Nationwide, Mr. Jurgensen served as an Executive Vice President with Bank One Corporation (a banking institution that is now a part of JPMorgan Chase & Co.) and later served as Chief Executive Officer for First Card, First Chicago Corporation’s credit card subsidiary. Mr. Jurgensen served as a director of The Scotts Miracle-Gro Company (a manufacturer and marketer of branded consumer lawn and garden products) from 2009 until 2013 and has served as a director of American International Group, Inc. (an insurance company) since 2013.

Summary of experiences, qualifications and skills considered in nominating Mr. Jurgensen:

 

    Broad Leadership Experience: Strong leadership capabilities and insights, including from his service as Chief Executive Officer of several Nationwide companies;

 

    Financial Acumen and Risk & Compliance Oversight Experience: Significant expertise in finance, accounting and risk and compliance oversight from his service at insurance companies, including risk assessment and risk management experience; and

 

    Corporate Governance: Broad understanding of governance issues facing public companies from his board service to other public companies.

Mr. Schindler will be a member of our board of directors. He served as Chairman of Reynolds American, Inc. (tobacco products company) from July 2004 until his retirement in December 2005 and as Chairman and Chief Executive Officer of R. J. Reynolds Tobacco Holdings, Inc. (tobacco products company) from 1999 to 2004. Prior to that, Mr. Schindler served in various management positions with R.J. Reynolds, which he joined in 1974. Mr. Schindler achieved the rank of captain in the U.S. Army, where he held command and staff positions in the United States and in Vietnam. Since 2006, he has served as a director of Krispy Kreme Doughnuts Inc. (retail food establishments) and Hanesbrands, Inc. (consumer products company).

Summary of experiences, qualifications and skills considered in nominating Mr. Schindler:

 

    Broad Leadership Experience: Extensive management and leadership experience through his service to R. J. Reynolds and in military roles, including as a Captain in the U.S. Army;

 

    Packaged Goods Experience: Strong people leadership, risk-management, brand marketing, operations, strategic change, and personnel development experience and skills pertinent to a company with a diverse customer set; and

 

    Corporate Governance: Broad understanding of governance issues facing public companies from his board service to other public companies.

 

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Agreement with Significant Stockholder

On May 27, 2016, ConAgra entered into an amended and restated cooperation agreement with one of its significant stockholders, JANA Partners LLC, or JANA. Pursuant to the cooperation agreement, ConAgra agreed that we would be incorporated in Delaware and that our certificate of incorporation and by-laws, as of the effective date of the spinoff, would include corporate governance provisions (including with respect to the annual election of directors) that are substantially similar to those set forth in ConAgra’s certificate of incorporation and by-laws. The cooperation agreement also provides that JANA has the right to designate two individuals to our board of directors so long as the individuals (i) are independent of JANA and its affiliates, (ii) are mutually agreed upon by ConAgra and JANA, (iii) qualify as independent directors under the NYSE rules and (iv) provide other items required to be provided by other members of our board of directors.

Our Executive Officers Following the Spinoff

The following table and biographies present information, as of September 30, 2016, concerning the individuals we expect to serve as our executive officers following the spinoff, including their respective business experience. See “—Our Directors Following the Spinoff” for additional information regarding our Executive Chairman, Mr. McLevish, and our President and Chief Executive Officer, Mr. Werner.

Name, Age and Position

 

Name

           Age             

Position

Timothy R. McLevish

     61       Executive Chairman

Thomas P. Werner

     50       President and Chief Executive Officer

John F. Gehring

     55       Vice President and interim Chief Financial Officer

Eryk J. Spytek

     48       General Counsel and Corporate Secretary

Micheline C. Carter

     50       Chief Human Resources Officer

John F. Gehring will serve as our Vice President and interim Chief Financial Officer. Mr. Gehring previously served as Executive Vice President, Chief Financial Officer of ConAgra from January 2009 until August 2016. Mr. Gehring joined ConAgra as Vice President of Internal Audit in 2002, became Senior Vice President in 2003, and served as Senior Vice President and Corporate Controller from July 2004 to January 2009. He served as ConAgra’s interim Chief Financial Officer from October 2006 to November 2006. Prior to joining ConAgra, Mr. Gehring was a partner at Ernst & Young LLP (an accounting firm) from 1997 to 2001.

Eryk J. Spytek will serve as our General Counsel and Corporate Secretary. From June 2015 until October 2016, Mr. Spytek was Of Counsel at Winston & Strawn LLP (an international law firm). Prior to returning to Winston & Strawn LLP, Mr. Spytek served from December 2009 until April 2015 in a variety of roles with Mead Johnson Nutrition Company (a pediatric nutrition company), including as Vice President, Deputy General Counsel and Assistant Secretary from April 2013 to April 2015 and as Vice President, Associate General Counsel and Assistant Secretary from December 2009 to April 2013. Mr. Spytek served as Senior Vice President, General Counsel and Secretary at SIRVA, Inc. (a global relocation services provider) from February 2006 to February 2009. SIRVA, Inc. and certain of its U.S. subsidiaries filed for Chapter 11 bankruptcy protection in February 2008 and re-organized and emerged in May 2008 as a private company. Prior to joining SIRVA, Inc., Mr. Spytek was a Partner at Winston & Strawn LLP.

Micheline C. Carter will serve as our Chief Human Resources Officer. Ms. Carter joined Lamb Weston in September 2016. From July 2012 until September 2016, Ms. Carter served in a variety of roles with The Kraft Heinz Company (a consumer packaged food company), including as Head of U.S. People and Performance and Global Corporate Functions from November 2015 to September 2016, Vice President of Human Resources, Global Corporate Functions from August 2015 until October 2015, Vice President of Human Resources, Cheese & Dairy from January 2015 until July 2015 and Senior Director Human Resources & Global Exports from July

 

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2012 until January 2015. Prior to joining The Kraft Heinz Company, Ms. Carter served from February 2011 until July 2012 as Senior Director Human Resources, Solar Energy & Solar Materials with MEMC Electronic Materials, Inc. (a renewable energy development company, now known as SunEdison, Inc.). Prior to this time, Ms. Carter served in a variety of roles with J.C. Penny Company, YUM! Restaurants International and Texas Instruments, Inc.

Director Independence

NYSE rules require that our board of directors have a majority of independent directors within one year of our initial listing, and we intend to comply with those requirements. We currently expect that all of our directors, other than Mr. McLevish and Mr. Werner, will qualify as independent according to the rules and regulations of the SEC and the NYSE as of the distribution date.

Board Leadership Structure

Our board of directors will be led by Executive Chairman Mr. McLevish. In addition, Mr. Jurgensen will be appointed as Lead Director as of the distribution date.

The Executive Chairman will oversee the planning of the annual board of directors’ calendar and, in consultation with the other directors, will schedule and set the agenda for meetings of the board of directors and lead the discussions at such meetings. In addition, the Executive Chairman will provide guidance and oversight to other members of management, help with the formulation and implementation of our strategic plans and act as the board of directors’ liaison to the rest of management. In this capacity, the Executive Chairman will be actively engaged on significant matters affecting us. The Executive Chairman will also lead our annual meetings of shareholders and perform such other functions and responsibilities as requested by the board of directors from time to time.

The Lead Director’s duties are expected to include: (a) developing agendas for, and presiding over, the executive sessions of the independent directors; (b) reporting the results of the executive sessions to the Executive Chairman and Chief Executive Officer; (c) serving as a liaison with the Executive Chairman, Chief Executive Officer and the independent directors; (d) consulting with the Executive Chairman on, and approving, agendas for board of director meetings; (e) calling meetings of the independent directors; and (f) ensuring that he or she is available for consultation and direct communications with major shareholders, as appropriate.

Committees of the Board

Upon completion of the spinoff, the committees of our board of directors are expected to consist of an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee. Each of these committees will be required to comply with the requirements of the SEC and the NYSE. Our board of directors will adopt a written charter for each of these committees, which will be posted to our website prior to the distribution date.

Audit Committee

Our Audit Committee will be responsible for, among other things, oversight of our independent auditors and the integrity of our financial statements. As of the distribution date, we expect that the Audit Committee will consist of Mr. Jurgensen, who will serve as its chair. We expect that all the members of the Audit Committee will be independent under the rules of the NYSE and Rule 10A-3 under the Exchange Act. We also expect that each committee member will be financially literate within the requirements of the NYSE and that Mr. Jurgensen will qualify as an audit committee financial expert.

 

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Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee will be responsible for, among other things, evaluating new director candidates and incumbent directors and recommending directors to serve as members of our board committees. We expect that all the members of the Nominating and Corporate Governance Committee will be independent under the rules of the NYSE.

Compensation Committee

Our Compensation Committee will be responsible for, among other things, establishing and administering our policies, programs and procedures for compensating our executive officers and board of directors. As of the distribution date, we expect that the Compensation Committee will consist of Mr. Schindler, who will serve as its chair. We expect that all the members of the Compensation Committee will be independent under the rules of the NYSE.

Director Compensation

Following the spinoff, director compensation will be determined from time to time by our board of directors with the assistance of our Compensation Committee, but we expect that such compensation will consist of a combination of cash and equity-based incentive compensation to attract and retain qualified candidates to serve on our board of directors.

Code of Conduct and a Code of Ethics for Senior Corporate Officers

Prior to the distribution date, we will adopt a written Code of Conduct and a written Code of Ethics for Senior Corporate Officers that are designed to reinforce our commitment to high ethical standards and to promote:

 

    accountability and responsibility for making good decisions and for the outcomes of those decisions;

 

    responsibility to one another by treating all with dignity and respect;

 

    responsibility to the public and our stockholders by taking responsibility for our actions;

 

    responsibility to our business partners by treating our business partners as equals in the quest for high business conduct standards; and

 

    responsibility to governments and the law by complying with applicable legal and regulatory standards.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Introduction and Background

For purposes of this Compensation Discussion and Analysis, the persons identified below (and listed in the Fiscal 2016 Summary Compensation Table below) are referred to collectively as our named executive officers, or NEOs:

 

    Timothy R. McLevish, our Executive Chairman;

 

    Thomas P. Werner, our President and Chief Executive Officer;

 

    John F. Gehring, our Vice President and interim Chief Financial Officer;

 

    Eryk J. Spytek, our General Counsel and Corporate Secretary; and

 

    Micheline C. Carter, our Chief Human Resources Officer.

In connection with the spinoff, we describe both the NEOs’ historical compensation (to the extent attributable to either us or ConAgra) and the material terms of any compensation arrangements in place for after the spinoff.

The information provided for fiscal 2016 and any prior periods reflects, to the extent applicable, compensation earned at ConAgra for each of the NEOs based on their respective roles with ConAgra during fiscal 2016 and any prior periods reflected, and the design and objectives of its executive compensation programs in place prior to the spinoff. Ms. Carter is identified as an NEO because she is expected to serve as our Chief Human Resources Officer. Mr. Spytek is identified as an NEO because he is expected to serve as our General Counsel and Corporate Secretary. Neither Mr. Spytek nor Ms. Carter was a ConAgra employee or a ConAgra director during fiscal 2016, so the following discussion of ConAgra’s historical executive compensation and director compensation programs do not apply to them. The discussion of current and future executive compensation programs, philosophy and principles for NEO compensation does, however, apply to the compensation Mr. Spytek and Ms. Carter are expected to receive from us following the spinoff.

As discussed above, we are currently a part of ConAgra and not an independent company, and our Compensation Committee of our Board of Directors (or Lamb Weston Compensation Committee) has not yet been formed. Historically, Mr. Werner and Mr. Gehring have participated in ConAgra’s executive compensation programs, and Mr. McLevish, as a non-employee director of ConAgra, has participated in ConAgra’s director compensation programs. All executive and director compensation decisions for our NEOs prior to the spinoff were or will be made or overseen by the ConAgra Human Resources Committee or the full ConAgra board of directors. Therefore, except as otherwise indicated, this Compensation Discussion and Analysis focuses on, as applicable, ConAgra compensation earned by each of the NEOs based on their respective roles with ConAgra during ConAgra’s fiscal year ended May 29, 2016 (which we refer to as fiscal 2016), or for prior periods, as applicable, and the design and objectives of ConAgra’s executive and director compensation programs in place prior to the spinoff. The compensation programs that were applicable to Mr. Werner and Mr. Gehring are different from the compensation programs that were applicable to Mr. McLevish because, prior to the spinoff, Mr. Werner and Mr. Gehring have been employees of ConAgra and Mr. McLevish has been a ConAgra non-employee director.

Executive compensation decisions following the spinoff are expected to be made by the Lamb Weston Compensation Committee. We currently anticipate that, except as otherwise described in this Compensation Discussion and Analysis, compensation programs for our NEOs immediately following the distribution date will be substantially similar to the programs currently utilized by ConAgra for its executive officers, although the programs applicable to Mr. McLevish may vary to address his new Executive Chairman role and the programs applicable to Mr. Gehring may vary to address the temporary nature of his role.

 

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Executive Summary of ConAgra Compensation Program for Our NEOs for Fiscal 2016

Overview of ConAgra Fiscal 2016 Non-Employee Director Compensation for Mr. McLevish:

The following table summarizes the compensation programs in effect during fiscal 2016 for Mr. McLevish in his role as a ConAgra non-employee director:

 

Annual Cash Retainer:    $90,000 per year (which amount was prorated to $78,626 for Mr. McLevish based on his date of appointment to the ConAgra board of July 17, 2015).
Annual Committee Chair Retainer:    None.
Meeting Fees:    None.
Equity Compensation:    A grant of restricted stock units, which we refer to as RSUs, with a value equal to $140,000 (which amount was prorated to $116,667 for Mr. McLevish based on the number of months remaining in the fiscal year at the time of his appointment to the ConAgra board on July 17, 2015).

Overview of ConAgra Fiscal 2016 Incentive Programs for Mr. Werner and Mr. Gehring:

The ConAgra Human Resources Committee approved the following incentive programs and performance measures for performance periods beginning in fiscal 2016 that were applicable to Mr. Werner and Mr. Gehring:

 

Incentive Programs       Performance Measures

Annual Incentive Plan

  

Fiscal 2016 Management Incentive Plan (payable in cash)

      For the program to pay out at any level for Mr. Werner and Mr. Gehring, ConAgra needed to achieve fiscal 2016 diluted earnings per share from continuing operations, adjusted for items impacting comparability, which we refer to as adjusted EPS, of at least $0.10.
         For the program to provide an incentive payout at the targeted levels for Mr. Werner and Mr. Gehring, ConAgra needed to also achieve levels of fiscal 2016 earnings before interest and taxes, which we refer to as EBIT (adjusted as described below), aligned to ConAgra’s internal business plans.
         Achievement of net sales growth above planned amounts and/or high levels of EBIT could increase Mr. Werner’s and Mr. Gehring’s earned awards. A below-target award would have been earned with lower levels of EBIT performance.
         For the program to pay out at any level for Mr. Gehring, ConAgra would need to achieve $0.10 of adjusted EPS for each of the three fiscal years covered by the program (fiscal years 2016, 2017 and 2018).
Long-Term Incentive Plan    Fiscal 2016 to 2018 cycle of Performance Share Plan (designed to be payable in shares of ConAgra common stock)       For the program to provide an incentive payment at the targeted level for Mr. Werner and Mr. Gehring, ConAgra needed to achieve, for 1/3 of the award, specified levels of fiscal 2016 earnings before interest, taxes, depreciation and amortization, or EBITDA, return on invested capital (a measure of earnings as a percentage of invested capital) (adjusted as described below). We refer to this measure as EBITDA return on capital. Achievement of EBITDA return on capital level above or below targeted levels would have increased or decreased earned awards.
   Stock Options       ConAgra’s stock options, which are non-qualified stock options, were designed to deliver value only with a growth in ConAgra’s stock price. Stock options were designed with an exercise price equal to the closing market price of ConAgra’s common stock on the date of grant.
   Restricted Stock Units       RSUs granted to Mr. Werner and Mr. Gehring generally “cliff-vest” after three-years. As a result, they were designed to reward long-term commitment to ConAgra and aid in continuity of management service. Since the RSUs were designed to be paid in shares of ConAgra’s common stock, it was expected that Mr. Werner and Mr. Gehring would also be rewarded if ConAgra’s stock price appreciates.

 

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ConAgra’s annual incentive plan is referred to as the MIP, for Management Incentive Plan. The long-term incentive plan is comprised of ConAgra’s Performance Share Plan, or PSP, a Stock Option program and a RSU program.

Overview of ConAgra Fiscal 2016 Compensation Decisions for Mr. Werner and Mr. Gehring:  ConAgra’s strong performance in fiscal 2016 led to above target payouts under ConAgra’s 2016 MIP. ConAgra’s strong fiscal 2016 performance also positively impacted the outstanding cycles of ConAgra’s PSP. More specifically:

 

    ConAgra’s fiscal 2016 MIP funded and paid out at an above-target level for Mr. Werner and Mr. Gehring due to ConAgra’s above plan earnings performance during fiscal 2016 and the individual contributions of ConAgra’s named executive officers, including Mr. Werner and Mr. Gehring.

 

    The fiscal 2014 to 2016 cycle of ConAgra’s PSP concluded this year, with payouts well below targeted levels. Strong performance in fiscal 2016 was insufficient to overcome ConAgra’s weaker financial performance in fiscal years 2014 and 2015.

 

    The fiscal 2015 to 2017 cycle of ConAgra’s PSP remains outstanding, with performance trending slightly below target; strong performance in fiscal 2016 did not fully offset weaker performance in fiscal 2015.

 

    Under the first 1/3 of the fiscal 2016 to 2018 cycle of ConAgra’s PSP (referred to as the 2016 tranche), ConAgra achieved results that align to a maximum award for Mr. Werner and Mr. Gehring. However, this cycle remains outstanding.

In determining attainment of the underlying performance goals for ConAgra’s incentive programs, ConAgra’s Human Resources Committee considered the impact of items that it believed were not indicative of the comparable operating performance of ConAgra’s businesses. Some of these items created financial benefits, and some of them created incremental expense or lost sales. The impact of these items was removed from ConAgra’s results for purposes of determining plan payouts. More information can be found below under “Use of Adjustments in Compensation Decisions.”

Objectives of ConAgra’s Fiscal 2016 Compensation Program for Our NEOs

ConAgra’s executive compensation program was designed to encourage and reward behavior that promotes attainment of annual and long-term ConAgra goals and sustainable growth in value for ConAgra’s stockholders. The ConAgra Human Resources Committee believed that the program must accomplish five objectives:

 

  1. Reward impact, to align the financial interests of ConAgra’s executives and ConAgra’s stockholders, and inspire and reward behavior that promotes sustainable growth in value for ConAgra’s stockholders;

 

  2. Incent the right results for the long-term health of ConAgra’s business, without creating unnecessary or excessive risks to ConAgra;

 

  3. Remain externally competitive to aid talent attraction and retention, because the achievement of ConAgra’s strategic plans requires it to attract and retain talented leaders who have the skills, vision and experience to lead ConAgra;

 

  4. Promote internal pay equity and consistency, recognizing that individual pay will reflect differences in experience, performance, responsibilities and market considerations, but that programs should be sufficiently similar to promote decisions that better ConAgra as a whole; and

 

  5. Promote and reward long-term commitment and longevity of career with ConAgra.

The ConAgra Human Resources Committee’s design of the compensation program with multiple objectives in mind helped mitigate the risk that ConAgra employees will take unnecessary and excessive risks that threaten the long-term health and viability of ConAgra.

 

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With the assistance of ConAgra Finance, Human Resources and Legal department personnel, and Frederic W. Cook & Co., Inc., which we refer to as F.W. Cook, the ConAgra Human Resources Committee’s independent compensation consultant, ConAgra’s Human Resources Committee undertook a risk review of ConAgra’s fiscal 2016 compensation programs for all employees. Based on the review, ConAgra has indicated that it believes its compensation programs encourage and reward prudent business judgment and appropriate risk-taking over the long-term. ConAgra has also indicated that it believes its compensation policies and practices are balanced and aligned with creating value for ConAgra’s stockholders, and do not create risks that are reasonably likely to have a material adverse effect on ConAgra.

As a non-employee director on ConAgra’s board, Mr. McLevish did not participate in ConAgra’s fiscal 2016 executive compensation program. ConAgra’s fiscal 2016 non-employee director compensation program was designed to use a combination of cash and equity-based incentive compensation to attract and retain qualified candidates to serve on the ConAgra board, and to reward them for this service and for their stewardship.

Design and Approval of ConAgra’s Fiscal 2016 Compensation Program for Our NEOs

Introduction:

The ConAgra Human Resources Committee was charged with designing and approving ConAgra’s executive compensation program and setting compensation opportunities for Mr. Werner and Mr. Gehring for fiscal 2016. In so doing, the ConAgra Human Resources Committee looked to ConAgra’s stockholders. The ConAgra Human Resources Committee’s policy is to present a “say-on-pay” vote to ConAgra’s stockholders annually. In fiscal 2015, ConAgra received over 96% approval on its say-on-pay vote, leading ConAgra’s Human Resources Committee to the conclusion that material changes in compensation design, solely due to the outcome of the say-on-pay vote, were not warranted for fiscal 2016.

The ConAgra Human Resources Committee also leveraged the advice and counsel of its independent compensation consultant, F.W. Cook, in setting fiscal 2016 compensation. F.W. Cook assisted the ConAgra Human Resources Committee in monitoring policy positions of ConAgra’s institutional stockholders and their advisors, emerging market practices in compensation design and philosophy and policy developments relevant to the ConAgra Human Resources Committee’s work. F.W. Cook also provided information on internal and external pay comparison data. The ConAgra Human Resources Committee used this data as a market check on its compensation decisions.

The ConAgra Human Resources Committee also considered the following ConAgra- and participant-focused matters in making fiscal 2016 compensation decisions:

ConAgra matters:

 

    ConAgra performance in prior years and expectations for the future;

 

    The general business environment in which compensation decisions were being made;

 

    The anticipated degree of difficulty inherent in the targeted incentive performance metrics;

 

    The level of risk-taking the program would reward; and

 

    Practices and developments in compensation design and governance.

Participant-focused matters:

 

    Mr. Werner’s and Mr. Gehring’s pay histories and performance;

 

    The potential complexity of each program, preferring programs that were transparent to participants and ConAgra’s stockholders and easily administered; and

 

    External and internal pay comparisons involving Mr. Werner and Mr. Gehring.

 

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External Pay Comparisons:

Although the ConAgra Human Resources Committee used internal and external pay comparison data as a market check on its compensation decisions, it recognized that over-reliance on external comparisons can be of concern, and it was mindful of the value and limitations of comparative data. The ConAgra Human Resources Committee’s first step in using external data for fiscal 2016 was the identification of an appropriate peer group. Prior to the start of fiscal 2016, F.W. Cook prepared a list of potential peer companies (with an emphasis on food and beverage companies) based on the following criteria:

 

    Operations: companies similar in size, operational scope and industry to ConAgra (competitors for ConAgra’s business);

 

    Investors: companies with which ConAgra competes for investor capital (similar performance characteristics, growth orientation, business cycles, volatility and access to capital as ConAgra); and

 

    Talent: companies with which ConAgra competes for executive talent.

At the ConAgra Human Resources Committee’s direction, F.W. Cook recommended companies with annual revenues in the range of between one-third to three times ConAgra’s annual revenue. If a larger or smaller company was a fit against the screening criteria, F.W. Cook was permitted to include it. However, to further enhance the comparability of the companies included in the peer group, F.W. Cook used regression analysis as needed to adjust the compensation data on a comparable basis to the size of the peer group in the aggregate. The ConAgra Human Resources Committee also asked F.W. Cook to ensure that the peer group would be large enough to withstand unanticipated changes in ConAgra’s, or an included company’s, structure or compensation programs.

Ultimately, the ConAgra Human Resources Committee approved the following peer group of 16 companies for fiscal 2016:

 

Altria Group. Inc.

 

Dr. Pepper Snapple Group, Inc.

  The Kraft Heinz Company

Campbell Soup Company

 

General Mills, Inc.

  Mondelez International, Inc.

The Clorox Company

 

The Hershey Company

  PepsiCo, Inc.

The Coca-Cola Company

 

Hormel Foods Corporation

  Tyson Foods, Inc.

Colgate-Palmolive Company

 

Kellogg Company

 

Dean Foods Company

 

Kimberly-Clark Corporation

 

With the exception of Kraft Foods Group, Inc., which was replaced by The Kraft Heinz Company as a result of the consummation of a merger transaction in July 2015, this same peer group was used by ConAgra for fiscal 2015. At the time of approval of the peer group, the median revenue of the peer group listed above was similar to ConAgra’s revenue; all of the companies fell within the desired range of approximately one-third to three times ConAgra’s annual revenue, with the exception of PepsiCo, Inc. Although PepsiCo, Inc. had revenues greater than three times larger than ConAgra’s revenue, the ConAgra Human Resources Committee determined to keep it in the peer group due to its status as a direct competitor for ConAgra’s business and executive talent. The ConAgra Human Resources Committee used data from this peer group, together with general industry data, as a market check on its fiscal 2016 compensation decisions for Mr. Werner and Mr. Gehring. As noted above, this was just one of many factors that played a role in compensation decisions.

The ConAgra Human Resources Committee did not mandate a target range for Mr. Werner’s or Mr. Gehring’s salary, annual incentive opportunity, long-term incentive opportunity, and total direct compensation level as compared to the peer group.

 

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ConAgra Management’s Role in the Design and Approval of ConAgra’s Programs for Mr. Werner and Mr. Gehring:

Mr. Connolly, ConAgra’s Chief Executive Officer, played a role in several key areas of the design and approval of the fiscal 2016 executive compensation program for Mr. Werner and Mr. Gehring.

 

  1. Selecting Performance Metrics and Targeted Performance Levels. An important part of designing incentive compensation programs is the selection of plan metrics and performance targets. To help ensure that the ConAgra Human Resources Committee’s pay-for-performance goals were achieved, selected metrics were tied to ConAgra shareholder value creation. In addition, performance targets were set at levels that balanced ConAgra’s investor expectations against achievability, without incenting undue risk taking. The ConAgra Human Resources Committee sought Mr. Connolly’s input on these matters for fiscal 2016. Mr. Connolly provided the ConAgra Human Resources Committee his views on the appropriate ConAgra goals for use in the ConAgra fiscal 2016 MIP and the fiscal 2016 tranche of the 2016 to 2018 cycle of the PSP. Mr. Connolly provided input based on his understanding of ConAgra’s investor expectations and the operating plans and financial goals of ConAgra. The ConAgra Human Resources Committee had sole authority to approve the program metrics and targets, but found Mr. Connolly’s input valuable.

 

  2. Assessing Company Performance. Financial performance was at the core of ConAgra’s incentive programs. However, the ConAgra Human Resources Committee retained the discretion to modify payouts based on the manner in which business results were delivered. At the end of fiscal 2016, Mr. Connolly offered the ConAgra Human Resources Committee his views of ConAgra’s performance against expectations.

 

  3. Assessing Individual Performance. With respect to individual performance, which also informed fiscal 2016 compensation decisions, the ConAgra Human Resources Committee relied on regular performance evaluations of ConAgra’s senior leadership team and focused on the outcome of strategic projects and initiatives, whether organizational goals were met and the leadership behaviors exhibited. Neither Mr. Werner nor Mr. Gehring played a direct role in his own compensation determination for fiscal 2016.

Design and Approval of ConAgra’s Programs for Mr. McLevish:

The process described above was not used to determine Mr. McLevish’s non-employee director compensation for fiscal 2016. Instead, in setting director compensation, ConAgra’s Human Resources Committee received input from F.W. Cook and also considered the time commitment and skill level required to serve on the ConAgra board. ConAgra’s Human Resources Committee recommended the non-employee director compensation program to the full ConAgra board for approval, and Mr. McLevish’s compensation reflects that he served for only a portion of the 2016 fiscal year.

Key Elements of ConAgra’s Fiscal 2016 Executive Compensation Program for Mr. Werner and Mr. Gehring

The fiscal 2016 compensation of Mr. Werner and Mr. Gehring consisted of the following key components:

 

Type

  

Component

Incentive Compensation    Annual incentive opportunity (cash)
   Long-term incentive opportunity (equity)

 

  

 

Fixed Compensation    Salary, retirement benefits and health and welfare benefits

 

  

 

 

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The ConAgra Human Resources Committee believed that using a mix of compensation types (salary, benefits, a cash incentive, and equity-based incentives) and performance periods promoted behavior consistent with ConAgra’s long-term strategic plan and minimized the likelihood of Mr. Werner or Mr. Gehring having significant motivation to pursue risky and unsustainable results.

Opportunity Mix. By design, targeted incentive compensation for Mr. Werner and Mr. Gehring for fiscal 2016 was a significant percentage of each of their total compensation opportunity. The ConAgra Human Resources Committee’s general policy was to provide the greatest percentage of the incentive opportunity in the form of long-term compensation payable in shares of ConAgra common stock. The ConAgra Human Resources Committee believed the emphasis on stock-based compensation was the best method of aligning Mr. Werner’s and Mr. Gehring’s interests with those of ConAgra’s stockholders.

Considerations for Mr. Werner. The ConAgra Human Resources Committee specifically considered the following when setting fiscal 2016 compensation opportunities for Mr. Werner (actual business performance over the relevant performance periods was the key determinant of fiscal 2016 incentive plan payouts for Mr. Werner): Mr. Werner was named President of Commercial Foods of ConAgra in May 2015, at the start of fiscal 2016. From June 2013 through April 2015, Mr. Werner served as Vice President of Finance for ConAgra’s Private Brands and Commercial Foods operating segments, and from May 2011 to June 2013, Mr. Werner was ConAgra’s Senior Vice President of Finance for the Lamb Weston operations. Prior to May 2011, Mr. Werner was Vice President of Supply Chain of ConAgra, working with ConAgra’s Consumer Foods Business, since December 2009. Mr. Werner originally joined ConAgra in 1999. The ConAgra Human Resources Committee considered Mr. Werner’s scope of responsibility, his new role and opportunity for development, internal equity and external market data when setting his compensation opportunities for fiscal 2016.

Considerations for Mr. Gehring. The ConAgra Human Resources Committee specifically considered the following when setting fiscal 2016 compensation opportunities for Mr. Gehring: Mr. Gehring served as ConAgra’s Executive Vice President and Chief Financial Officer since 2009. Since he joined ConAgra in 2002, Mr. Gehring held roles with increasing responsibilities within ConAgra’s Finance organization, including responsibilities over key areas such as Accounting, Treasury, Risk, Investor Relations, Information Technology, Enterprise Business Services and Aviation. The ConAgra Human Resources Committee considered the broad scope of his responsibilities, his tenure, internal equity and external market data in setting his compensation opportunity for fiscal 2016. As a result of this analysis, the ConAgra Human Resources Committee approved a salary increase for Mr. Gehring from $600,000 to $650,000 in fiscal 2016.

Below is a more detailed analysis of each element of the fiscal 2016 compensation program for Mr. Werner and Mr. Gehring, as well as actual fiscal 2016 payouts to Mr. Werner and Mr. Gehring under the programs, as applicable.

Salary. ConAgra paid a salary to each of Mr. Werner and Mr. Gehring to provide him with a base level of fixed income for services rendered.

Incentive Programs. Consistent with its overall compensation objectives, the ConAgra Human Resources Committee aligned Mr. Werner’s and Mr. Gehring’s compensation with ConAgra performance through a mix of annual and long-term incentive opportunities for fiscal 2016.

Financial targets disclosed in this section are done so in the limited context of these incentive plans and they are not statements of ConAgra’s or ConAgra’s management’s expectations or estimates of results or other guidance. Investors are cautioned not to apply these statements to other contexts.

 

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Management Incentive Plan

ConAgra’s fiscal 2016 MIP provided a cash incentive opportunity to Mr. Werner and Mr. Gehring. For Mr. Werner, the fiscal 2016 MIP used a framework that positioned awards to potentially qualify as tax deductible under Section 162(m) of the Internal Revenue Code, which we refer to as the Code (Mr. Gehring’s award did not require this framework, but was subject to it nonetheless). This framework, discussed more in the following paragraphs, used an overarching performance goal and underlying performance goal. Please refer to the discussion under “Tax and Accounting Implications of the ConAgra Human Resources Committee’s Compensation Decisions” for more information on this plan design.

Overarching ConAgra EPS Performance Goal. At the start of fiscal 2016, the ConAgra Human Resources Committee approved an overarching goal under the fiscal 2016 MIP of adjusted EPS of $0.10. This goal, applicable to only a small subset of senior officers, including Mr. Werner, was required to be achieved before any payouts could be made to Mr. Werner or Mr. Gehring. The fiscal 2016 MIP further provided that with achievement of the overarching adjusted EPS goal, the ConAgra Human Resources Committee could exercise negative discretion to potentially reduce, but not increase, authorized payouts. This negative discretion was to be guided by performance against the underlying financial goals described in the next paragraph.

Underlying Pre-Established Financial Goals. At the start of fiscal 2016, the ConAgra Human Resources Committee approved EBIT and net sales goals as the underlying metrics for the fiscal 2016 MIP (each to be adjusted, as appropriate, for unusual items). The ConAgra Human Resources Committee developed performance goals to align with threshold, target and maximum incentive opportunities. Assuming the overarching adjusted EPS goal was met, Mr. Werner was eligible to earn a payout from 0% to 176% of his target amount and Mr. Gehring was eligible to earn a payout from 0% to 220% of his target amount, in each case, calculated as follows:

 

    Primary Metric – EBIT. The primary metric for the fiscal 2016 MIP was EBIT, which could be adjusted for items impacting comparability of results. Achievement of a targeted level of total company EBIT for fiscal 2016 was designed to result in a payout equal to 100% of Mr. Werner’s and Mr. Gehring’s approved target opportunities. Achievement at or below threshold performance would result in a payout equal to 0% of the opportunity. The maximum portion of each 2016 MIP award that could have been earned under the primary metric of EBIT for fiscal 2016 was 200% of the target award. The EBIT targets for the fiscal 2016 MIP are detailed here:

 

Threshold EBIT (0% payout)

  

Target EBIT (100% payout)

  

Maximum EBIT (200% payout)

$1,390 million    $1,636 million    $1,881 million

At the time these EBIT performance goals were established, ConAgra was engaged in pursuing strategic alternatives for its Private Brands business segment. However, ConAgra was still the owner of the business and had not entered into a definitive agreement to sell it. As a result, the EBIT goals included in the fiscal 2016 MIP included expected contributions from the Private Brands business. The business was sold during the fiscal year.

 

    Secondary Metric – Net Sales Growth. The fiscal 2016 MIP included a secondary metric as well. If EBIT at or above threshold was achieved in fiscal 2016, an additional payout could occur if ConAgra’s adjusted net sales growth exceeded planned amounts. The additional payout under this secondary metric was designed to provide an additional 20 points of funding if adjusted net sales growth of 3.4% or more was achieved for the 2016 fiscal year. Adjusted net sales growth of 2.4% to 2.9% would have provided an additional 6.67 points of funding, and adjusted net sales growth of above 2.9% but below 3.4% would have provided an additional 13.33 points of funding. Adjusted net sales growth below 2.4% during fiscal 2016 was designed not to be rewarded under this aspect of the plan. Due to the planned divestiture of the Private Brands business unit, net sales for that business unit were excluded from the target and calculation of this metric.

 

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As a result of the two-metric structure, high levels of financial performance were designed to result in payouts up to a total of 176% of targeted award for Mr. Werner and 220% of targeted award for Mr. Gehring under the fiscal 2016 MIP.

In addition to setting the financial goals for the fiscal 2016 MIP, the ConAgra Human Resources Committee set corresponding target compensation opportunities under the plan for Mr. Werner and Mr. Gehring measured as a percentage of base salary. The following table shows the range of authorized payments (expressed as a percentage of base salary earned during fiscal 2016) for Mr. Werner and Mr. Gehring upon achievement of the threshold, target and maximum EBIT and net sales goals approved for the fiscal 2016 MIP. If the overarching adjusted EPS goal or the threshold EBIT goal were not met, no payment would be made under the fiscal 2016 MIP. No portion of the incentive was guaranteed.

 

Named Executive Officer

  

Threshold

  

Target MIP Award

   Maximum MIP Award
Mr. Werner    0%    80% of salary    176% of salary
Mr. Gehring    0%    100% of salary    220% of salary

Application of the Metrics to Determine Payouts. To incent management to make decisions that have positive long-term impacts, even at the expense of shorter term results, and to prevent unusual gains and losses from having too great of an impact on plan payouts in any year, the ConAgra Human Resources Committee retained discretion to exclude items impacting comparability from ConAgra-wide results and adjust actual results for specific items that occurred during the fiscal year. The use of adjustments approved by the ConAgra Human Resources Committee and applicable to the fiscal 2016 EBIT and net sales metrics is described below under “Use of Adjustments in Compensation Decisions.”

After taking into account reported results and the approved adjustments, ConAgra achieved fiscal 2016 EBIT of $1,803.6 million for MIP purposes, which was meaningfully above target. The level of net sales growth achieved for the year did not exceed the threshold levels required for the secondary metric to impact awards.

Business Plan Delivery. Once the performance metrics review was complete, the ConAgra Human Resources Committee considered the manner in which management executed the operating plan during the year. Reflecting on many operational and strategic accomplishments from the year, as set forth below, the ConAgra Human Resources Committee determined the financial performance results for fiscal 2016, before consideration of individual performance, warranted a payout level equal to 158% of target:

 

    ConAgra exceeded its adjusted EPS goal;

 

    ConAgra grew operating profit in its segments by more than 5%, expanded margins in its Consumer Foods segment, and delivered year-over-year growth in both volume and operating profit in its Commercial Foods segment;

 

    ConAgra developed a robust plan to deliver $300 million in annual run-rate efficiencies by the end of fiscal 2018, with approximately $200 million of these efficiencies coming from reductions in its selling, general and administrative expenses and the remaining $100 million from trade spend efficiencies (ConAgra began to implement the program in fiscal 2016);

 

    ConAgra began meaningfully transforming its portfolio;

 

    ConAgra divested its Private Brands business;

 

    ConAgra announced plans to separate ConAgra into two public companies, Conagra Brands and Lamb Weston;

 

    During the fourth quarter of fiscal 2016 and shortly thereafter, ConAgra announced agreements to divest two smaller, non-core businesses in its Commercial Foods business – Spicetec Flavors & Seasonings and J.M. Swank (which transactions were completed in the first quarter of fiscal 2017);

 

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    ConAgra strengthened its balance sheet during fiscal 2016, and using the proceeds from its portfolio transformation repaid approximately $2.4 billion of debt during fiscal 2016;

 

    During fiscal 2016, ConAgra took steps to transform its culture, including by announcing the relocation of its corporate headquarters to Chicago, Illinois. The new headquarters location was selected to enable greater collaboration across ConAgra’s teams while enhancing its ability to attract and retain top talent. The move was completed shortly after the end of the fiscal year;

 

    ConAgra maintained its annual dividend rate of $1.00 per share during fiscal 2016; and

 

    The closing market price of ConAgra common stock rose from $38.87 per share on the first trading day of fiscal 2016 to $45.29 per share on the last trading day of fiscal 2016. With dividends, this represented a total return to ConAgra stockholders of 19.1%. On a three-year basis, from fiscal 2014 through fiscal 2016, the closing market price of ConAgra common stock grew from $34.98 per share on the first trading day of fiscal 2014 to $45.29 per share on the last trading day of fiscal 2016. With dividends, this represented a total return to ConAgra stockholders of 38.1%.

Awards to Mr. Werner and Mr. Gehring. The ConAgra Human Resources Committee’s final consideration was to determine each of Mr. Werner’s and Mr. Gehring’s individual fiscal 2016 MIP payout. This process involved an assessment of Mr. Werner’s and Mr. Gehring’s individual performance. The ConAgra Human Resources Committee considered the factors discussed above under the headings “Considerations for Mr. Werner” and “Considerations for Mr. Gehring” when determining the fiscal 2016 MIP payouts. Mr. Connolly’s input on the individual contribution of Mr. Werner and Mr. Gehring, and his recommendations on program payouts, also assisted the ConAgra Human Resources Committee in approving Mr. Werner’s and Mr. Gehring’s MIP payouts. The ConAgra Human Resources Committee has indicated that it believed that the MIP award paid to Mr. Werner and Mr. Gehring for fiscal 2016 are consistent with the level of accomplishment by ConAgra and Mr. Werner and Mr. Gehring, as described in this section.

 

Named Executive Officer

   Target Payout    Actual MIP Payout    Actual Payout as
a % of Target
Mr. Werner    $350,923    $637,626    181.7%
Mr. Gehring    $643,269    $1,118,001    173.8%

Long-Term Incentive Plan

The ConAgra Human Resources Committee has indicated that it firmly believes in aligning ConAgra executive officers’ interests with those of ConAgra stockholders. The significant extent to which equity was included in Mr. Werner’s and Mr. Gehring’s compensation opportunities evidences this belief. The long-term incentive plan for Mr. Werner and Mr. Gehring has historically been the primary vehicle for delivering this equity-based compensation.

In fiscal 2016, the ConAgra Human Resources Committee determined that it was appropriate to award stock options, performance shares and service-based RSUs to Mr. Werner and Mr. Gehring. A goal of the ConAgra Human Resources Committee’s executive compensation program was long-term commitment to and continuity of employment with ConAgra. RSUs, which were designed to cliff-vest at the end of three-years, assisted with this goal.

The actual number of stock options, RSUs and targeted performance shares granted under the long-term incentive plan for fiscal 2016 was determined using a value-based approach. Each of Mr. Werner and Mr. Gehring was provided a total targeted grant value, based on the considerations discussed above under “Considerations for Mr. Werner” and “Considerations for Mr. Gehring.” Fifty percent (50%) of the total targeted value was delivered as performance shares, 25% of the total targeted value was delivered as RSUs and 25% of the total targeted value was delivered as stock options. Performance share and RSUs grant sizes were determined by dividing the dollar value of the targeted opportunity by the average of the closing market price of ConAgra

 

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common stock for the 30 trading days as of 10 trading days prior to, and not including, the date of grant. Stock option grant details were determined by multiplying the number of RSUs granted by six. The ConAgra Human Resources Committee used this approach to deliver what it has indicated it views as an equal mix of stock options and RSUs to participants.

Each element of the long-term incentive plan is discussed more fully below.

Stock Options. The use of stock options was designed to directly align Mr. Werner’s and Mr. Gehring’s interests with those of ConAgra stockholders. All options granted for fiscal 2016 have a ten-year term and were designed to have an exercise price equal to the closing market price of ConAgra common stock on the date of grant. The options vest 33% on each of the first three anniversaries of the grant date, generally subject (as originally designed) to continued employment with ConAgra.

The number of options granted to Mr. Werner and Mr. Gehring during fiscal 2016 are set forth below:

 

Named Executive Officer

  

Stock Options Granted During Fiscal 2016

Mr. Werner    40,458
Mr. Gehring    53,946

The ConAgra Human Resources Committee considered the factors discussed above under the heading “Considerations for Mr. Werner” and “Considerations for Mr. Gehring.” when determining the size of this particular grant. This grant was made on August 28, 2015 with an exercise price of $41.73 per share. The grant date fair value of the stock options awarded to Mr. Werner and Mr. Gehring are included in the “Option Awards” column of the Summary Compensation Table – Fiscal 2016.

Restricted Stock Units. RSUs were designed to generally represent the right to receive a defined number of shares of ConAgra common stock after completing a period of service established at the date of grant. All RSUs granted for fiscal 2016 generally vest in full on the third anniversary of the date of grant, generally subject (as originally designed) to continued employment with ConAgra. RSUs granted in fiscal 2016 are not entitled to dividend equivalents.

The number of RSUs granted to Mr. Werner and Mr. Gehring in the fiscal 2016 long-term incentive program are set forth below.

 

Named Executive Officer

  

RSUs Granted During Fiscal 2016

Mr. Werner    6,743
Mr. Gehring    8,991

The ConAgra Human Resources Committee considered the factors discussed above under the heading “Considerations for Mr. Werner” and “Considerations for Mr. Gehring.” when determining the size of this particular grant. This grant was made on August 28, 2015. The grant date fair value of the RSUs awarded to Mr. Werner and Mr. Gehring are included in the “Stock Awards” column of the Summary Compensation Table – Fiscal 2016.

Performance Shares. Performance shares were designed to represent an opportunity to earn a defined number of shares of ConAgra common stock if ConAgra achieves pre-set, three-year performance goals. Dividend equivalents are paid on the portion of the performance shares actually earned and were designed to be paid at the regular dividend rate in shares of ConAgra common stock.

 

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The targeted number of performance shares granted to Mr. Werner and Mr. Gehring in fiscal 2016, together with the performance share grants made under the comparable program in fiscal 2015 and fiscal 2014, are set forth below.

 

Named Executive
Officer

   Targeted Performance
Shares for Fiscal 2016
to 2018 Cycle
   Targeted Performance
Shares for Fiscal 2015
to 2017 Cycle
   Targeted Performance
Shares for Fiscal 2014
to 2016 Cycle
Mr. Werner    13,486    9,580    5,471
Mr. Gehring    17,981    25,547    21,882

Overarching EPS Performance Goal. For Mr. Gehring’s recent PSP awards, ConAgra utilized an overarching adjusted EPS performance goal (similar to that used for the fiscal 2016 MIP). The overarching adjusted EPS goal applicable to Mr. Gehring in each PSP cycle outstanding during fiscal 2016 was as follows:

 

    Fiscal 2014 to 2016 cycle: Adjusted ConAgra EPS of $0.50 in each of fiscal years 2014, 2015 and 2016;

 

    Fiscal 2015 to 2017 cycle: Adjusted ConAgra EPS of $0.10 in each of fiscal years 2015, 2016 and 2017; and

 

    Fiscal 2016 to 2018 cycle: Adjusted ConAgra EPS of $0.10 in each of fiscal years 2016, 2017 and 2018.

As with the fiscal 2016 MIP, the adjusted EPS goal was designed to be met before any payout could be made to Mr. Gehring. If the overarching adjusted EPS goal was met, the ConAgra Human Resources Committee could exercise negative discretion to potentially reduce, but not increase, the authorized payout. This negative discretion was to be guided by performance against underlying financial goals approved by the ConAgra Human Resources Committee, further discussed below.

Certain Pre-Established Financial Goals. For the fiscal 2014 to 2016 and fiscal 2015 to 2017 cycles of the PSP, the actual number of shares of ConAgra common stock earned by Mr. Werner and Mr. Gehring were designed to tie to ConAgra’s performance against three-year average EBITDA return on capital and three-year average net sales growth goals. The ConAgra Human Resources Committee selected these financial metrics because it believed they have a positive impact on shareholder value.

For the fiscal 2016 to 2018 cycle of the PSP, the ConAgra Human Resources Committee chose to approve the additional performance goals in a multi-step process. This shift was a result of the significant amount of change being led by Mr. Connolly. At the time of incentive plan goal setting for fiscal 2016, Mr. Connolly was only four months into his tenure. The portfolio, cost and cultural overhauls he identified had just commenced. In addition, strategic alternatives were being launched for a major business unit, Private Brands. As a result, multi-year performance objectives were challenging to set; the ConAgra Human Resources Committee decided to set the pre-established financial goals relevant to the fiscal 2016 to 2018 PSP in stages.

In August 2015, the ConAgra Human Resources Committee approved the first set of underlying goals for the fiscal 2016 to 2018 PSP. The ConAgra Human Resources Committee approved a ConAgra fiscal 2016 EBITDA return on capital goal and applied such goal to only 33% of the total targeted fiscal 2016 to 2018 award, which we refer to as the 2016 tranche. The ConAgra Human Resources Committee agreed to approve underlying goals for the remaining 67% of the targeted award in the future. The ConAgra Human Resources Committee also chose to eliminate the ConAgra net sales growth goal for the 2016 tranche. Achievement of ConAgra’s net sales commitments to stockholders remained a priority. However, the ConAgra Human Resources Committee determined that ConAgra’s profit improvement was a more important metric to incent in the near-term. The company had begun to implement initiatives related to reducing ineffective trade promotion spending in an effort to improve the long-term health and profitability of its volume base, and the ConAgra Human Resources Committee did not want to incent the short-term pursuit of unprofitable sales growth.

The grant date fair value of Mr. Werner’s and Mr. Gehring’s performance shares granted under the fiscal 2016 to 2018 cycle, based on the probable outcome of the performance conditions for such period, are included in the “Stock Awards” column of the Summary Compensation Table – Fiscal 2016.

 

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More information on the underlying metrics in the ConAgra PSP cycles follows.

 

    Primary Metric – ConAgra EBITDA Return on Capital. In each of the cycles of the PSP that were outstanding during fiscal 2016 (in other words, fiscal 2014 to 2016, fiscal 2015 to 2017 and fiscal 2016 to 2018), ConAgra EBITDA return on capital was a key metric. This metric is calculated by dividing ConAgra EBITDA by ConAgra average invested capital as follows:

 

ConAgra EBITDA

   =  

ConAgra earnings before interest and taxes + depreciation and
amortization expense

ConAgra Average Invested Capital    =   ConAgra interest bearing debt + ConAgra equity (13 period average)

The operating results were designed to be adjusted for items impacting comparability of results. The ConAgra EBITDA return on capital goals under the outstanding PSP cycles are as follows:

 

Plan Cycle

   Threshold
3-Year Average
ConAgra EBITDA return
on capital

(25% payout)
    Target
3-Year Average
ConAgra EBITDA

return on capital
(100% payout)
    Maximum
3-Year Average
ConAgra EBITDA

return on capital
(200% payout)
 

Fiscal 2014 to 2016

     14.6     17.9     19.9

Fiscal 2015 to 2017

     14.2     17.5     19.5

Achievement of the threshold level of three-year average ConAgra EBITDA return on capital for each of the fiscal 2014 to 2016 cycle and the fiscal 2015 to 2017 cycle was designed to result in a payout equal to 25% of Mr. Werner’s and Mr. Gehring’s approved target opportunities. Target performance was designed to result in a payout equal to 100% of the opportunity. The maximum number of shares of ConAgra common stock that were designed to be earned under the primary metric of ConAgra EBITDA return on capital for each of these two cycles is 200% of the targeted number of performance shares granted.

 

Plan Cycle

   Threshold ConAgra
EBITDA return on
capital (0% payout as
to 1/3 of targeted
award)
    Target ConAgra
EBITDA return on
capital (100% payout as
to 1/3 of targeted
award)
    Maximum ConAgra
EBITDA return on
capital (200% payout
as to 1/3 of targeted
award)
 
2016 Tranche of Fiscal 2016 to 2018      20.2     22.8     25.1

For the fiscal 2016 to 2018 cycle, failure to achieve greater than the threshold level of ConAgra EBITDA return on capital for fiscal 2016 was designed to result in a payout equal to 0% of Mr. Werner’s and Mr. Gehring’s approved target opportunities as to the 2016 tranche.

Performance at a level equal to target was designed to result in a payout equal to 100% of the opportunity for the 2016 tranche. The maximum number of shares of ConAgra common stock that was designed to be earned for the 2016 tranche is 200% of one-third of the granted award.

 

   

Secondary Metric – ConAgra Net Sales Growth. In both the fiscal 2014 to 2016 and fiscal 2015 to 2017 cycles of the PSP, the ConAgra Human Resources Committee chose to include a secondary metric: average ConAgra net sales growth. There is no secondary metric applicable to the 2016 tranche. For the two cycles in which the ConAgra net sales growth goal is relevant, minimum levels of ConAgra EBITDA return on capital were designed to be achieved before the ConAgra average net sales growth feature is assessed: 15.9% in the fiscal 2014 to 2016 cycle and 15.5% in the fiscal 2015 to 2017 cycle. Upon attainment of these amounts, up to 20 additional points of funding were designed to be earned based on the secondary metric of three-year average ConAgra net sales growth. Three-year average ConAgra net sales growth of 7% or more was designed to fund the fiscal 2014 to 2016 cycle by an additional 20 points;

 

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three-year average ConAgra net sales growth of 4.5% or more was designed to fund the fiscal 2015 to 2017 cycle an additional 20 points. As a result of the two-metric structure, high levels of ConAgra financial performance was designed to result in payouts up to a total of 220% of targeted shares under each of these cycles.

The ConAgra Human Resources Committee has indicated that, at the time the target levels of performance were set for each of the outstanding cycles, it believed them to appropriately balance the interests of ConAgra stockholders and participants.

Awards Earned for Fiscal 2014 to 2016 Cycle. At the end of fiscal 2016, the fiscal 2014 to 2016 cycle of the long-term incentive program concluded. After taking into account reported results and the approved adjustments (the use of adjustments approved by the ConAgra Human Resources Committee and applicable to the cycle is described below under “Use of Adjustments in Compensation Decisions”), ConAgra achieved three-year average EBITDA return on capital of 15.7%. According to the pre-established goals, this performance level equated to a payout of 25% of the targeted performance share awards; the ConAgra EBITDA return on capital performance did not reach levels that would permit the average ConAgra net sales growth feature to apply. The ConAgra Human Resources Committee did not exercise additional discretion to increase or decrease final payouts.

The table below lists the number of shares of ConAgra common stock that were issued to Mr. Werner and Mr. Gehring following fiscal 2016 for the fiscal 2014 to 2016 cycle of the PSP. The noted amounts include dividend equivalents on earned shares, which were paid in additional ConAgra shares.

 

Named Executive
Officer

   Target Performance
Shares Granted for
Fiscal 2014 to 2016
Cycle
   Actual Performance
Shares Earned for Fiscal
2014 to 2016 Cycle
   Actual as % of Target
(with Dividend
Equivalents)
Mr. Werner    5,471    1,475    27%
Mr. Gehring    21,882    5,900    27%

Awards Under the Fiscal 2015 to 2017 Cycle. The fiscal 2015 to 2017 cycle of the PSP was ongoing at the end of fiscal 2016 and thus no payouts had yet been earned as of the end of fiscal 2016.

Awards Notionally Earned for Fiscal 2016 Tranche of the Fiscal 2016 to Fiscal 2018 Cycle. At the end of fiscal 2016, the underlying performance metric applicable to the 2016 tranche could be calculated. After taking into account reported results and the approved adjustments (the use of adjustments approved by the ConAgra Human Resources Committee and applicable to the 2016 tranche is described below under “Use of Adjustments in Compensation Decisions”), ConAgra achieved one-year EBITDA return on capital of 25.1%. According to the pre-established goals (but still subject to the adjusted EPS goal for Mr. Gehring), this level of performance permitted payout at the maximum level (200% of target) for the 2016 tranche for Mr. Werner and Mr. Gehring. This percentage was designed to still be adjusted by the ConAgra Human Resources Committee prior to payout in early fiscal 2019, depending on its further evaluation of performance under the applicable underlying metrics and other considerations. The ConAgra Human Resources Committee has not yet exercised additional discretion to increase or decrease final earned amounts.

Other Notes on Performance Shares. In general, performance shares that have not been paid at the time of a participant’s termination of employment are forfeited. An exception allows for pro rata payouts, based on actual plan performance, in the event of death, disability or retirement. The ConAgra Human Resources Committee has also retained the discretion to provide for payouts on termination when it finds it appropriate and in the best interest of ConAgra. To date, however, the ConAgra Human Resources Committee has not used this discretion.

 

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Retention RSU Program

At the start of fiscal 2016, Mr. Connolly was beginning his tenure as CEO of ConAgra and mobilizing the organization in pursuit of a new strategic path. In light of the change underway and the need to retain key members of management, the ConAgra Human Resources Committee authorized a special retention RSU program for key leaders of ConAgra. The ConAgra Human Resources Committee consulted with F.W. Cook in connection with the adoption of the retention program. As a result of the program, effective July 17, 2015, RSUs in the amount set forth in the table below were granted to Mr. Werner and Mr. Gehring. The actual number of RSUs granted to each of Mr. Werner and Mr. Gehring was determined using a value-based approach. Mr. Werner and Mr. Gehring were provided a total targeted grant value. The RSU grant size was determined by dividing the dollar value of the targeted opportunity by the average of the closing market price of ConAgra common stock for the 30 trading days as of 10 trading days prior to, and not including, the date of grant. All of the RSUs were granted under the ConAgra Foods, Inc. 2014 Stock Plan. These RSUs were designed to generally cliff-vest at the end of three years, subject (as originally designed) to continued employment with ConAgra.

 

Named Executive Officer

  

Targeted Grant Value

  

RSUs Granted

Mr. Werner    $800,000    19,912
Mr. Gehring    $1,600,000    39,825

Key Elements of ConAgra’s Fiscal 2016 Non-Employee Director Compensation Program for Mr. McLevish

The fiscal 2016 compensation of Mr. McLevish as a ConAgra non-employee director consisted of the following key components:

 

Type

  

Component

Incentive Compensation

 

  

Short-term incentive opportunity (RSUs)

 

Fixed Compensation

 

  

Annual cash retainer

 

The number of RSUs granted to Mr. McLevish was determined by dividing $116,667 by the average closing price of ConAgra common stock on the NYSE for the 30 trading days prior to the grant date of July 17, 2015. The RSUs vested one year from the date of grant and were subject to continued service during the entire term. Vesting would have been accelerated in the event of Mr. McLevish’s death or permanent disability. If Mr. McLevish had no longer been serving one year from the date of grant, vesting would have been prorated 25% for each fiscal quarter during which he served for any amount of time. Dividend equivalents were paid on the RSUs at the regular dividend rate in shares of ConAgra stock (50 shares for Mr. McLevish through the end of fiscal 2016).

Other ConAgra Non-Employee Director Compensation Programs for Mr. McLevish:

In addition to the cash payment and equity award described above, Mr. McLevish was entitled to participate in the following programs during fiscal 2016:

 

    A matching gifts program pursuant to which ConAgra would match up to $10,000 of Mr. McLevish’s charitable donations per fiscal year; and

 

    A non-qualified deferred compensation plan through which Mr. McLevish could defer receipt of his cash or stock compensation. This program does not provide above-market earnings (as defined by SEC rules).

In fiscal 2016, Mr. McLevish did not participate in the matching gifts program.

 

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Treatment of Outstanding ConAgra Equity Compensation in the Spinoff.

We currently anticipate that, in general, each outstanding ConAgra equity award held by Messrs. McLevish and Werner as of the spinoff will be converted into an award with respect to Lamb Weston common stock. Given that Mr. Gehring is currently anticipated to serve as the interim Chief Financial Officer for a limited period of time, Mr. Gehring’s outstanding ConAgra equity awards will be equitably adjusted to reflect the spinoff but will continue to cover shares of ConAgra common stock, and after the spinoff service or employment requirements under his equity awards will be based on Mr. Gehring’s service or employment with us rather than ConAgra. In each case, the award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra equity award and, other than regarding performance share awards, which are described in more detail below, the terms of the equity awards, such as vesting dates, will generally remain substantially the same.

Each of Mr. Werner’s and Mr. Gehring’s ConAgra performance share awards for the fiscal 2015 to 2017 cycle are expected to be equitably adjusted or converted to vest solely based on their original service-based vesting criteria, with the number of shares subject to the award adjusted in a manner intended to preserve the aggregate intrinsic value of the original ConAgra award based on actual performance achieved through the end of the last fiscal period ending prior to the distribution date; provided, however, that Mr. Gehring’s performance share awards for the fiscal 2015 to 2017 cycle will remain subject to the achievement of the overarching adjusted EPS goal established at the beginning of the performance period. To this end, such ConAgra performance share awards held by Mr. Werner as of the spinoff will be adjusted or converted into an equity award with respect to Lamb Weston common stock and ConAgra performance share awards held by Mr. Gehring will continue to cover ConAgra common stock and will be equitably adjusted to reflect the spinoff. Each of Mr. Werner’s other ConAgra performance share awards (those for the fiscal 2016 to 2018 cycle and the 2017 to 2019 cycle) will be adjusted or converted into a Lamb Weston performance share award (payable in Lamb Weston common stock), with the number of shares subject to such awards equitably adjusted in a manner intended to preserve the aggregate intrinsic value of the original award, but will otherwise remain subject to substantially the same terms and vesting criteria as included in the original grant. Each of Mr. Gehring’s other ConAgra performance share awards (those for the fiscal 2016 to 2018 cycle and the fiscal 2017 to 2019 cycle) will continue to be a ConAgra performance share award (payable in ConAgra common stock), with the number of shares subject to such awards equitably adjusted in a manner intended to preserve the aggregate intrinsic value of the original award, but will otherwise remain subject to substantially the same terms and vesting criteria as included in the original grant.

Other Fiscal 2016 Compensation for Mr. Werner and Mr. Gehring. The additional material elements of ConAgra’s compensation program for Mr. Werner and Mr. Gehring during fiscal 2016 were as follows:

Benefit Programs. ConAgra offered a package of core employee benefits to Mr. Werner and Mr. Gehring. With respect to health and welfare benefits, ConAgra offered health, dental and vision coverage and life and disability insurance. ConAgra and each of Mr. Werner and Mr. Gehring shared in the cost of these programs. ConAgra also offered a matching-gifts program through the ConAgra Foods Foundation. To maximize community impact, the ConAgra Foods Foundation matches, dollar for dollar, donations employees make to eligible organizations, up to $1,000 in a calendar year.

With respect to retirement benefits, ConAgra maintains qualified 401(k) retirement plans (with a company match on employee contributions) and qualified pension plans. Mr. Werner and Mr. Gehring were entitled to participate in these plans on the same terms as other ConAgra employees.

Mr. Werner and Mr. Gehring also participated in a non-qualified pension plan, and voluntary deferred compensation plan offered by ConAgra. The non-qualified pension and voluntary deferred compensation plans permitted ConAgra to pay retirement benefits in amounts that exceed the limitations imposed by the Code under ConAgra’s qualified plans.

ConAgra’s voluntary deferred compensation plan allowed Mr. Werner and Mr. Gehring to defer receipt of up to 50% of base salary and 90% of annual cash incentive compensation. The program permitted Mr. Werner

 

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and Mr. Gehring to save for retirement in a tax-efficient way at minimal administrative cost to ConAgra. Participants in the program are not entitled to above-market (as defined by the SEC) or guaranteed rates of return on their deferred funds.

We include contributions made by ConAgra to Mr. Werner’s and Mr. Gehring’s 401(k) plan and voluntary deferred compensation accounts in the “All Other Compensation” column of the Summary Compensation Table – Fiscal 2016. A complete description of these retirement programs is provided under the headings “Pension Benefits – Fiscal 2016” and “Non-Qualified Deferred Compensation – Fiscal 2016” below.

As a non-employee director on ConAgra’s board, Mr. McLevish did not participate in any of these other ConAgra benefits or retirement programs during fiscal 2016.

Change of Control / Severance Benefits. ConAgra has an agreement with each of Mr. Werner and Mr. Gehring that was designed to help promote stability and continuity of senior management in the event of a ConAgra change of control. The ConAgra Human Resources Committee routinely evaluates participation in this program and its benefit levels to ensure their reasonableness. Since fiscal 2012, individuals promoted or hired into positions that, in the ConAgra Human Resources Committee’s view, are appropriate for change of control program participation have not been entitled to any excise tax gross-up protection. Although the ConAgra Human Resources Committee has indicated that it continues to believe in the importance of maintaining a change of control program, it has also indicated that it believes that offering excise tax gross-ups to new participants is inappropriate relative to best executive pay practices. The amounts potentially payable to Mr. Werner and Mr. Gehring under their respective agreements can be found under the heading “Potential Payments Upon Termination or Change of Control.” The spinoff will not constitute a change of control of ConAgra under Mr. Werner’s or Mr. Gehring’s change of control agreement or other arrangements with ConAgra. ConAgra has also adopted a broad severance plan applicable to Mr. Werner and Mr. Gehring.

As a non-employee director on ConAgra’s board, Mr. McLevish was not a party to similar change in control or severance benefits arrangements with ConAgra during fiscal 2016.

Use of Adjustments in ConAgra’s Compensation Decisions

To incent ConAgra management to make decisions that have positive long-term impacts, even at the expense of shorter term results, and to prevent one-time gains and losses from having too great of an impact on incentive payouts, the ConAgra Human Resources Committee designed its programs to exclude certain items impacting comparability from results in the fiscal 2016 MIP, the fiscal 2014 to 2016 cycle of the PSP and the 2016 tranche of the fiscal 2016 to 2018 cycle of the PSP. The underlying metrics for the fiscal 2016 MIP were fiscal 2016 ConAgra EBIT and ConAgra net sales goals. The underlying metrics for the fiscal 2014 to 2016 cycle of the PSP were ConAgra EBITDA return on capital and average ConAgra net sales growth. The metric for the 2016 tranche of the fiscal 2016 to 2018 cycle of the PSP was ConAgra EBITDA return on capital.

With respect to earnings-related measures, the ConAgra Human Resources Committee approved adjustments that are generally consistent with the adjustments presented to investors in ConAgra’s discussions of comparable earnings results.

ConAgra has indicated that its goal is to pay incentives based on the underlying business trends and results that its investors are using to measure management performance.

ConAgra Human Resources Committee’s Views on Our NEOs’ Stock Ownership

The ConAgra Human Resources Committee has adopted stock ownership guidelines applicable to Mr. Werner and Mr. Gehring. These guidelines are represented as a percentage of salary. The ConAgra Human

 

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Resources Committee adopted these guidelines because it believed that Mr. Werner’s and Mr. Gehring’s stock ownership promoted alignment with ConAgra stockholder interests. Mr. Werner and Mr. Gehring were expected to reach their respective ownership requirement within a reasonable period of time after appointment. Shares of ConAgra common stock personally acquired by Mr. Werner or Mr. Gehring through open market purchases or through ConAgra’s 401(k) plan or employee stock purchase plan, as well as RSUs and shares acquired upon the deferral of earned bonuses, are counted toward the ownership requirement. Neither unexercised stock options nor unearned performance shares are counted. The following table reflects ownership as of July 29, 2016 for Mr. Werner and Mr. Gehring.

 

Named Executive Officer

   Stock Ownership Guideline
(% of Salary)
   Actual Ownership
(% of Salary) (1)
Mr. Werner    300%    664%
Mr. Gehring    400%    1,640%

 

  1. Based on the average daily price of ConAgra common stock on the NYSE for the 12 months ended July 29, 2016 ($42.34) and the salary of Mr. Werner and Mr. Gehring in effect as of July 29, 2016.

The ConAgra board maintained stock ownership requirements for its non-employee directors, including Mr. McLevish, during fiscal 2016. All ConAgra non-employee directors, including Mr. McLevish, were expected to acquire and hold shares of common stock of ConAgra with a value of at least $450,000 within five years following their first election to the ConAgra Board. Shares personally acquired by the ConAgra non-employee directors through open market purchases, as well as RSUs, and shares acquired upon the deferral of fees were counted toward the ownership requirement. Unexercised stock options were not counted. As of July 29, 2016, Mr. McLevish owned ConAgra common stock with a value of $352,226.

ConAgra Human Resources Committee’s Practices Regarding the Timing of Equity Grants

ConAgra has indicated that it does not backdate stock options or grant equity retroactively. ConAgra has also indicated that it does not coordinate grants of equity with disclosures of positive or negative information. All equity awards are granted with an exercise price (if applicable) equal to the closing price of ConAgra common stock on the NYSE on the date of grant. The vast majority of ConAgra stock option grants for a fiscal year are made in July at a regular ConAgra Human Resources Committee meeting.

In most instances, when ConAgra management proposes an off-cycle award or sign-on grant for a non-executive officer, the ConAgra Human Resources Committee considers approval of the grant at a regularly scheduled meeting. In the event management proposes a sign-on grant for a senior officer and a grant-related decision is necessary between regularly scheduled meetings, the ConAgra Human Resources Committee may hold a special meeting to consider the grant. If approved, the grant date will be the first trading day of the month on or following the officer’s date of hire.

Additional Information on the ConAgra Human Resources Committee’s Compensation Consultant

The ConAgra Human Resources Committee engaged F.W. Cook directly to assist it in obtaining and reviewing information relevant to compensation decisions. ConAgra Human Resources Committee policy prevents management from directly engaging the consultant without the prior approval of the ConAgra Human Resources Committee’s Chair. For fiscal 2016, F.W. Cook did not provide any additional services to ConAgra or its affiliates. The ConAgra Human Resources Committee reviews the types of services provided by the consultant and all fees paid for those services on a regular basis and conducts a formal evaluation of the consultant on an annual basis. The ConAgra Human Resources Committee has assessed the independence of F.W. Cook, as required under NYSE listing rules. The ConAgra Human Resources Committee has also considered and assessed all relevant factors, including those required by the SEC that could give rise to a potential conflict of interest with respect to F.W. Cook during fiscal 2016. Based on this review, the ConAgra Human Resources Committee did not identify any conflict of interest raised by the work performed by F.W. Cook.

 

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Tax and Accounting Implications of the ConAgra Human Resources Committee’s Compensation Decisions

U.S. federal income tax law prohibits ConAgra from taking a tax deduction for certain compensation paid in excess of $1 million to ConAgra’s chief executive officer or any of ConAgra’s three other most highly compensated executive officers, other than the chief financial officer, who are employed as of the end of the year. This limitation does not apply to qualified performance-based compensation under federal tax law. Generally, this is compensation paid only if performance meets pre-established, objective goals based on performance metrics approved by ConAgra stockholders. The ConAgra Human Resources Committee has indicated that its general intent is to structure ConAgra’s executive compensation programs so that payments may be able to qualify as fully tax deductible. However, while the ConAgra Human Resources Committee has indicated that it believes it is in the best interests of ConAgra and its stockholders to have the ability to grant “qualified performance-based compensation” under Section 162(m) of the Code, the ConAgra Human Resources Committee has also indicated that it may decide from time to time to grant compensation that will not qualify as “qualified performance-based compensation” for purposes of Section 162(m) of the Code. Moreover, the ConAgra Human Resources Committee has indicated that even if it intends to grant compensation that qualifies as “qualified performance-based compensation” for purposes of Section 162(m) of the Code, ConAgra cannot guarantee that such compensation ultimately will be deductible by it.

For fiscal 2016, the annual incentive award to Mr. Werner was subject to, and made in accordance with, performance-based compensation arrangements that were intended to qualify as tax deductible. In order to achieve this potential result, the ConAgra Human Resources Committee approved a framework in which (1) maximum awards under this incentive program were authorized upon attainment of adjusted EPS of: $0.10 for the fiscal 2016 MIP; and (2) negative discretion would be applied by the ConAgra Human Resources Committee to decrease an authorized award based upon the program framework described above. Mr. Gehring’s award was also subject to this framework.

Our Anticipated Compensation Programs

We believe the ConAgra executive compensation programs described above were both effective at retaining and motivating Mr. Werner and Mr. Gehring and competitive as compared to compensation programs at peer companies. Except as otherwise described below, the executive compensation programs that will initially be adopted by Lamb Weston are currently expected to be substantially similar to those in place at ConAgra immediately prior to the spinoff. However, after the spinoff, the Lamb Weston Compensation Committee will continue to evaluate our compensation and benefit programs and may make adjustments, which may be significant, as necessary to meet prevailing business needs and strategic priorities. Adjustments to elements of our compensation programs may be made going forward if appropriate, based on industry practices and the competitive environment for a newly-formed, publicly-traded company of our size, or for other reasons.

On September 28, 2016, ConAgra entered into an Interim Position and Non-Compete Agreement with Mr. Gehring, which agreement is effective as of September 28, 2016, which we refer to as the Gehring Agreement. Under the Gehring Agreement, Mr. Gehring will serve as the Vice President and interim Chief Financial Officer of ConAgra’s Lamb Weston business. Mr. Gehring’s employment under the Gehring Agreement is generally expected to continue until December 15, 2016. Mr. Gehring’s employment as described in this paragraph is subject to certain earlier employment termination scenarios as further described in the Gehring Agreement.

The Gehring Agreement provides that Mr. Gehring will receive a base salary during his employment at an annual rate of $650,000. Mr. Gehring will continue to participate in ConAgra’s fiscal year 2017 short-term annual cash incentive program until the completion of the spinoff (based on a target award level of 100% of salary actually received from ConAgra during fiscal year 2017), pro-rated based on his actual service to ConAgra during fiscal year 2017 prior to the spinoff and based on the funding percentages as in effect for ConAgra’s senior executive officers at the end of fiscal year 2017. Mr. Gehring will also participate in our fiscal year 2017 short-term annual cash incentive program after completion of the spinoff on a pro-rata basis tied to his actual service to us during fiscal year 2017 after the spinoff.

 

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Mr. Gehring will not be eligible for new equity grants from ConAgra during the remainder of fiscal year 2017. However, Mr. Gehring’s ConAgra equity awards outstanding at the time of the spinoff will be equitably adjusted under the terms of the applicable ConAgra equity plans to reflect the spinoff, will settle in ConAgra stock and will continue vesting based on his service to us after the spinoff. Mr. Gehring will also remain eligible for “early retirement” treatment for his ConAgra equity awards.

Prior to the spin-off, Mr. Gehring will continue to participate in applicable ConAgra benefit plans, but will cease such participation at the time of the spin-off in favor of participation in our benefit plans. Mr. Gehring will also be entitled to (1) use ConAgra or Lamb Weston aircraft for commuting purposes related to his employment and (2) reimbursement for reasonable legal expenses relating to the execution of the Gehring Agreement. Mr. Gehring will also be available to provide assistance to and cooperation with ConAgra with respect to matters of which he is knowledgeable for up to one year after the spinoff.

Mr. Gehring is eligible for a payment of $250,000 as consideration for his execution and the nonrevocation of a customary release of claims in favor of ConAgra in connection with executing the Gehring Agreement. In addition, if Mr. Gehring complies with the terms of the Gehring Agreement (including certain customary confidentiality, two-year non-solicitation, one-year non-competition and mutual non-disparagement covenants) and executes and does not revoke both the first release and an additional customary release of claims following his separation from service, he will be entitled to receive $400,000, $200,000 of which is payable six months following his separation from service and the remaining $200,000 of which is payable 12 months following his separation from service.

In connection with her assumption of the role of our Chief Human Resources Officer in September 2016, we have entered into an offer letter with Ms. Carter that describes certain terms of Ms. Carter’s initial compensation arrangements with Lamb Weston. This letter arrangement does not have a fixed term or expiration date, as Ms. Carter is employed by us “at will.” Under the letter agreement, Ms. Carter will receive a minimum annual base salary of $350,000 and will participate in our annual incentive program and long-term incentive program (with her initial participation levels expected to be (1) 60% of base salary for the annual incentive program, prorated for fiscal 2017 based on actual service during the fiscal year, and (2) subject to Lamb Weston Compensation Committee approval of awards from time to time, a long-term incentive with a target grant value of $400,000 beginning in fiscal 2018). Ms. Carter will also receive an initial discretionary cash bonus of $175,000 (subject to repayment upon certain termination events occurring during her first two years of employment), relocation benefits including a transition support payment of $18,000 plus tax assistance with respect to such payment, four weeks of vacation, and (subject to the approval of the ConAgra Human Resources Committee) an initial grant of $400,000 service-based restricted stock units generally scheduled to vest in annual installments over three years. The letter agreement also provides that Ms. Carter will be eligible to participate in certain of our retirement and other employee benefit programs and to attend a professional development program. Finally, Ms. Carter will be entitled to certain severance benefits, consisting of two times the sum of her annual base salary plus her target annual incentive opportunity, in the event of certain transactions or situations involving Lamb Weston and a separation of her service with us as described in the letter arrangement.

In connection with his assumption of the role of our General Counsel and Corporate Secretary in October 2016, we entered into an offer letter with Mr. Spytek that describes certain terms of Mr. Spytek’s initial compensation arrangements with Lamb Weston. This letter arrangement, generally similar in structure to that described above for Ms. Carter, does not have a fixed term or expiration date, as Mr. Spytek is employed by us “at will.” Under the letter agreement, Mr. Spytek will receive a minimum annual base salary of $400,000 and will participate in our annual incentive program and long-term incentive program (with his initial participation levels expected to be (1) 70% of base salary for the annual incentive program, prorated for fiscal 2017 based on actual service during the fiscal year, and (2) subject to Lamb Weston Compensation Committee approval of awards from time to time, a long-term incentive with a target grant value of $600,000 beginning in fiscal 2018). Mr. Spytek will also receive an initial discretionary cash bonus of $40,000 (subject to repayment upon certain termination events occurring during his first two years of employment), relocation benefits including a transition

 

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support payment of $18,000 plus tax assistance with respect to such payment, four weeks of vacation, and (subject to the approval of the ConAgra Human Resources Committee) an initial grant of $600,000 service-based restricted stock units generally scheduled to vest after three years. The letter agreement also provides that Mr. Spytek will be eligible to participate in certain of our retirement and other employee benefit programs. Finally, Mr. Spytek will be entitled to certain severance benefits, consisting of two times the sum of his annual base salary plus his target annual incentive opportunity, in the event of certain transactions or situations involving Lamb Weston and a separation of his service with us as described in the letter arrangement.

 

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EXECUTIVE COMPENSATION

Summary Compensation Table—Fiscal 2016

The table below presents compensation information paid to or earned by our named executive officers under ConAgra’s compensation programs during fiscal 2016. As a non-employee director of ConAgra, Mr. McLevish had historically participated in ConAgra’s non-employee director compensation programs. Mr. Werner and Mr. Gehring, as named executive officers of ConAgra, had historically participated in ConAgra’s executive compensation programs. Neither Mr. Spytek nor Ms. Carter was a ConAgra employee or a ConAgra director during fiscal 2016, so the following information about ConAgra’s historical executive compensation and director compensation programs do not apply to them.

For more information about the ConAgra non-employee director compensation programs in which Mr. McLevish participated, see “ConAgra Non-Employee Director Compensation Programs (Applicable to Mr. McLevish)” above. For more information about Mr. Werner’s and Mr. Gehring’s mix of base salary and annual incentive compensation to total compensation, see the discussion above under “Key Elements of ConAgra’s Fiscal 2016 Executive Compensation Program for Mr. Werner and Mr. Gehring.” For more information about the material terms of the change of control agreement ConAgra entered into with Mr. Werner and Mr. Gehring, see above under “Other Fiscal 2016 Compensation—Change of Control/Severance Benefits” and “Potential Payments Upon Termination or Change of Control” below.

 

Name and Principal Position

  Fiscal
Year
    Salary
($)(1)
    Bonus
($)
    Stock
Awards
($)(2)
    Option
Awards
($)(3)
    Non-Equity
Incentive
Plan
Compen

-sation
($)(4)
    Change in
Pension
Value and
Non-qualified
Deferred
Compen-
sation
Earnings
($)(5)
    All Other
Compen-
sation
($)(6)
    Total
($)
 

Timothy R. McLevish,

    2016        78,626        —          123,410        —          —          —          —          202,036   

Executive Chairman

                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Thomas P. Werner,

    2016        438,654        —          1,729,045        198,244        637,626        75,865        35,293        3,114,727   

President and Chief Executive Officer

                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

John F. Gehring

    2016        643,269        —          2,895,365        264,335        1,118,001        365,019        20,172        5,306,161   

Vice President and interim Chief

    2015        600,000        —          789,147        502,775        —          306,119        36,198        2,234,239   

Financial Officer

    2014        589,904        —          766,964        657,667        147,476        220,461        38,302        2,420,774   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Eryk J. Spytek,

    2016        —          —          —          —          —          —          —          —     

General Counsel and Corporate

Secretary(7)

                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Micheline C. Carter

    2016        —          —          —          —          —          —          —          —     

Chief Human Resources Officer(7)

                 

 

1. For Mr. McLevish, reflects the pro-rated $90,000 annual cash retainer paid to non-employee directors of ConAgra based on his appointment to ConAgra’s board on July 15, 2015.
2. Reflects the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification, or FASB ASC Topic 718, for stock awards (ConAgra RSUs and ConAgra performance shares, in the case of Mr. Werner and Mr. Gehring, and ConAgra RSUs in the case of Mr. McLevish) granted during the reported fiscal years. For the ConAgra performance shares awarded to Mr. Werner and Mr. Gehring in fiscal 2016 (the fiscal 2016 to fiscal 2018 cycle of the PSP), the amounts reported are based on the probable outcome of the relevant performance conditions as of the grant date. Assuming the highest level of performance is achieved for the ConAgra performance shares awarded in fiscal 2016, the grant date fair value of these awards would have been: Mr. Werner, $1,125,542; and Mr. Gehring $1,500,694.
3. Reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 for stock options granted during the reported fiscal years. Assumptions used in the calculation of these amounts are included in Note 14 to the consolidated financial statements contained in ConAgra’s Annual Report on Form 10-K for the 2016 fiscal year. No awards of ConAgra stock options were made to Mr. McLevish during fiscal 2016.

 

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4. For fiscal 2016, reflects the award earned by Mr. Werner and Mr. Gehring under the fiscal 2016 MIP. A description of the fiscal 2016 MIP is included in our Compensation Discussion and Analysis above. As a non-employee director of ConAgra, Mr. McLevish did not participate in the fiscal 2016 MIP.
5. The measurement date for pension value for fiscal 2016 was May 29, 2016. ConAgra does not offer above-market (as defined by SEC rules) or preferential earnings rates in its deferred compensation plans. For fiscal 2016, the entire amount for Mr. Werner and Mr. Gehring reflects the aggregate change in the actuarial present value of pension amounts rather than non-qualified deferred compensation earnings. As a non-employee director of ConAgra, Mr. McLevish did not participate in ConAgra’s pension plans during fiscal 2016.
6. The components of fiscal 2016 “All Other Compensation” include the following:
7. Neither Mr. Spytek nor Ms. Carter was employed by us or ConAgra in fiscal 2016 and therefore no historical information is provided for them.

 

Named Executive Officer

   Personal Use
of Aircraft

$ (a)
     Executive
Physical /
Security
Costs / Home
Office

$
     Company
Contribution
to Defined
Contribution
Plans

$ (c)
 

Mr. McLevish

     —           —           —     

Mr. Werner

     —           (b      35,292   

Mr. Gehring

     (b      (b      17,858   

Mr. Spytek

     —           —           —     

Ms. Carter

     —           —           —     

 

  (a) The referenced amount is valued at the incremental cost to ConAgra of providing the benefit. For “Personal Use of Aircraft”, also includes the incremental cost of repositioning flights associated with personal use by the named executive officer.

 

  (b) A (b) notation in lieu of a dollar amount indicates that the executive received the benefit but at an incremental cost to ConAgra of less than $25,000.

 

  (c) Reflects the qualified and non-qualified CRISP contributions by ConAgra. In addition, ConAgra credited Mr. Werner’s account in the Voluntary Deferred Comp Plan (as further described below) with a non-elective contribution equal to 3% of eligible compensation in excess of the IRS limit. Mr. Gehring was not eligible for this contribution. See the discussion under “Non-Qualified Deferred Compensation—Fiscal 2016.” Mr. McLevish elected to defer fees into the Directors’ Deferred Compensation Plan (as further described below); however, ConAgra did not make any contributions to that plan in fiscal 2016 on behalf of Mr. McLevish.

 

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Grants of Plan-Based Awards—Fiscal 2016

The following table presents information about grants of plan-based ConAgra awards (equity and non-equity) during fiscal 2016 to our named executive officers. All equity-based grants were made under the stockholder-approved ConAgra Foods, Inc. 2014 Stock Plan and related to shares of ConAgra common stock. The number of ConAgra RSUs granted to Mr. McLevish was determined by dividing $116,667 (the $140,000 annual retainer normally paid to non-employee directors for a full fiscal year’s service pro-rated based on the number of months remaining in the fiscal year at the time of his appointment to the ConAgra board on July 17, 2015) by the average of ConAgra’s closing stock price on the NYSE for the 30 trading days prior to grant. The table includes certain ConAgra RSUs granted as of July 17, 2015 to Mr. Werner and Mr. Gehring pursuant to a special retention program for key ConAgra leaders approved by the ConAgra Human Resources Committee. Please refer to “ConAgra Non-Employee Director Compensation Programs (Applicable to Mr. McLevish)—Overview of Fiscal 2016 ConAgra Non-Employee Director Compensation” above and “Other Fiscal 2016 Compensation—Retention RSU Program” above for further information about these grants.

 

          Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards(1)
    Estimated Future Payouts
Under Equity Incentive
Plan Awards(2)
                         

Name

  Grant
Date
    Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
    All Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)
    All Other
Option
Awards:
Number of
Securities
Underlying
Options

(#)
    Exercise
or Base
Price of
Option
Awards
($/Sh)
    Grant Date
Fair Value
of Stock
and Option
Awards
($)(3)
 

Mr. McLevish

    7/17/2015        —          —          —          —          —          —          2,777        —          —          123,410   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mr. Werner

    —          —          350,923        772,031        —          —          —          —          —          —          —     
    7/17/2015        —          —          —          —          —          —          19,912        —          —          884,889   
    8/28/2015        —          —          —          —          13,486        26,972        —          —          —          562,771   
    8/28/2015        —          —          —          —          —          —          6,743        —          —          281,385   
    8/28/2015        —          —          —          —          —          —          —          40,458        41.73        198,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mr. Gehring

    —          —          643,269        1,415,192        —          —          —          —          —          —          —     
    7/17/2015        —          —          —          —          —          —          39,825        —          —          1,769,823   
    8/28/2015        —          —          —          —          17,981        35,962        —          —          —          750,347   
    8/28/2015        —          —          —          —          —          —          8,991        —          —          375,194   
    8/28/2015        —          —          —          —          —          —          —          53,946        41.73        264,335   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mr. Spytek(4)

    —          —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ms. Carter(4)

    —          —          —          —          —          —          —          —          —          —          —     

 

1. Amounts reflect award opportunities made available to Mr. Werner and Mr. Gehring under the fiscal 2016 MIP discussed in our Compensation Discussion and Analysis. The actual payout earned under the program for fiscal 2016 for Mr. Werner and Mr. Gehring can be found in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table—Fiscal 2016. As a non-employee director of ConAgra, Mr. McLevish did not participate in the fiscal 2016 MIP.
2. Amounts reflect the ConAgra performance shares granted to Mr. Werner and Mr. Gehring under ConAgra’s long-term incentive program for the fiscal 2016 to 2018 cycle. All awards under the fiscal 2016 to 2018 cycle, including any above-target payouts, were designed to be earned based on ConAgra’s performance for the three fiscal years ending May 29, 2016, May 28, 2017 and May 27, 2018, respectively. Further information about these grants can be found in the section headed “Compensation Discussion and Analysis—Long-Term Incentive Plan” above. Final payouts were designed to be subject to full negative discretion by the ConAgra Human Resources Committee. As a non-employee director of ConAgra, Mr. McLevish did not participate in ConAgra’s long-term incentive plan for fiscal 2016.
3. The grant date fair value of ConAgra performance shares granted to Mr. Werner and Mr. Gehring under ConAgra’s long-term incentive program for the fiscal 2016 to 2018 performance cycle are based on the probable outcome of the relevant performance conditions as of the grant date (computed in accordance with FASB ASC Topic 718). The amounts reflected in this column are included in the “Stock Awards” and “Option Awards” columns, as applicable, of the Summary Compensation Table—Fiscal 2016.
4. Neither Mr. Spytek nor Ms. Carter was employed by us or ConAgra in fiscal 2016 and therefore no historical information is provided for them.

 

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Outstanding Equity Awards at Fiscal Year-End—Fiscal 2016

The following table lists all ConAgra stock options, ConAgra performance shares and ConAgra RSU awards outstanding as of May 29, 2016 for Messrs. McLevish, Werner and Gehring.

 

            Option Awards      Stock Awards  

Name

   Grant
Date
     Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
     Number of
Securities
Underlying
Unexercised
Options (#)
Unexercis-
able (1)
     Option
Exercise
Price

($)
     Option
Expir-
ation
Date
     Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)(2)
     Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
($)(3)
     Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
that Have
Not
Vested
(#)(4)
     Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
that Have
Not
Vested
($)(3)
 

Mr. McLevish

     7/17/2015         —           —           —           —           2,827         128,035         —           —     

Mr. Werner

     7/15/2013         24,436         10,472         36.89         7/14/2023         —           —           —           —     
     7/14/2014         22,992         34,490         30.89         7/13/2024         —           —           —           —     
     8/28/2015         —           40,458         41.73         8/27/2025         —           —           —           —     
     7/15/2013         —           —           —           —           5,818         263,497         —           —     
     7/17/2015         —           —           —           —           19,912         901,814         —           —     
     8/28/2015         —           —           —           —           6,743         305,390         —           —     
     7/14/2014         —           —           —           —           —           —           22,073         999,686   
     8/28/2015                           27,296         1,236,236   

Mr. Gehring

     7/15/2013         97,743         41,889         36.89         7/14/2023         —           —           —           —     
     7/14/2014         61,314         91,971         30.89         7/13/2024         —           —           —           —     
     8/28/2015         —           53,946         41.73         8/27/2025         —           —           —           —     
     7/17/2015         —           —           —           —           39,825         1,803,674         —           —     
     8/28/2015         —           —           —           —           8,991         407,202         —           —     
     7/14/2014         —           —           —           —           —           —           58,863         2,665,905   
     8/28/2015         —           —           —           —           —           —           36,394         1,648,284   

Mr. Spytek(5)

     —           —           —           —           —           —           —           —           —     

Ms. Carter(5)

     —           —           —           —           —           —           —           —           —     

 

1. All ConAgra options were granted with an exercise price equal to the closing market price of ConAgra common stock on the NYSE on the date of grant. Mr. McLevish did not hold any outstanding ConAgra option awards at 2016 fiscal year-end. The vesting schedule for options that were outstanding but that could not be exercised at fiscal year-end for Mr. Werner and Mr. Gehring are as follows:

 

            Vesting Schedule  

Name

   Unexercisable
at FYE
     # of Shares      Vesting Date  

Werner

     10,472         10,472         7/15/16   
     34,490         17,245         7/14/16   
        17,245         7/14/17   
     40,458         13,486         8/28/16   
        13,486         8/28/17   
        13,486         8/28/18   

Gehring

     41,889         41,889         7/15/16   
     91,971         45,985         7/14/16   
        45,986         7/14/17   
     53,946         17,982         8/28/16   
        17,982         8/28/17   
        17,982         8/28/18   
2. ConAgra RSUs granted to Mr. McLevish vest one year from the grant date. ConAgra RSUs granted to Mr. Werner and Mr. Gehring vest in full on the third anniversary of the grant date.

 

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3. The market value of unvested or unearned ConAgra RSUs and unearned ConAgra shares is calculated using $45.29 per share, which was the closing market price of ConAgra common stock on the NYSE on the last trading day of fiscal 2016.
4. Reflects, on separate lines, as of May 29, 2016, the target number of ConAgra shares that could be earned under the fiscal 2015 to 2017 cycle of the PSP, and the maximum number of ConAgra shares that could be earned under the fiscal 2016 to 2018 cycle of the PSP, plus accrued ConAgra dividend equivalents. The ConAgra performance shares were originally designed not to be earned unless ConAgra achieves the performance targets specified in the ConAgra plan. As originally designed, ConAgra shares earned under the fiscal 2015 to 2017 cycle, plus ConAgra dividend equivalents, would be distributed, if earned, following fiscal 2017, and ConAgra shares earned under the fiscal 2016 to 2018 cycle, plus ConAgra dividend equivalents, would be distributed, if earned, following fiscal 2018. As a non-employee director of ConAgra, Mr. McLevish did not participate in the PSP in fiscal 2016.
5. Neither Mr. Spytek nor Ms. Carter was employed by us or ConAgra in fiscal 2016 and therefore no historical information is provided for them.

Option Exercises and Stock Vested—Fiscal 2016

The following table summarizes the ConAgra option awards exercised during fiscal 2016 by our named executive officers and the ConAgra performance shares that were earned and paid out to Mr. Werner and Mr. Gehring for the fiscal 2014 to 2016 cycle of the PSP. As a non-employee director of ConAgra, Mr. McLevish did not participate in the PSP in fiscal 2016.

The performance period for the fiscal 2014 to 2016 cycle of the PSP ended on May 29, 2016. The column entitled “Stock Awards” below includes ConAgra shares earned under that cycle for cumulative three-year performance.

 

     Option Awards      Stock Awards  

Name

   Number of Shares
Acquired on
Exercise (#)
     Value Realized
on Exercise ($)
     Number of Shares
Acquired on
Vesting (#)(1)
     Value Realized
on Vesting ($)
 

Mr. McLevish

     —           —           —           —     

Mr. Werner

     —           —           10,475         474,421   

Mr. Gehring

     320,000         5,192,919         5,900         267,220   

Mr. Spytek(2)

     —           —           —           —     

Ms. Carter(2)

     —           —           —           —     

 

1. Pursuant to the terms of the PSP, dividend equivalents on earned ConAgra shares, paid in additional shares of ConAgra common stock, were also distributed to Mr. Werner and Mr. Gehring. The ConAgra shares distributed through this dividend equivalent feature (and included in this table) were: 107 ConAgra shares for Mr. Werner and 430 ConAgra shares for Mr. Gehring.
2. Neither Mr. Spytek nor Ms. Carter was employed by us or ConAgra in fiscal 2016 and therefore no historical information is provided for them.

Pension Benefits—Fiscal 2016

ConAgra maintains a non-contributory defined benefit pension plan for all eligible employees, referred to as the Qualified Pension. Employees eligible to participate in the Qualified Pension are salaried employees of ConAgra hired prior to August 1, 2013, including Mr. Werner and Mr. Gehring. The Qualified Pension was closed to new participants who joined ConAgra on or after August 1, 2013, including Mr. Spytek and Ms. Carter. Non-employee directors of ConAgra, including Mr. McLevish, are not entitled to participate in the Qualified Pension.

The pension benefit formula in the Qualified Pension applicable to Mr. Werner and Mr. Gehring are determined by adding three components:

 

    1.0% of Average Monthly Earnings (up to the integration level) multiplied by years of credited service with ConAgra (up to 35 years of credited service);

 

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    1.44% of Average Monthly Earnings (over the integration level) multiplied by years of credited service with ConAgra (up to 35 years of credited service); and

 

    1.0% of Average Monthly Earnings multiplied by years of credited service with ConAgra over 35 years.

“Average Monthly Earnings” is the monthly average of the executive’s annual compensation from ConAgra for the highest five consecutive years of the final ten years of his service. Only salary and annual incentive payments (reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table—Fiscal 2016) are considered in computing Average Monthly Earnings. The integration level is calculated by the Internal Revenue Service, or IRS, by averaging the last 35 years of Social Security taxable wages, up to and including the year in which the executive’s employment ends.

The executive is vested in the pension benefit once he has five years of vesting service with ConAgra. Pension benefits become payable at the normal retirement age of 65, or age 60 if he has 25 or more years of service. The Qualified Plan defines early retirement as age 55 with 10 years of service. There is no payment election option that would impact the amount of annual benefits either Mr. Werner or Mr. Gehring would receive.

Mr. Werner and Mr. Gehring participate in a supplemental retirement plan (which we refer to in the table below as the Non-Qualified Pension). To the extent that a participant’s benefit under the Qualified Pension exceeds the limit on the maximum annual benefit payable under the Employee Retirement Income Security Act of 1974 or the participant’s Average Monthly Earnings exceed the limit under the Code on the maximum amount of compensation that can be taken into account under the Qualified Pension, payments are made under the Non-Qualified Pension. The retirement age and benefit formulas are the same as those used for the Qualified Plan except as described in the following paragraphs.

Generally, a participant’s benefit under the Non-Qualified Pension is payable in installments beginning in January following his separation from service or disability, but he may also elect to receive the payment as a lump sum and elect a specified year in which payment will be made or commence, or elect to receive his benefit in the form of annuity payments. Elections regarding the time and form of payment are intended to comply with Section 409A of the Code, and certain payments to executives meeting the definition of a “specified employee” under Section 409A of the Code will be delayed for six months after the date of the separation from service.

Pension Benefits—Fiscal 2016

The Present Value of Accumulated Benefit reported in the table below represents the accumulated benefit obligation for benefits earned to date, based on age, service and earnings through the ConAgra plan’s measurement date of May 29, 2016.

 

Name

  

Plan Name(1)

   Number of Years
Credited
Service (#)(2)
     Present Value of
Accumulated
Benefit ($)(3)
 

Mr. McLevish

   —        —           —     

Mr. Werner

   Qualified Pension      17.2         71,966   
   Non-Qualified Pension      17.2         3,899   
     

 

 

    

 

 

 

Mr. Gehring

   Qualified Pension      14.4         475,062   
   Non-Qualified Pension      14.4         1,462,564   

Mr. Spytek(4)

   —        —           —     

Ms. Carter(4)

   —        —           —     

 

1. Qualified Pension refers to the ConAgra Foods, Inc. Pension Plan for Salaried Employees, and Non-Qualified Pension refers to the ConAgra Foods, Inc. Nonqualified Pension Plan. There were no plan payments for fiscal 2016.

 

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