DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Nov. 27, 2016

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

14.   DERIVATIVE FINANCIAL INSTRUMENTS

Lamb Weston’s operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives. We do not enter into derivative financial instruments for trading or speculative purposes.

Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, packaging materials, and electricity. Historically, Conagra economically hedged a portion of Lamb Weston’s anticipated consumption of commodity inputs for periods of up to 36 months.

In order to reduce exposures related to changes in foreign currency exchange rates, Lamb Weston enters into forward exchange, option, or swap contracts from time to time for transactions denominated in a currency other than the applicable functional currency. This includes, but is not limited to, hedging against foreign currency risk in purchasing inventory and capital equipment, sales of finished goods, and future settlement of foreign-denominated assets and liabilities. Prior to the Separation, Conagra exited all derivative instruments that were used to economically hedge portions of Lamb Weston’s foreign currency risk in anticipated transactions. The effect of exiting these positions was insignificant to our second quarter fiscal 2017 results.

Economic Hedges of Forecasted Cash Flows

Lamb Weston does not generally designate commodity derivatives to achieve hedge accounting treatment. We reflect realized and unrealized gains and losses from derivatives used to economically hedge anticipated commodity consumption in earnings immediately within cost of sales.

Prior to the Separation, Conagra entered into certain commodity and foreign exchange derivatives with a diversified group of counterparties on behalf of Lamb Weston. Conagra monitored Lamb Weston’s positions and the credit ratings of the counterparties involved and limited the amount of credit exposure to any one party. We have not incurred a material loss due to nonperformance in any period presented and do not expect to incur any such material loss.

Economic Hedges of Fair Values—Foreign Currency Exchange Rate Risk

Lamb Weston may use options and cross currency swaps to economically hedge the fair value of certain monetary assets and liabilities (including intercompany balances) denominated in a currency other than the functional currency. These derivatives are marked-to-market with gains and losses immediately recognized in selling, general and administrative expenses. These substantially offset the foreign currency transaction gains or losses recognized as values of the monetary assets or liabilities being economically hedged change.

All derivative instruments are recognized in our Condensed Combined and Consolidated Balance Sheets at fair value (refer to Note 15, Fair Value Measurements for additional information related to fair value measurements). The fair value of derivative assets are recognized within “Prepaid expenses and other current assets”, while the fair value of derivative liabilities are recognized within “Accrued liabilities”. In accordance with generally accepted accounting principles, Lamb Weston offsets certain derivative asset and liability balances where master netting agreements provide for legal right of setoff. No collateral was received or pledged in connection with these agreements.

Derivative assets and liabilities were reflected in Lamb Weston’s Consolidated and Combined Balance Sheets as follows (dollars in millions):

	November 27,		May 29,
	2016		2016
Prepaid expenses and other current assets	$	—	$	2.1
Accrued liabilities	$	0.6	$	0.2

The following table presents Lamb Weston’s derivative assets and liabilities, at November 27, 2016, on a gross basis (dollars in millions):

	Derivative Assets			Derivative Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Prepaid expenses and other current assets	$	—	Accrued liabilities	$	0.6

The following table presents Lamb Weston’s derivative assets and liabilities, at May 29, 2016, on a gross basis, prior to the setoff of $0.1 million where legal right of setoff existed (dollars in millions):

	Derivative Assets			Derivative Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Prepaid expenses and other current assets	$	1.5	Accrued liabilities	$	0.2
Foreign exchange contracts	Prepaid expenses and other current assets		0.6	Accrued liabilities		—
		$	2.1		$	0.2

The location and amount of gains (losses) from derivatives in Lamb Weston’s Condensed Combined and Consolidated Statements of Earnings were as follows (dollars in millions):

		Amount of Gain (Loss)
		Recognized on Derivatives in
		Combined Statement of Earnings
	Location in Consolidated	for the Thirteen Weeks Ended
Derivatives Not Designated as Hedging	Statement of Earnings of Gain	November 27,		November 29,
Instruments	(Loss) Recognized on Derivatives	2016		2015
Commodity contracts	Cost of sales	$	(0.5)	$	(1.9)
Foreign exchange contracts	Selling, general and administrative expenses		(0.1)		—
Total loss from derivative instruments not designed as hedging instruments		$	(0.6)	$	(1.9)

		Amount of Gain (Loss)
		Recognized on Derivatives in
		Combined Statement of Earnings
	Location in Consolidated	for the Twenty-Six Weeks Ended
Derivatives Not Designated as Hedging	Statement of Earnings of Gain	November 27,		November 29,
Instruments	(Loss) Recognized on Derivatives	2016		2015
Commodity contracts	Cost of sales	$	(0.1)	$	(5.2)
Foreign exchange contracts	Selling, general and administrative expenses		(0.1)		0.8
Total loss from derivative instruments not designed as hedging instruments		$	(0.2)	$	(4.4)

As of November 27, 2016, Lamb Weston had no open derivative contracts. As of May 29, 2016, Lamb Weston’s open derivative contracts had a notional value of $32.8 million and $13.6 million for purchase and sales contracts, respectively.