10. STOCK-BASED COMPENSATION

On October 29, 2016, our Board of Directors adopted the Lamb Weston Holdings, Inc. 2016 Stock Plan (“Stock Plan”). Under the Stock Plan, we may grant eligible employees and non-employee directors awards of stock options, cash, and stock-settled restricted stock units (“RSUs”), restricted stock awards, other awards based on our common stock, and performance-based long-term incentive awards (“Performance Shares”). At May 28, 2017, we had 10.0 million shares authorized under the Stock Plan, and 8.2 million were available for future grants.

Prior to the Separation Date, Conagra maintained equity incentive plans in which our employees and certain of our non-employee directors participated. Under these plans, Conagra could grant eligible employees awards of stock options, RSUs, restricted stock, and other awards based on its common stock, as well as Performance Shares. In addition, certain Lamb Weston employees participated in Conagra’s employee stock purchase plan, which allowed employees to purchase shares of Conagra common stock.

In connection with the Separation, outstanding Conagra stock options, RSUs and Performance Shares granted to Lamb Weston employees and non-employee directors under Conagra’s equity incentive plans were adjusted and converted into Lamb Weston stock awards under the Stock Plan. The awards were adjusted and converted in a manner intended to preserve the aggregate intrinsic value of the original Conagra equity award and are 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 Separation Date.

Stock Options

We grant options to employees for the purchase of stock at exercise prices equal to the fair market value of the underlying stock on the date of grant. Options generally become exercisable in three annual installments beginning on the first anniversary of the grant date and have a maximum term of ten years.

The fair value of each option is estimated on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions for stock options granted after the Separation Date:


Expected volatility (%) (a)			23.94
Dividend yield (%)			2.18
Risk-free interest rate (%)			1.57
Expected life of stock option (years)			3.4

(a)

Because our equity shares have been traded for a relatively short period of time, we based our expected volatility assumption on the volatility of related industry stocks.

The following table summarizes stock option activity for fiscal 2017:


			Weighted-		Weighted-
			Average		Average		Aggregate
			Exercise		Remaining		Intrinsic
			Price		Contractual		Value (a)
	Shares		(per share)		Term (Years)		(in millions)
Outstanding at May 29, 2016		—		—
Converted on November 9, 2016		607,420	$	23.60
Granted		146,514		35.15
Exercised		(22,896)		21.90
Forfeited/cancelled		(10,211)		30.68
Outstanding at May 28, 2017		720,827	$	25.90		7.4	$	14.2

Exercisable at May 28, 2017		310,247	$	20.42		5.6	$	7.8

(a)

The aggregate intrinsic values represent the total pre-tax intrinsic value (the difference between the closing price of our common stock on the last trading day of our fiscal 2017 fourth quarter, or May 26, 2017, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options at the end of the fiscal year. The amount changes based on the fair market value of our common stock.

RSUs and Performance Shares

We grant RSUs to eligible employees and non-employee directors. The employee RSUs generally vest over a three-year period while the non-employee director RSUs generally vest after one year. We estimate the fair value of the RSUs based upon the market price of our common stock at the date of grant. Certain RSU grants do not provide for the payment of dividend equivalents to the participant during the vesting period. For those grants, the value of the grants is reduced by the net present value of the foregone dividend equivalent payments.

Performance Shares are granted to certain executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. Awards actually earned range from 0% to 220% of the targeted number of Performance Shares for each of the performance periods. Awards, if earned, will be paid in shares of our common stock. Subject to limited exceptions set forth in the Stock Plan, any shares earned will be distributed at the end of the three-year performance period. The value of the Performance Shares is adjusted based upon the market price of our common stock at the end of each reporting period and amortized as compensation expense over the vesting period.

The following table summarizes RSU and Performance Share activity for fiscal 2017:


	Stock-Settled				Cash-Settled				Performance Shares
			Weighted-				Weighted-				Weighted-
			Average				Average				Average
			Grant-				Grant-				Grant-
			Date Fair				Date Fair				Date Fair
	Shares		Value		Shares		Value		Shares		Value
Outstanding at May 29, 2016		—		—		—		—		—		—
Converted on November 9, 2016		459,466	$	25.05		469,837	$	25.33		56,050	$	25.84
Granted (a)		86,642		33.96		—		—		1,640		25.84
Vested (b)		(17,753)		18.68		(1,503)		23.70		—		—
Forfeited/expired/cancelled		(38,751)		24.24		(5,722)		26.73		—		—
Outstanding at May 28, 2017		489,604	$	26.92		462,612	$	25.33		57,690	$	25.84

(a)

Granted represents stock awards granted by us after the Separation and dividend equivalents accrued.

(b)

The aggregate fair value of awards that vested in fiscal 2017 was $0.7 million, which represents the market value of our common stock on the date that the RSUs vested. The number of RSUs vested includes shares of common stock that we withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. RSUs that are expected to vest are net of estimated future forfeitures.

Compensation Expense

Prior to the Separation Date, Conagra charged us for the costs related to the portion of Conagra’s incentive plans in which Lamb Weston employees participated and an allocation of stock-based compensation costs of certain Conagra employees who provided general and administrative services on our behalf (see Note 3, Related Party Transactions). Our stock-based compensation expense is recorded in “Selling, general and administrative expenses.” Compensation expense for stock-based awards recognized in the Combined and Consolidated Statements of Earnings, net of forfeitures, was as follows (dollars in millions):


	For the Fiscal Years Ended May
	2017		2016		2015
Stock options	$	0.6	$	0.4	$	0.4
Stock-settled RSUs		4.0		2.4		2.0
Cash-settled RSUs (a)		9.7		5.7		4.4
Performance Shares		1.1		0.4		0.1
Total compensation expense		15.4		8.9		6.9
Income tax benefit (b)		(5.7)		(3.3)		(2.5)
Total compensation expense, net of tax benefit	$	9.7	$	5.6	$	4.4

(a)

All cash-settled RSUs are marked-to-market and presented within “Accrued liabilities” and “Other noncurrent liabilities” in our Combined and Consolidated Balance Sheets.

(b)

Income tax benefit determined using our marginal tax rate.

Based on estimates at May 28, 2017, total unrecognized compensation expense related to stock-based payments was as follows (dollars in millions):


			Remaining
			Weighted
	Unrecognized		Average
	Compensation		Recognition
	Expense		Period (in years)
Stock options	$	1.2		1.6
Stock-settled RSUs		7.1		2.0
Cash-settled RSUs		7.3		1.7
Performance Shares		0.9		1.7
Total unrecognized stock-based compensation expense	$	16.5		1.8