Part I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Income

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Consolidated Balance Sheets

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Consolidated Statements of Cash Flows

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Notes to Consolidated Financial Statements

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Item 2.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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Item 4.

Controls and Procedures

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Part II – OTHER INFORMATION

Item 1.

Legal Proceedings

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Item 1A.

Risk Factors

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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Item 3.

Defaults upon Senior Securities

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Item 4.

(Removed and Reserved)

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Item 5.

Other Information

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Item 6.

Exhibits

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SIGNATURES

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PART I. – FINANCIAL INFORMATION

ITEM 1.  Financial Statements

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Nash-Finch Company and Subsidiaries

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restated on July 14, 2008) (“2000 Plan”), the Director Deferred Compensation Plan, and the 1997 Non-Employee Director Stock Compensation Plan.  These plans are more fully described in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011 under the caption “Footnote 10 – Share-based Compensation Plans” and in our Definitive Proxy Statement on Form DEF 14A filed on April 15, 2011.

Since 2005, awards have taken the form of performance units (including share units pursuant to our Long-Term Incentive Plan (“LTIP”), restricted stock units (“RSUs”) and Stock Appreciation Rights (“SARs”)).  

Performance units have been granted during each of fiscal years 2005 through 2011 pursuant to our LTIP.  These units vest at the end of a three-year performance period.  All units under the 2007 plan were settled in shares of our common stock during the second quarter 2010.  Under the 2008 plan, 104,111 units vested on January 1, 2011 and were settled in the second quarter 2011 for approximately 122,000 shares of common stock, of which approximately 96,000 were deferred by recipients until termination of employment as provided in the plan.

During year-to-date 2011, a total of 113,044 units were granted pursuant to our 2011 LTIP.  Depending on a comparison of the Company’s three-year compound annual growth rate of Consolidated EBITDA results to the Company’s peer group and the Company’s ranking on absolute return on net assets and compound annual growth rate for return on net assets among the companies in the peer group, a participant could receive a number of shares ranging from zero to 200% of the number of performance units granted.   Because these units can only be settled in stock, compensation expense (for shares expected to vest) is recorded over the three-year period for the grant date fair value.  

During fiscal 2006 through 2010, RSUs were awarded to certain executives of the Company.  Awards vest in increments over the term of the grant or cliff vest on the fifth anniversary of the grant date, as designated in the award documents.  In addition to the time vesting criteria, awards granted in 2008 and 2009 to two of the Company’s executives include performance vesting conditions.  The Company records expense for such awards over the service vesting period if the Company anticipates the performance vesting conditions will be satisfied.

On December 17, 2008, in connection with the Company’s announcement of its planned acquisition of certain military distribution assets of GSC Enterprises, Inc., eight executives of the Company were granted a total of 267,345 SARs with a per share price of $38.44.  The SARs are eligible to become vested during the 36 month period commencing on closing of the acquisition of the GSC assets which was January 31, 2009.  The SARs will vest on (i) the first business day during the vesting period that follows the date on which the closing prices on NASDAQ for a share of Nash Finch common stock for the previous 90 market days is at least $55.00, (ii) a change in control occurs following the six month anniversary of the grant date or (iii) termination of the executive’s employment due to death or disability.  Upon exercise, the Company will award the executive a number of shares of restricted stock equal to (a) the product of (i) the number of shares with respect to which the SAR is exercised and (ii) the excess, if any, of (x) the fair market value per share of common stock on the date of exercise over (y) the base price per share relating to such SAR, divided by (b) the fair market value of a share of common stock on the date such SAR is exercised.  The restricted stock shall vest on the first anniversary of the date of exercise so long as the executive remains continuously employed with the Company.

The fair value of SARs is estimated on the date of grant using a modified binomial lattice model which factors in the market and service vesting conditions.  The modified binomial lattice model used by the Company incorporates a risk-free interest rate based on the 5-year treasury rate on the date of the grant.  The model uses an expected volatility calculated as the daily price variance over 60, 200 and 400 days prior to grant date using the Fair Market Value (average of daily high and low market price of Nash Finch common stock) on each day.  Dividend yield utilized in the model is calculated by the Company as the average of the daily yield (as a percent of the Fair Market Value) over 60, 200 and 400 days prior to the grant date.  The modified binomial lattice model calculated a fair value of $8.44 per SAR which is being recorded over a derived service period of 3.55 years.

The following assumptions were used to determine the fair value of SARs granted during fiscal 2008:

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The following table summarizes activity in our share-based compensation plans during the year-to-date 2011:

⁽¹⁾

“Shares deferred upon vesting/settlement” above are net of the performance adjustment factor applied to the “units settled” for the participants that deferred shares as provided in the plan.

The weighted-average grant-date fair value of time vesting equity units and performance vesting units granted during year-to-date 2011 was $34.73 and $39.40, respectively.  

Note 4 – Fair Value Measurements

ASC Topic 820 – Fair Value Measurement (“ASC 820”) defines fair value, establishes a framework for measuring fair value and expands disclosures about financial and non-financial assets and liabilities recorded at fair value.   It also applies under other accounting pronouncements that require or permit fair value measurements.  

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The fair value hierarchy for disclosure of fair value measurements under ASC 820 is as follows:

Level 1:  Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:  Quoted prices, other than quoted prices included in Level 1, which are observable for the assets or liabilities, either directly or indirectly.

Level 3:  Inputs that are unobservable for the assets or liabilities.

Our outstanding interest rate swap agreements are classified within level 2 of the valuation hierarchy as readily observable market parameters are available to use as the basis of the fair value measurement.  As of October 8, 2011, we have no significant liability in relation to our outstanding interest rate swap agreements, as compared to a fair value liability of $0.4 million as of January 1, 2011.  The fair value of all such liabilities is included in accrued expenses on our Consolidated Balance Sheet.

Other Financial Assets and Liabilities

 Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable.  Financial liabilities with carrying values approximating fair value include accounts payable and outstanding checks. The carrying value of these financial assets and liabilities approximates fair value due to their short maturities.

The fair value of notes receivable approximates the carrying value at October 8, 2011 and January 1, 2011.  Substantially all notes receivable are based on floating interest rates which adjust to changes in market rates.

Long-term debt, which includes the current maturities of long-term debt, at October 8, 2011, had a carrying value and fair value of $290.4 million and $293.0 million, respectively, and at January 1, 2011, had a carrying value and fair value of $292.9 million and $305.6 million, respectively. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities.

We account for the impairment of long-lived assets in accordance with ASC Topic 360 – Property, Plant, and Equipment.  For year-to-date 2011 and 2010, asset impairments were $0.4 million and $0.9 million, respectively.  We utilize a discounted cash flow model that incorporates unobservable level 3 inputs to test for long-lived asset impairment.  

Note 5 – Derivatives

We have market risk exposure to changing interest rates primarily as a result of our borrowing activities and commodity price risk associated with anticipated purchases of diesel fuel.  Our objective in managing our exposure to changes in interest rates and commodity prices is to reduce fluctuations in earnings and cash flows.  From time-to-time we use derivative instruments, primarily interest rate swap agreements, to manage risk exposures when appropriate, based on market conditions.  We do not enter into derivative agreements for trading or other speculative purposes, nor are we a party to any leveraged derivative instrument.  

The interest rate swap agreements are designated as cash flow hedges and are reflected at fair value in our Consolidated Balance Sheet and the related gains or losses on these contracts are deferred in stockholders’ equity as a component of other comprehensive income.  As of October 8, 2011, we have no significant liability in relation to our outstanding interest rate swap agreements, as compared to a fair value liability of $0.4 million as of January 1, 2011.  The fair value of all such liabilities is included in accrued expenses on our Consolidated Balance Sheet.  Deferred gains and losses are amortized as an adjustment to interest expense over the same period in which the related items being hedged are recognized in income.  However, to the extent that any of these contracts are not considered to be effective in accordance with ASC Topic 815 – Derivatives and Hedging (“ASC 815”) in offsetting the change in the value of the items being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income. Our two outstanding interest rate swaps have been considered effective in accordance with ASC 815 since they began during fiscal 2008.

Our interest rate swap agreements resulted in net payments of approximately $0.2 million and $0.3 million during the third quarters of fiscal 2011 and 2010, respectively, and resulted in net payments of $0.4 million

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and $0.9 million during year-to-date 2011 and 2010, respectively, which are included in interest expense on our Consolidated Statement of Income.

As of October 8, 2011, we had two outstanding interest rate swap agreements with notional amounts totaling $17.5 million as compared to $35.0 million as of October 9, 2010, as follows (amounts in thousands):

Note 6 – Other Comprehensive Income

Other comprehensive income for the periods presented includes market value adjustments to reflect derivative instruments at fair value, pursuant to ASC 815.   The components of comprehensive income are as follows:

The gains reported in other comprehensive income during the third quarter and year-to-date periods of 2011 and 2010 reflect a change in fair value of our outstanding interest rate swap agreements during the respective periods.  Please refer to “Note 5 - Derivatives” of this Form 10-Q for information related to our interest rate swap agreements.

Note 7 – Long-term Debt and Bank Credit Facilities

Total debt outstanding was comprised of the following:

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Asset-backed Credit Agreement

Our credit agreement is an asset-backed loan consisting of a $340.0 million revolving credit facility, which includes a $50.0 million letter of credit sub-facility (the “Revolving Credit Facility”).  Provided no default is then existing or would arise, the Company may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $110.0 million.  The Revolving Credit Facility has a 5-year term and will be due and payable in full on April 11, 2013. The Company can elect, at the time of borrowing, for loans to bear interest at a rate equal to the base rate, as defined in the credit agreement, or LIBOR plus a margin. The LIBOR interest rate margin was 2.00% as of October 8, 2011, and can vary quarterly in 0.25% increments between three pricing levels ranging from 1.75% to 2.25% based on the excess availability, which is defined in the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions.  As of October 8, 2011, $180.1 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $11.8 million of outstanding letters of credit primarily supporting workers’ compensation obligations.  

The credit agreement contains no financial covenants unless and until (i) the continuance of an event of default under the credit agreement, or (ii) the failure of the Company to maintain excess availability (a) greater than 10% of the borrowing base for more than two (2) consecutive business days or (b) greater than 7.5% of the borrowing base at any time, in which event, the Company must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0:1.0, which ratio shall continue to be tested each month thereafter until excess availability exceeds 10% of the borrowing base for 90 consecutive days.  

The credit agreement contains standard covenants requiring the Company and its subsidiaries, among other things, to maintain collateral, comply with applicable laws, keep proper books and records, preserve the corporate existence, maintain insurance, and pay taxes in a timely manner. Events of default under the credit agreement are usual and customary for transactions of this type including, among other things: (a) any failure to pay principal there under when due or to pay interest or fees on the due date; (b) material misrepresentations; (c) default under other agreements governing material indebtedness of the Company; (d) default in the performance or observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the credit agreement; and (h) any failure of a collateral document, after delivery thereof, to create a valid mortgage or first-priority lien.

We are currently in compliance with all covenants contained within the credit agreement.

Senior Subordinated Convertible Debt

To finance a portion of the acquisition of distribution centers in 2005, we sold $150.1 million in aggregate issue price (or $322.0 million aggregate principal amount at maturity) of senior subordinated convertible notes due in 2035.  The notes are our unsecured senior subordinated obligations and rank junior to our existing and future senior indebtedness, including borrowings under our Revolving Credit Facility.  See our Annual Report on Form 10-K filed with the SEC for the fiscal year ended January 1, 2011, for additional information regarding the notes.

Note 8 – Guarantees

We have guaranteed lease obligations of certain food distribution customers.  In the event these retailers are unable to meet their lease payments or otherwise experience an event of default, we would be unconditionally liable for the outstanding balance of their lease obligations ($8.1 million as of October 8, 2011, as compared to $9.4 million in debt and lease obligations as of January 1, 2011), which would be due in accordance with the underlying agreements.

We have entered into lease guarantees on behalf of certain food distribution customers that are accounted for under ASC Topic 460 - Guarantees (“ASC 460”).  ASC 460 provides that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee.  The maximum undiscounted payments we would be required to make in the event of default under the guarantees is $5.7 million, which is included in the $8.1 million total referenced above.  These guarantees are secured by certain business assets and personal guarantees of the respective customers.  We believe these customers will be able to perform under their respective agreements and that no payments will be required and no

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loss will be incurred under the guarantees.  As required by ASC 460, a liability representing the fair value of the obligations assumed under the guarantees of $0.9 million is included in the accompanying consolidated financial statements for the guarantees accounted for under ASC 460.  All of the other guarantees were issued prior to December 31, 2002 and are therefore not subject to the recognition and measurement provisions of ASC 460.

We have also assigned various leases to other entities.  If the assignees were to become unable to continue making payments under the assigned leases, we estimate our maximum potential obligation with respect to the assigned leases to be $10.9 million as of October 8, 2011 as compared to $8.9 million as of January 1, 2011.

Note 9 – Income Taxes

For the third quarter 2011 and 2010, our tax expense was $6.6 million and $7.5 million, respectively.  During year-to-date 2011 and 2010, our tax expense was $18.1 million and $20.1 million, respectively.

The provision for income taxes reflects the Company’s estimate of the effective rate expected to be applicable for the full fiscal year, adjusted for any discrete events, which are reported in the period that they occur.  This estimate is re-evaluated each quarter based on the Company’s estimated tax expense for the full fiscal year.  The third quarter 2011 and 2010 Company effective tax rate was impacted by the reversal of previously unrecognized tax benefits primarily due to statute of limitations expirations.  The effect of these discrete events in the third quarter 2011 was less than ($0.1) million and ($2.2) million for 2010.  For the third quarter and year-to-date periods of 2011, the effective tax rate was 39.7% and 39.6%, respectively as compared to 32.8% and 37.2% for the third quarter and year-to-date periods of 2010, respectively.  

The total amount of unrecognized tax benefits as of the end of the third quarter 2011 was $2.0 million.  The net increase in unrecognized tax benefits of $0.1 million since June 18, 2011 is due to the increase in unrecognized tax benefits as a result of tax positions taken in prior periods.  The total amount of tax benefits that if recognized would impact the effective tax rate was $0.5 million at the end of the third quarter 2011.  We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.  At the end of the third quarter 2011, we had approximately $0.2 million for the payment of interest and penalties accrued.

We do not expect our unrecognized tax benefits to change significantly over the next 12 months.  

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state or local examinations by tax authorities for years 2006 and prior.  

Note 10 – Pension and Other Postretirement Benefits

The following tables present the components of our pension and postretirement net periodic benefit cost:

Weighted-average assumptions used to determine net periodic benefit cost for the third quarter and year-to-date periods of 2011 and 2010 are as follows:

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Total contributions to our pension plan in fiscal 2011 are expected to be $4.6 million.

Multi-employer pension plan

Certain of our unionized employees are covered by the Central States Southeast and Southwest Areas Pension Funds (“the Plan”), a multi-employer pension plan.  Contributions are determined in accordance with the provisions of negotiated union contracts and are generally based on the number of hours worked.  In fiscal 2010, the Company contributed $3.3 million to the Plan.  Based on the most recent information available, we believe the present value of actuarial accrued liabilities of the Plan substantially exceeds the value of the assets held in trust to pay benefits.  The underfunding is not a direct obligation or liability of the Company.  However, if the Company were to exit certain markets or otherwise cease making contributions to the Plan, the Company could trigger a substantial withdrawal liability.  The amount of any increase in contributions will depend upon several factors, including the number of employers contributing to the Plan, results of the Company’s collective bargaining efforts, investment returns on assets held by the Plan, actions taken by the trustees of the Plan, and actions that the Federal government may take.  We are currently unable to reasonably estimate a withdrawal liability.  Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated.

A more detailed discussion of the risks associated with the Plan are contained in Part I, Item 1A, “Risk Factors,” of our Annual Report filed with the SEC on Form 10-K for the fiscal year ended January 1, 2011.

Note 11– Earnings Per Share

The following table reflects the calculation of basic and diluted earnings per share:

SARs are excluded from the calculation of diluted net earnings per share because the exercise price was greater than the market price of the stock and would have been anti-dilutive under the treasury stock method.

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The senior subordinated convertible notes due in 2035 will be convertible at the option of the holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.6224 shares (initially 9.3120) of our common stock per $1,000 principal amount at maturity of notes (equal to an adjusted conversion price of approximately $48.44 per share). Upon conversion, we will pay the holder the conversion value in cash up to the accreted principal amount of the note and the excess conversion value, if any, in cash, stock or both, at our option.  The notes are only dilutive above their accreted value and for all periods presented the weighted average market price of the Company’s stock did not exceed the accreted value.  Therefore, the notes are not dilutive to earnings per share for any of the periods presented.  

During the second quarters of 2011 and 2010, performance units granted under the 2008 LTIP Plan and 2007 LTIP Plan, respectively, were settled in shares of common stock, some of which were deferred by executives as required by the plan.  Vested shares deferred by executives and board members are included in the calculation of basic earnings per share.  Other performance units and RSUs granted during 2007, 2008, 2009, 2010 and 2011 pursuant to the 2000 Plan and 2009 Plan will be settled in shares of Nash Finch common stock.  Unvested RSUs are not included in basic earnings per share until vested.  All shares of time-restricted stock are included in diluted earnings per share using the treasury stock method, if dilutive.  Performance units granted for the LTIP are only issuable if certain performance criteria are met, making these shares contingently issuable under ASC Topic 260 – Earnings Per Share.  Therefore, the performance units are included in diluted earnings per share at the payout percentage based on performance criteria results as of the end of the respective reporting period and then accounted for using the treasury stock method, if dilutive.  For the third quarter 2011, approximately 74,000 shares related to the LTIP and 154,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as compared to approximately 171,000 shares related to the LTIP and 208,000 shares related to RSUs during the third quarter 2010.  For year-to-date 2011, approximately 60,000 shares related to the LTIP and 214,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as compared to approximately 142,000 shares related to the LTIP and 210,000 shares related to RSUs during year-to-date 2010.

Note 12 – Segment Reporting

We sell and distribute products that are typically found in supermarkets and operate three reportable operating segments.  The military segment consists of seven distribution centers that distribute products to military commissaries and exchanges and one shared facility which services both military and independent food distribution customers.  During fiscal 2010, our military distribution centers in Columbus, Georgia and Bloomington, Indiana became operational.  Excluded from the military distribution center total are two adjacent military distribution centers we purchased during the third quarter of fiscal 2010 in Oklahoma City, Oklahoma, which are scheduled to become operational during fiscal 2012.  Our food distribution segment consists of 14 distribution centers that sell to independently operated retail grocery stores, our corporate owned stores and other customers.  The retail segment consists of 46 corporate-owned stores that sell directly to the consumer.  

During fiscal 2009 and fiscal 2010, we acquired facilities in Columbus, Georgia, Bloomington, Indiana and Oklahoma City, Oklahoma for expansion of our military distribution business.  We have historically serviced military commissaries and exchanges outside of the military segment’s distribution network through distribution centers that are included in our food distribution segment.  The revenue and segment profit associated with this business had previously been reported in the food distribution segment.  We are currently in the process of transitioning the military business serviced by the food distribution segment to military distribution facilities and are scheduled to have all of the business transitioned during fiscal 2012.  Accordingly, we revised our segment reporting during the fourth quarter of fiscal 2010 to include this business in our military segment, which impacts quarterly amounts previously reported during fiscal 2010.  This revision had no impact on our consolidated financial statements in any period presented.

Certain prior year amounts shown below have been revised to conform to the current year presentation.  

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A summary of the major segments of the business is as follows:

Note 13 – Legal Proceedings

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We are engaged from time-to-time in routine legal proceedings incidental to our business.  We do not believe that these routine legal proceedings, taken as a whole, will have a material impact on our business or financial condition.

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Overview

In terms of revenue, we are the second largest publicly traded wholesale food distributor in the United States serving the retail grocery industry and the military commissary and exchange systems.  Our business consists of three primary operating segments: military food distribution, food distribution and retail.

In November 2006, we announced the launch of a strategic plan, Operation Fresh Start, designed to sharpen our focus and provide a strong platform to support growth initiatives.  Our strategic plan is built upon extensive knowledge of current industry, consumer and market trends, and is formulated to differentiate the Company.  The strategic plan includes long-term initiatives to increase revenues and earnings, improve productivity and cost efficiencies of our military, food distribution and retail business segments, and leverage our corporate support services.  The Company has strategic initiatives to improve working capital, manage debt, and increase shareholder value through capital expenditures with acceptable returns on investment.  Several important elements of the strategic plan include:

Supply chain services focused on supporting our businesses with warehouse management, inbound and outbound transportation management and customized solutions for each business;

Growing the Military business segment through acquisition and expansion of products and services, as well as creating warehousing and transportation cost efficiencies with a long-term distribution center strategic plan;

Providing our independent retail customers with a high level of order fulfillment, broad product selection  including leveraging the Our Family^® brand, support services emphasizing best-in-class offerings in marketing, advertising, merchandising, store design and construction,  market research, retail store support, retail pricing and license agreement opportunities; and

Retail formats designed to appeal to the needs of today’s consumers.

In addition to the strategic initiatives already in progress, our 2011 initiatives consist of the following:  

Continue implementation of our military distribution center network expansion;

Execute supply chain and center store initiatives within our food distribution segment;

Implement cost reduction and profit improvement initiatives; and

Identify acquisitions that support our strategic plan.

Our military segment contracts with manufacturers to distribute a wide variety of food products to military commissaries and exchanges located in the United States and the District of Columbia, and in Europe, Puerto Rico, Cuba, the Azores, Egypt and Bahrain.  We have over 30 years of experience acting as a distributor to U.S. military commissaries and exchanges.  During the third quarter of fiscal 2010, we purchased facilities in Bloomington, Indiana and Oklahoma City, Oklahoma for expansion of our military business.  The Bloomington, Indiana facility became operational during the fourth quarter of fiscal 2010, while Oklahoma City, Oklahoma, which consists of two adjacent facilities, is scheduled to become operational during fiscal 2012.  In addition, we purchased the real estate associated with our Pensacola, Florida and Norfolk, Virginia facilities, which had previously been leased, during the third quarter of fiscal 2010 and the first quarter of fiscal 2011, respectively.

Our food distribution segment sells and distributes a wide variety of nationally branded and private label grocery products and perishable food products from 14 distribution centers to approximately 1,800 independent retail locations located in 28 states, primarily in the Midwest and Southeast regions of the United States.  

Our retail segment operated 46 corporate-owned grocery stores primarily in the Upper Midwest as of October 8, 2011.  Primarily due to highly competitive conditions in which supercenters and other alternative formats compete for price conscious customers, we closed two and sold four retail stores during fiscal 2011 and closed two retail stores during fiscal 2010.  We are implementing initiatives of varying scope and duration with a view toward improving our response to and performance under these highly competitive conditions.  These initiatives include designing and reformatting some of our retail stores into alternative formats to increase overall retail sales performance.  As we continue to assess the impact of performance improvement initiatives and the operating results of individual stores, we may need to recognize additional impairments of long-lived assets and goodwill associated with our retail segment, and may incur restructuring or other charges in connection with closure or sales activities.  The retail segment yields a higher gross profit percent of sales and higher selling, general and administrative (“SG&A”) expenses as a percent of sales compared to our food distribution and

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military segments.  Thus, changes in sales of the retail segment can have a disproportionate impact on consolidated gross profit and SG&A as compared to similar changes in sales in our food distribution and military segments.

Results of Operations

Sales

Sales for our military and food distribution segments for the third quarter and year-to-date periods of fiscal 2010 presented below have been revised to conform to our current year presentation.  Please refer to Part I, Item 1 in this report under Note 12 – “Segment Reporting” of this Form 10-Q for additional information regarding our segment reporting revision.

The following tables summarize our sales activity for the 16 weeks ended October 8, 2011 (“third quarter 2011”) compared to the 16 weeks ended October 9, 2010 (“third quarter 2010”) and the 40 weeks ended October 8, 2011 (“year-to-date 2011”) compared to the 40 weeks ended October 9, 2010 (“year-to-date 2010”):

Total Company sales declined 2.6% during the third quarter 2011 as compared to the prior year period.  Excluding sales declines primarily attributable to the effect of the sale of four and closing of four corporate-owned retail stores, total Company comparable sales declined 1.6% during the third quarter 2011.

Total Company sales declined 4.5% during year-to-date 2011 as compared to the prior year period.  Excluding the previously announced transition of a portion of a food distribution customer buying group to another supplier during the second quarter of fiscal 2010, which accounted for $53.2 million of sales in the prior year period, and the effect of the sale of four and closing of four corporate-owned retail stores, total Company comparable sales declined 2.5% during year-to-date 2011.

Military segment sales increased 1.4% during the third quarter 2011 as compared to the prior year.  However, a larger portion of military sales were performed on consignment during the third quarter 2011, which are not included in our reported net sales.  The year-over-year increase in gross consignment sales was approximately $3.4 million during the third quarter 2011.  Including the impact of consignment sales, comparable military sales increased 1.9% during the third quarter 2011 as compared to the prior year.  Domestic sales increased 0.1% while overseas sales increased 7.9% as compared to the comparable prior year quarter.  

Military segment sales increased 1.2% during year-to-date 2011 as compared to the prior year.  However, a larger portion of military sales were performed on consignment during year-to-date 2011, which are not included in our reported net sales.  The year-over-year increase in gross consignment sales was approximately $11.7 million during year-to-date 2011.  Including the impact of consignment sales, comparable military sales increased 1.8% during year-to-date 2011 as compared to the prior year.  Domestic sales increased 0.4% while overseas sales increased 5.1% as compared to the comparable prior year-to-date period.  

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Domestic and overseas sales represented the following percentages of military segment sales:  

The decrease in food distribution sales for the third quarter 2011 of 5.0% is primarily attributable to the sales volume of lost customer accounts exceeding new account gains.

The decrease in food distribution sales during year-to-date 2011 of 9.5% is partially attributable to the previously announced transition of a portion of a food distribution customer buying group to another supplier during the second quarter 2010 which accounted for $53.2 million of additional sales during year-to-date 2010.  Excluding the impact of the customer transition, food distribution sales declined 6.5%, which is primarily the result of sales volume of lost customer accounts exceeding new account gains.

Retail sales declined 10.7% during the third quarter 2011 as compared to the comparable prior year period.  The decline in retail sales is primarily the result of the closure of four stores and the sale of four stores since the beginning of the third fiscal quarter of 2010.  In addition, same store sales were down 0.5% during the third quarter 2011.  Same store sales compare retail sales for stores which were in operation for the same number of weeks in the comparative periods.

Retail sales declined 8.9% during year-to-date 2011 as compared to the comparable prior year period.  The decline in retail sales is primarily the result of the closure of four stores and the sale of four stores since the beginning of the third quarter of fiscal 2010.  In addition, same store sales were down 2.2% during year-to-date 2011.  Same store sales compare retail sales for stores which were in operation for the same number of weeks in the comparative periods.

During the third quarters of 2011 and 2010, our corporate store count changed as follows:

During year-to-date 2011 and 2010, our corporate store count changed as follows:

The tables above exclude corporate-owned stand-alone pharmacies and convenience stores.  

Consolidated Gross Profit

Consolidated gross profit was 7.7% of sales for the third quarter 2011 as compared to 8.1% of sales during the third quarter 2010.  Our overall gross profit was negatively affected by 0.5% of sales in the third quarter of 2011 due to non-cash LIFO charges which do not impact Consolidated EBITDA.  The LIFO charge for the third quarter 2011 was approximately $7.1 million compared to approximately $0.3 million in the third quarter

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2010.  Our overall gross profit margin was also negatively affected by 0.2% of sales in the third quarter 2011 due to a sales mix shift between our business segments between the years.  This was due to a higher percentage of 2011 sales occurring in the military segment which has a lower gross profit margin than the retail and food distribution segments.  Excluding the impacts of LIFO and the sales mix shift, our overall gross profit margin improved by 0.3% compared to the prior year quarter as a result of gains achieved from initiatives that focused on better management of inventories.

Consolidated gross profit was 8.0% of sales for both year-to-date 2011 and year-to-date 2010.  Our overall gross profit was negatively affected by 0.3% of sales during year-to-date 2011 due to non-cash LIFO charges which do not impact Consolidated EBITDA.  The LIFO charge for year-to-date 2011 was approximately $9.7 million compared to a credit of approximately $0.1 million in year-to-date 2010.  Our overall gross profit margin was also negatively affected by 0.2% of sales during year-to-date 2011 due to a sales mix shift between our business segments between the years.  This was due to a higher percentage of 2011 sales occurring in the military segment which has a lower gross profit margin than the retail and food distribution segments.  Excluding the impacts of LIFO and the sales mix shift, our overall gross profit margin improved by 0.5% compared to the prior year-to-date period as a result of gains achieved from initiatives that focused on better management of inventories.

Consolidated Selling, General and Administrative Expenses

Consolidated SG&A was 5.4% of sales for both the third quarter 2011 and third quarter 2010.  Consolidated SG&A during the third quarter 2011 included approximately $2.0 million of unusual professional fees and $0.9 million of restructuring costs related to the centralization of overhead functions.  Consolidated SG&A for year-to-date 2011 was 5.5% of sales, and was relatively flat in comparison to 5.4% of sales during year-to-date 2010.  Consolidated SG&A for year-to-date 2011 included approximately $2.0 million of unusual professional fees and $1.4 million of restructuring costs related to the centralization of overhead functions.  In addition, year-to-date SG&A was impacted by conversion and transition costs associated with our Military distribution centers of approximately $1.6 million and $1.7 million in 2011 and 2010, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense was $10.7 million for the third quarter 2011 as compared to $10.9 million during the comparable prior year period.  Depreciation and amortization expense for our military segment was approximately $1.3 million higher during the third quarter 2011 as compared to the prior year, which is the result of expansion activities associated with that business.  The increase in military depreciation and amortization was offset by a decline of $0.6 million in our food distribution segment and a $0.9 million decline in the retail segment.  

Depreciation and amortization expense was $27.7 million for year-to-date 2011 as compared to $27.6 million during the comparable prior year period.  Depreciation and amortization expense for our military segment was approximately $3.3 million higher during year-to-date 2011 as compared to the prior year, which is the result of expansion activities associated with that business.  The increase in military depreciation and amortization was offset by a decline of $1.4 million in our food distribution segment and a $1.9 million decline in the retail segment.  

Interest Expense

Interest expense was $7.0 million for the third quarter of 2011 as compared to $7.1 million during the comparable prior year period.  Average borrowing levels declined to $321.4 million during the third quarter 2011 from $323.4 million during the third quarter 2010.  The effective interest rate was 4.3% for the third quarter 2011 as compared to 4.6% for the third quarter 2010.  

Interest expense was $17.8 million for year-to-date 2011 compared to $17.7 million during the comparable prior year period.  Average borrowing levels increased to $342.5 million during year-to-date 2011 from $324.5 million during year-to-date 2010.  The effective interest rate was 4.2% for year-to-date 2011 as compared to 4.6% during year-to-date 2010.  Certain components of our interest expense are excluded from the calculation of our effective interest rate as the costs are not directly attributable to our long-term borrowing rates.   

The calculation of our effective interest rate excludes non-cash interest required to be recognized on our senior subordinated convertible notes under Financial Accounting Standards Board (“FASB”) Accounting

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Standards Codification (“ASC”) Subtopic 470-20 – Debt-Debt with Conversion and Other Options (“ASC 470-20”).  Non-cash interest expense recognized under ASC 470-20 was $1.8 million and $1.6 million during the third quarters of 2011 and 2010, respectively.  Non-cash interest expense recognized under ASC 470-20 was $4.4 million and $4.1 million during the year-to-date periods of 2011 and 2010, respectively.  Additionally, the calculation of our average borrowing levels includes the unamortized equity component of our senior subordinated convertible notes that is required to be recognized under ASC 470-20.  The inclusion of the unamortized equity component brings the basis in our senior subordinated convertible notes to $150.1 million for purposes of calculating our average borrowing levels, or their aggregate issue price, on which we are required to pay semi-annual cash interest at a rate of 3.50% until March 15, 2013.  

Income Taxes

Income tax expense is provided on an interim basis using management’s estimate of the annual effective rate.  Our effective tax rate for the full fiscal year is subject to change and may be impacted by changes to nondeductible items and tax reserve requirements in relation to our forecasts of operations, sales mix by taxing jurisdictions, or changes in tax laws and regulations.  The effective income tax rate was 39.7% and 32.8% for the third quarters of 2011 and 2010, respectively.   The effective income tax rate was 39.6% and 37.2% for year-to-date 2011 and 2010, respectively.   

During the third quarter of 2011, the Company did not file any claims with or receive refunds from any of the various tax authorities.  The effective rate for the third quarter differed from statutory rates due to the amount of permanent book tax differences relative to the Company’s pre-tax book income.   We estimate the full year effective tax rate for 2011 will be approximately 39.6% which excludes the potential impact of discrete events.

Net Earnings

Net earnings were $10.1 million, or $0.77 per diluted share, during the third quarter 2011 as compared to net earnings of $15.3 million, or $1.18 per diluted share, during the third quarter 2010.  Net earnings for year-to-date 2011 were $27.6 million, or $2.12 per diluted share, as compared to net earnings of $34.0 million, or $2.57 per diluted share, during year-to-date 2010.  Net earnings in the periods presented in this report were affected by the events included in the discussion above.  The primary differences in earnings per share (net of tax) between years were due to higher non-cash LIFO expense which negatively impacted third quarter 2011 net earnings by $4.3 million, or $0.33 per diluted share, as compared to $0.2 million, or $0.01 per diluted share, in the third quarter 2010, as well as unusual professional fees which negatively impacted third quarter 2011 net earnings by $1.2 million, or $0.09 per diluted share, and restructuring costs related to the centralization of overhead functions which negatively impacted third quarter 2011 net earnings by $0.5 million, or $0.04 per diluted share.  The non-cash LIFO expense negatively impacted year-to-date 2011 net earnings by $5.9 million, or $0.45 per diluted share, as compared to no significant impact in year-to-date 2010.  Also negatively impacting year-to-date 2011 net earnings were unusual professional fees which negatively impacted year-to-date 2011 net earnings by $1.2 million, or $0.09 per diluted share, and restructuring costs related to the centralization of overhead functions which negatively impacted year-to-date 2011 net earnings by $0.8 million, or $0.07 per diluted share.

Liquidity and Capital Resources

The following table summarizes our cash flow activity and should be read in conjunction with the Consolidated Statements of Cash Flows:

Cash provided by operating activities increased $38.6 million during year-to-date 2011 as compared to the prior year.  Inventories increased $21.0 million during year-to-date 2011, as compared to an increase in

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inventory of $55.9 million in the prior year, which contributed $34.9 million to the year-over-year increase in cash provided by operating activities.  Also contributing to this increase was a $21.3 million year-over-year increase in our accounts payable.  This impact was partially offset by a year-over-year increase in our accounts and notes receivable of $15.2 million.  

Net cash used in investing activities increased by $12.6 million during year-to-date 2011 as compared to the prior year.  Net cash used in investing activities for year-to-date 2011 consisted primarily of additions to property, plant and equipment of $47.3 million.  The additions to property, plant and equipment during year-to-date 2011 consisted primarily of the purchase of the real estate associated with our military distribution facility in Norfolk, Virginia, which was previously a leased location, for $27.6 million, and construction costs of $10.3 million related to the Oklahoma City military distribution facility, which is scheduled to become operational during 2012.  During year-to-date 2010, net cash used in investing activities consisted primarily of additions to property, plant and equipment of $39.9 million.

Cash used in financing activities increased by $26.1 million during year-to-date 2011 as compared to the prior year.  During year-to-date 2011, cash used in financing activities consisted primarily of dividend payments of $6.5 million, payments of revolving debt of $6.0 million and payments of capital lease obligations of $2.3 million which were partially offset by an increase in outstanding checks of $12.2 million.  Cash provided by financing activities during year-to-date 2010 included proceeds of revolving debt of $38.0 million and an increase in outstanding checks of $15.0 million partially offset by share repurchases of $20.3 million and dividend payments of $6.7 million.

During the remainder of fiscal 2011, we expect that cash flows from operations will be sufficient to meet our working capital needs and enable us to reduce our debt, with temporary draws on our credit facility during the year to build inventories for certain holidays.  Longer term, we believe that cash flows from operations, short-term bank borrowing, various types of long-term debt and lease and equity financing will be adequate to meet our working capital needs, planned capital expenditures and debt service obligations.  There can be no assurance, however, that we will continue to generate cash flows at current levels as our business is sensitive to trends in consumer spending at our customer locations and our owned retail food stores, as well as certain factors outside of our control, including, but not limited to, the current and future state of the U.S. and global economy, competition, recent and potential future disruptions to the credit and financial markets in the U.S. and worldwide and continued volatility in food and energy commodities.  Please see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K filed with the SEC for the fiscal year ended January 1, 2011, for a more detailed discussion of potential factors that may have an impact on our liquidity and capital resources.

Asset-backed Credit Agreement  

Our credit agreement is an asset-backed loan consisting of a $340.0 million revolving credit facility, which includes a $50.0 million letter of credit sub-facility (the “Revolving Credit Facility”).  Provided no default is then existing or would arise, we may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $110.0 million.  

The Revolving Credit Facility has a 5-year term and will be due and payable in full on April 11, 2013. We can elect, at the time of borrowing, for loans to bear interest at a rate equal to the base rate, as defined in the credit agreement, or LIBOR plus a margin. The LIBOR interest rate margin was 2.00% as of October 8, 2011, and can vary quarterly in 0.25% increments between three pricing levels ranging from 1.75% to 2.25% based on the excess availability, which is defined in the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions.

The credit agreement contains no financial covenants unless and until (i) the continuance of an event of default under the credit agreement, or (ii) the failure of us to maintain excess availability (a) greater than 10% of the borrowing base for more than two (2) consecutive business days or (b) greater than 7.5% of the borrowing base at any time, in which event, we must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0:1.0, which ratio shall continue to be tested each month thereafter until excess availability exceeds 10% of the borrowing base for 90 consecutive days.  

The credit agreement contains standard covenants requiring us, among other things, to maintain collateral, comply with applicable laws, keep proper books and records, preserve the corporate existence, maintain

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insurance, and pay taxes in a timely manner. Events of default under the credit agreement are usual and customary for transactions of this type including, among other things: (a) any failure to pay principal thereunder when due or to pay interest or fees on the due date; (b) material misrepresentations; (c) default under other agreements governing material indebtedness of the Company; (d) default in the performance or observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the credit agreement; and (h) any failure of a collateral document, after delivery thereof, to create a valid mortgage or first-priority lien.

As of October 8, 2011, $180.1 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $11.8 million of outstanding letters of credit primarily supporting workers’ compensation obligations.  We are currently in compliance with all covenants contained within the credit agreement.

Our Revolving Credit Facility represents one of our primary sources of liquidity, both short-term and long-term, and the continued availability of credit under that agreement is of material importance to our ability to fund our capital and working capital needs.

Senior Subordinated Convertible Debt

We also have outstanding $150.1 million in aggregate issue price (or $322.0 million in aggregate principal amount at maturity) of senior subordinated convertible notes due in 2035. The notes are unsecured senior subordinated obligations and rank junior to our existing and future senior indebtedness, including borrowings under our Revolving Credit Facility.  Cash interest at the rate of 3.50% per year is payable semi-annually on the issue price of the notes until March 15, 2013.  After that date, cash interest will not be payable, unless contingent cash interest becomes payable, and original issue discount for non-tax purposes will accrue on the notes daily at a rate of 3.50% per year until the maturity date of the notes.  See our Annual Report on Form 10-K filed with the SEC for the fiscal year ended January 1, 2011, for additional information.

Consolidated EBITDA (Non-GAAP Measurement)

The following is a reconciliation of EBITDA and Consolidated EBITDA to net earnings for the third quarters and year-to-date periods of 2011 and 2010 (amounts in thousands):

EBITDA and Consolidated EBITDA are measures used by management to measure operating performance.  EBITDA is defined as net earnings before interest, taxes, depreciation, and amortization.  Consolidated EBITDA excludes certain non-cash charges and other items that management does not utilize in assessing operating performance and is a metric used to determine payout of performance units pursuant to our Short-Term and Long-Term Incentive Plans.  The above table reconciles net earnings to EBITDA and Consolidated EBITDA.  Not all companies utilize identical calculations; therefore, the presentation of EBITDA and Consolidated EBITDA may not be comparable to other identically titled measures of other companies. 

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Neither EBITDA or Consolidated EBITDA are recognized terms under GAAP and do not purport to be an alternative to net earnings as an indicator of operating performance or any other GAAP measure.  In addition, EBITDA and Consolidated EBITDA are not intended to be measures of free cash flow for management’s discretionary use since they do not consider certain cash requirements, such as interest payments, tax payments and capital expenditures.

Derivative Instruments

We have market risk exposure to changing interest rates primarily as a result of our borrowing activities.  Our objective in managing our exposure to changes in interest rates is to reduce fluctuations in earnings and cash flows.  From time-to-time we use derivative instruments, primarily interest rate swap agreements, to manage risk exposures when appropriate, based on market conditions.  We do not enter into derivative agreements for trading or other speculative purposes, nor are we a party to any leveraged derivative instrument.  

The interest rate swap agreements are designated as cash flow hedges and are reflected at fair value in our Consolidated Balance Sheet and the related gains or losses on these contracts are deferred in stockholders’ equity as a component of other comprehensive income.  As of October 8, 2011, we have no significant liability in relation to our outstanding interest rate swap agreements, as compared to a fair value liability of $0.4 million as of January 1, 2011.  The fair value of all such liabilities is included in accrued expenses on our Consolidated Balance Sheet.  Deferred gains and losses are amortized as an adjustment to interest expense over the same period in which the related items being hedged are recognized in income.  However, to the extent that any of these contracts are not considered to be effective in accordance with ASC Topic 815 – Derivatives and Hedging (“ASC 815”) in offsetting the change in the value of the items being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income.  Our two outstanding interest rate swaps have been considered effective in accordance with ASC 815 since they began during fiscal 2008.

Our interest rate swap agreements resulted in net payments of approximately $0.2 million and $0.3 million during the third quarters of fiscal 2011 and 2010, respectively, and resulted in net payments of $0.4 million and $0.9 million during year-to-date 2011 and 2010, respectively, which are included in interest expense on our Consolidated Statement of Income.

As of October 8, 2011, we had two outstanding interest rate swap agreements with notional amounts totaling $17.5 million as compared to $35.0 million as of October 9, 2010, as follows (amounts in thousands):

Off-Balance Sheet Arrangements

As of the date of this report, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities, which are generally established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  

Recoverability of Goodwill

Our most recent annual impairment test of goodwill was completed during the fourth quarter of fiscal 2010 based on conditions as of the end of our third quarter of fiscal 2010 which resulted in no indication of goodwill impairment for any of our reporting units.  The fair value of the military segment was approximately 54% higher than its carrying value, while the food distribution segment fair value exceeded its carrying value by approximately 17% and the retail segment fair value was approximately 13% higher than its carrying value.  

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During the second quarter of 2011, the Company sold four retail stores which resulted in approximately a $0.3 million reduction in goodwill.

The fair value for each reporting unit is determined based on an income approach which incorporates a discounted cash flow analysis which uses significant unobservable inputs, or level 3 inputs, as defined by the fair value hierarchy, and a market approach that utilizes current earnings multiples of comparable publicly-traded companies.  The Company has weighted the valuation of its reporting units at 70% based on the income approach and 30% based on the market approach. The Company believes that this weighting is appropriate since it is often difficult to find other comparable publicly-traded companies that are similar to our reporting units and it is our view that future discounted cash flows are more reflective of the value of the reporting units.  

Critical Accounting Policies and Estimates

Our critical accounting policies are discussed in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2011, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Critical Accounting Policies.”  There have been no material changes to these policies or the estimates used in connection therewith during the 40 weeks ended October 8, 2011.

Recently Adopted and Proposed Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-09, Compensation – Retirement Benefits – Multiemployer Plans (Subtopic 715-80).  The new guidance requires employers participating in multiemployer plans to provide additional disclosures regarding an employer’s involvement in multiemployer plans.  The new guidance will be effective for the Company’s fiscal year ending December 31, 2011 and will result in additional disclosures, but will not otherwise have an impact on the Company’s consolidated financial statements.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

ITEM 4.  Controls and Procedures

PART II - OTHER INFORMATION

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ITEM 6.  Exhibits

Exhibits filed or furnished with this Form 10-Q:

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