10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the 16 weeks ended October 4, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-785

NASH-FINCH COMPANY

(Exact Name of Registrant as Specified in its Charter)


DELAWARE		41-0431960
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

7600 France Avenue South,
P.O. Box 355
Minneapolis, Minnesota		55440-0355
(Address of principal executive offices)		(Zip Code)

(952) 832-0534
(Registrant’s telephone number including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 28, 2008, 12,798,284 shares of Common Stock of the Registrant were outstanding.

PART I. — FINANCIAL INFORMATION

ITEM 1. Financial Statements

NASH-FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)
(In thousands, except per share amounts)


	16 Weeks Ended				40 Weeks Ended
	October 4,		October 6,		October 4,		October 6,
	2008		2007		2008		2007
Sales	$	1,436,490		1,367,116	$	3,500,788		3,463,333
Cost of sales		1,314,325		1,245,731		3,191,721		3,155,145

Gross profit		122,165		121,385		309,067		308,188


Other costs and expenses:
Selling, general and administrative		89,937		84,298		216,109		216,345
Special charges		—		—		—		(1,282	)
Depreciation and amortization		11,643		11,902		29,378		29,885
Interest expense		6,065		6,948		16,750		18,214

Total other costs and expenses		107,645		103,148		262,237		263,162


Earnings before income taxes		14,520		18,237		46,830		45,026

Income tax expense		5,926		2,832		16,851		14,726


Net earnings	$	8,594		15,405	$	29,979		30,300


Net earnings per share:
Basic	$	0.67		1.14	$	2.33		2.25
Diluted	$	0.65		1.12	$	2.28		2.22

Declared dividends per common share	$	0.180		0.180	$	0.540		0.540

Weighted average number of common shares outstanding and common equivalent shares outstanding:
Basic		12,839		13,524		12,893		13,490
Diluted		13,174		13,720		13,176		13,622

See accompanying notes to consolidated financial statements.

NASH-FINCH COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets
(In thousands, except per share amounts)


	October 4,			December 29,
	2008			2007
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	811			862
Accounts and notes receivable, net		207,213			197,807
Inventories		311,221			246,762
Prepaid expenses and other		17,592			27,882
Deferred tax asset, net		691			4,621

Total current assets		537,528			477,934

Notes receivable, net		25,630			12,429
Property, plant and equipment:
Property, plant and equipment		604,694			617,241
Less accumulated depreciation and amortization		(411,508	)		(414,704	)

Net property, plant and equipment		193,186			202,537

Goodwill		218,414			215,174
Customer contracts and relationships, net		25,594			28,368
Investment in direct financing leases		3,430			4,969
Other assets		13,049			9,971

Total assets	$	1,016,831			951,382


Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt and capitalized lease obligations	$	4,043			3,842
Accounts payable		256,140			209,402
Accrued expenses		64,856			69,113

Total current liabilities		325,039			282,357

Long-term debt		288,288			278,443
Capitalized lease obligations		25,944			29,885
Deferred tax liability, net		14,435			7,227
Other liabilities		27,816			37,854
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock — no par value. Authorized 500 shares; none issued		—			—
Common stock — $1.66 2/3 par value. Authorized 50,000 shares, issued 13,646 and 13,559 shares, respectively		22,744			22,599
Additional paid-in capital		72,380			61,446
Common stock held in trust		(2,219	)		(2,122	)
Deferred compensation obligations		2,219			2,122
Accumulated other comprehensive income (loss)		(5,329	)		(5,092	)
Retained earnings		275,004			252,142
Common stock in treasury, 848 and 434 shares, respectively		(29,490	)		(15,479	)

Total stockholders’ equity		335,309			315,616

Total liabilities and stockholders’ equity	$	1,016,831			951,382

See accompanying notes to consolidated financial statements.

NASH-FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)
(In thousands)


	40 Weeks Ended
	October 4,			October 6,
	2008			2007
Operating activities:
Net earnings	$	29,979			30,300
Adjustments to reconcile net earnings to net cash provided by operating activities:
Special charge		—			(1,282	)
Depreciation and amortization		29,378			29,885
Amortization of deferred financing costs		1,643			629
Amortization of rebatable loans		2,154			2,126
Increase (decrease) in provision for bad debts		(525	)		894
Increase (decrease) in provision for lease reserves		(1,515	)		551
Deferred income tax expense		11,138			5,299
LIFO charge		11,892			2,692
Asset impairments		1,490			1,781
Stock-based compensation		6,978			4,172
Other		(773	)		100
Changes in operating assets and liabilities:
Accounts and notes receivable		(7,031	)		2,048
Inventories		(73,369	)		(47,213	)
Prepaid expenses		2,757			(259	)
Accounts payable		37,992			32,837
Accrued expenses		(6,161	)		(1,802	)
Income taxes payable		7,447			7,747
Other assets and liabilities		(2,305	)		(8,920	)

Net cash provided by operating activities		51,169			61,585


Investing activities:
Disposal of property, plant and equipment		361			2,412
Additions to property, plant and equipment		(17,716	)		(10,371	)
Business acquired, net of cash		(6,566	)		—
Loans to customers		(17,579	)		(2,494	)
Other		857			1,410

Net cash used in investing activities		(40,643	)		(9,043	)

Financing activities:
Proceeds (payments) of revolving debt		128,800			(41,300	)
Dividends paid		(6,922	)		(7,269	)
Repurchase of common stock		(14,348	)		—
Payments of long-term debt		(118,940	)		(344	)
Payments of capitalized lease obligations		(2,903	)		(2,418	)
Increase (decrease) in bank overdraft		6,742			(851	)
Payments of deferred financing costs		(3,573	)		—
Other		567			3,369

Net cash used by financing activities		(10,577	)		(48,813	)

Net increase in cash and cash equivalents		(51	)		3,729
Cash and cash equivalents:
Beginning of year		862			958

End of period	$	811			4,687

See accompanying notes to consolidated financial statements.

Nash-Finch Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)
October 4, 2008

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 29, 2007.

The accompanying unaudited consolidated financial statements include all adjustments which are, in the opinion of management, necessary to present fairly the financial position of Nash-Finch Company and our subsidiaries (“Nash Finch” or “the Company”) at October 4, 2008 and December 29, 2007, and the results of operations and changes in cash flows for the 16 and 40 weeks ended October 4, 2008 (third quarter 2008) and October 6, 2007 (third quarter 2007). Adjustments consist only of normal recurring items, except for any items discussed in the notes below. All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2 – Inventories

We use the LIFO method for valuation of a substantial portion of inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these estimates are subject to many factors beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation. If the FIFO method had been used, inventories would have been approximately $68.3 million and $56.4 million higher at October 4, 2008 and December 29, 2007, respectively. In the third quarter 2008 we recorded LIFO charges of $8.4 million compared to $1.1 million for the third quarter 2007. Year-to-date LIFO charges recorded were $11.9 million and $2.7 million, respectively, at October 4, 2008 and October 6, 2007.

Note 3 – Goodwill

As a result of the acquisition of two stores in the second quarter 2008, goodwill increased by $3.2 million. Changes in the net carrying amount of goodwill for year-to-date 2008 were as follows (in thousands):


	Food
	distribution		Military		Retail		Total
Goodwill as of December 29, 2007	$	121,863		25,754		67,557		215,174
Acquisition of retail stores		—		—		3,240		3,240

Goodwill as of October 4, 2008	$	121,863		25,754		70,797		218,414

Note 4 – Share-Based Compensation

We account for share-based compensation awards in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment — Revised,” which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period. We recognized share-based compensation expense in our Consolidated Statements of Income of $3.0 and $7.0 million, respectively, for the 16 and 40 weeks ended October 4, 2008, versus expense of $1.6 and $4.2 million for the 16 and 40 weeks ended October 6, 2007.

We have four equity compensation plans under which incentive stock options, non-qualified stock options and other forms of share-based compensation have been, or may be, granted primarily to key employees and non-employee members of the Board of Directors. The 1995 Director Stock Option Plan was terminated as of December 27, 2004, and participation in the 1997 Non-Employee Director Stock Compensation Plan was frozen as of December 31, 2004. The Board adopted the Director Deferred Compensation Plan for amounts deferred on or after January 1, 2005. The plan permits non-employee directors to annually defer all or a portion of his or her cash compensation for service as a director, and have the amount deferred into either a cash account or a share unit account. Each share unit is payable in one share of Nash Finch common stock following termination of the participant’s service as a director.

Under the 2000 Stock Incentive Plan (“2000 Plan”), employees, non-employee directors, consultants and independent contractors may be awarded incentive or non-qualified stock options, shares of restricted stock, stock appreciation rights, performance units or stock bonuses.

Awards to non-employee directors under the 2000 Plan began in 2004 and have taken the form of restricted stock units (“RSUs”) that are granted annually to each non-employee director as part of his or her annual compensation for service as a director. The number of such units awarded to each director in 2008 was determined by dividing $45,000 by the fair market value of a share of our common stock on the date of grant. Each of these units vest six months after issuance and will entitle a director to receive one share of our common stock six months after the director’s service on our Board ends.

The following table summarizes information concerning outstanding and exercisable options under the 2000 Plan as of October 4, 2008 (number of shares in thousands):


	Options Outstanding				Options Exercisable
	Number of		Weighted		Number of		Weighted
Range of Exercise	Options		Average		Options		Average
Prices	Outstanding		Exercise Price		Exercisable		Exercise Price

$24.55		8.0				8.0
35.36		10.0				8.0

		18.0	$	30.56		16.0	$	29.96

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

Performance units were granted during 2005, 2006, 2007 and 2008 under the 2000 Plan pursuant to our LTIP. These units vest at the end of a three-year performance period. The 2005 plan provided for payout in shares of our common stock or cash, or a combination of both, at the election of the participant, and therefore was accounted for as a liability award in accordance with SFAS 123(R). All units under the 2005 plan were settled in shares of our common stock during the second quarter 2008. The payout for units granted in 2005 was determined by comparing our growth in “Consolidated EBITDA” (defined as net income, adjusted by (i) adding thereto interest expense, provision for income taxes, depreciation and amortization expense, and other non-cash charges that were deducted in computing net income for the period; (ii) excluding the amount of any extraordinary gains or losses and gains or losses from sales of assets other than inventory in the ordinary course of business; and (iii) subtracting cash payments made during the period with respect to non-cash charges incurred in a previous period) and return on net assets (“RONA”) (defined as net income divided by the sum of net fixed assets plus the difference between current assets and current liabilities) during the performance period to the growth in those measures over the same period experienced by the companies in a peer group selected by us.

In February 2008, the Compensation and Management Development Committee (the “Committee”) of the Board of Directors amended the 2006 and 2007 LTIP plans to take into account the Company’s decision in the fall of 2007 to invest strategic capital in support of its strategic plan. To ensure the interests of management and shareholders remained aligned after the decision to invest strategic capital, the Committee decided in February 2008 to revise the 2006 and 2007 LTIP plans by, among other things, adding a definition for Strategic Project and amending the definitions of Net Assets, RONA and Free Cash Flow. The 2006 and 2007 LTIP Plans were amended as follows:

	•		2006 LTIP Plan: The Committee amended the definition of RONA in the 2006 LTIP as follows: “RONA” means the weighted average of the return on Net Assets for the fiscal years during a Measurement Period. This is the quotient of (i) the sum of net income for each fiscal year (or portion thereof) during the Measurement Period divided by (ii) the sum of Average Net Assets for each fiscal year (or portion thereof) during the measurement period. Each of the measures in (i) and (ii) shall be as reported by the entity for the applicable fiscal periods in periodic reports filed with the Securities and Exchange Commission (“SEC”) under the Exchange Act. Net Income will be adjusted by (x) subtracting projected Strategic Project Consolidated EBITDA, offset by the associated interest, depreciation and income taxes. If a Strategic Project generates positive Consolidated EBITDA through July 1 of the year placed in service, the adjustment for (x) above will only be made through July 1 of that year. If a Strategic Project first generates positive Consolidated EBITDA after July 1 of the year placed in service, then the adjustment for (x) above will be made through the first anniversary date of the Strategic Project being placed in service. Weighting of the return on Net Assets for the fiscal years during the Measurement Period shall be based upon the Average Net Assets for each fiscal year.

	•		2007 LTIP Plan: The Committee amended the definition of “net assets” consistent with the change to the 2006 LTIP Plan to allow for the impact on net assets resulting from the Company’s decision to expend strategic capital. Net Assets is defined in the amended Plan as: “Net Assets” means total assets minus current liabilities, excluding current maturities of long-term debt and capitalized lease obligations and further adjusted by (x) subtracting the additions of Strategic Project PP&E and Strategic Project Working Capital. “Strategic Project” means projects of the following type that have been approved by the Committee: (i) all Strategic Projects identified in the Company’s Five-Year Plan dated October 29, 2007; (ii) new retail store additions; (iii) conversions of current retail stores to a new format; (iv) conversion of current wholesale distribution centers; (v) new wholesale distribution centers or additions thereto; (vi) conversion of current distribution network systems; (vii) conversion of current wholesale or retail pricing and billing systems; (viii) conversion of current wholesale or retail merchandising systems; (ix) conversion of vendor income management systems. If a Strategic Project generates positive Consolidated EBITDA through July 1 of the year placed in service, then the adjustment for (x) above will not be made. If a Strategic Project first generates positive Consolidated EBITDA after July 1 of the year placed in service, then the adjustment for (x) above will be made during that fiscal year only. Net Assets will be further adjusted upward by the amount of any impairment of goodwill that the Company records beginning with the affected year during the Measurement Period. In addition, the Committee amended the definition of “Free Cash Flow” to provide as follows: “Free Cash Flow” means cash provided by operating activities minus additions of property, plant and equipment (“PP&E); and (i) adding back

the additions of Strategic Project PP&E; (ii) adding back Strategic Project Working Capital; and (iii) subtracting projected Strategic Project Consolidated EBITDA, offset by the associated cash interest and income taxes. If a Strategic Project generates positive Consolidated EBITDA through July 1 of the year placed in service, the adjustment for (iii) above will only be made through July 1 of that year. If a Strategic Project first generates positive Consolidated EBITDA after July 1 of the year placed in service, then the adjustment for (iii) above will be made through the first anniversary date of the Strategic Project being placed in service.

The Committee made the following additional amendments to those plans at its February 2008 meeting; (1) removing the plan participant’s option to receive payout of the award in cash; instead requiring that all awards be paid in stock; and (2) automatically deferring settlement of stock payouts to senior vice presidents, executive vice presidents and the CEO until 30 days following termination of their employment or until six months after termination of their employment if they are determined to be “specified employees” under 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986. The above modifications resulted in replacement of the previously outstanding liability awards with equity awards as defined by SFAS 123(R). Therefore, the total expense recognized over the remaining service (vesting) period of the awards will equal the grant date fair value times number of shares that ultimately vest. The Company estimates expected forfeitures in determining the compensation expense recorded each period.

In the first quarter 2008, units were granted pursuant to our 2008 LTIP. Depending on our ranking on compound annual growth rate for Consolidated EBITDA among the companies in the peer group and our free cash flow return on net assets performance against targets established by the Committee for the 2008 awards, 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.

The following table summarizes activity in our share-based compensation plans during the year-to-date period ended October 4, 2008:


									Weighted
									Average
				Weighted		Restricted			Remaining
				Average		Stock Awards/			Restriction/
	Stock Option			Option Price		Performance			Vesting Period
(In thousands, except per share amounts)	Shares			Per Share		Units			(Years)

Outstanding at December 29, 2007		35.1		$	25.85		907.0			1.9
Granted		—					367.5
Exercised/restrictions lapsed *		(15.4	)				(78.8	)
Forfeited/cancelled		(1.7	)				(276.0	)

Outstanding at October 4, 2008		18.0		$	30.56		919.7			1.5

Exercisable/unrestricted at December 29, 2007		28.1		$	25.40		168.3

Exercisable/unrestricted at October 4, 2008		16.0		$	29.96		189.4


*		The “exercised/restrictions lapsed” amount above under Restricted Stock Awards/Performance Units excludes 82,082 RSUs held by Alec Covington and 12,921 RSUs held by Robert Dimond that vested during year-to-date 2008, respectively. Mr. Covington and Mr. Dimond elected to defer the shares until after their employment with the Company ends.

The weighted-average grant-date fair value of equity based restricted stock/performance units granted was $37.21 during the 40 weeks ended October 4, 2008 versus $32.82 during the comparable period ended October 6, 2007.

Note 5 – Other Comprehensive Income

Other comprehensive income consists of market value adjustments to reflect derivative instruments at fair value, pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

In the third quarter 2008 we entered into two interest rate swap agreements that became effective October 15, 2008. The interest rate swap agreements are designated as cash flow hedges of interest payments on borrowings under our asset-backed credit agreement and are reflected at fair value in our Consolidated Balance Sheet with the related gains or losses on these contracts deferred in stockholders’ equity as a component of other comprehensive income. The loss reported in other comprehensive income during the third quarter 2008 reflects a change in fair value of those agreements as of October 4, 2008. During the quarter and year-to-date periods ended October 6, 2007 all interest rate swap agreements were designated as cash flow hedges.

During the first quarter 2008 our only outstanding commodity swap agreement, which expired February 29, 2008, did not qualify for hedge accounting in accordance with SFAS No. 133, and the corresponding change in fair value of the commodity swap agreement was recognized in earnings. During the quarter and year-to-date periods ended October 6, 2007 our only outstanding commodity swap agreement also did not qualify for hedge accounting and the corresponding change in fair value of the commodity swap agreement was recognized in earnings.

The components of comprehensive income are as follows:


	16 Weeks						Year-to-date
	Ended						Ended
	October 4,			October 6,			October 4,			October 6,
(In thousands)	2008			2007			2008			2007

Net Earnings	$	8,594			15,405			29,979			30,300
Change in fair value of derivatives, net of tax		(236	)		(122	)		(236	)		(322	)

Comprehensive income	$	8,358			15,283			29,743			29,978

Note 6 – Long-term Debt and Bank Credit Facilities

Total debt outstanding was comprised of the following:


	October 4,			December 29,
(In thousands)	2008			2007

Senior secured credit facility:
Revolving credit	$	—			6,300
Term Loan B		—			118,700
Asset-backed credit agreement:
Revolving credit		135,100			—
Senior subordinated convertible debt, 3.50% due in 2035		150,087			150,087
Industrial development bonds, 5.60% to 5.75% due in various installments through 2014		3,170			3,345
Notes payable and mortgage notes, 7.95% due in various installments through 2013		494			559

Total debt		288,851			278,991
Less current maturities		(563	)		(548	)

Long-term debt	$	288,288			278,443

Asset-backed Credit Agreement

On April 11, 2008, we entered into our new credit agreement which is an asset-backed loan consisting of a $300.0 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 $150.0 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 or LIBOR plus a margin. The LIBOR interest rate margin currently is 2.00% 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. At October 4, 2008, $149.6 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $15.3 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 ninety (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.

Senior Subordinated Convertible Debt

To finance a portion of the acquisition of two 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 asset-backed credit facility. See our

Annual Report on Form 10-K for the fiscal year ended December 29, 2007 for additional information regarding the notes.

Note 7 – Guarantees

We have guaranteed debt and lease obligations of certain food distribution customers. In the event these retailers are unable to meet their debt service payments or otherwise experience an event of default, we would be unconditionally liable for the outstanding balance of their debt and lease obligations ($14.0 million as of October 4, 2008 as compared to $7.4 million as of October 6, 2007), which would be due in accordance with the underlying agreements.

In the third quarter 2008 we entered into new lease guarantees with a food distribution customer. The maximum undiscounted payments we would be required to make in the event of default under the guarantees is $4.6 million, which is included in the $14.0 million total referenced above. The guarantees have a ten-year term, but upon the event of default by the customer our obligation under the guarantees is limited to two-years of rent payments up to a maximum of $4.6 million. The guarantees are secured by certain business assets of the affiliated customer. We believe the customer will be able to perform under the lease agreements and that no payments will be required and no loss will be incurred under the guarantee.

The lease guarantees entered into during the second and third quarters of 2008 are accounted for under Financial Accounting Standards Board (FASB) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 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. An initial liability of $1.2 million was recorded at fair value in the accompanying consolidated financial statements for the lease guarantees entered into during 2008.

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 $9.4 million as of October 4, 2008 as compared to $11.6 million as of October 6, 2007.

Note 8 – Income Taxes

For the third quarter 2008 and 2007, our tax expense was $5.9 million and $2.8 million, respectively. For the year-to-date 2008 and 2007, our tax expense was $16.9 million and $14.7 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. During the third quarter 2008 the Company filed claims with and received refunds from various tax authorities. Accordingly, the Company reported the effect of these discrete events in the third quarter 2008. The effect of these discrete events in the third quarter 2008 was less than $0.1 million compared to $4.9 million in the third quarter 2007. The effective tax rate for the third quarter and year to date 2008 was 40.8% and 36.0%, respectively. The effective rate for the third quarter and year-to-date 2007 was 15.5% and 32.7%, respectively.

During the next 12 months, the Company expects various state and local statutes of limitation to expire during the year. However, we do not expect our unrecognized tax benefits to change significantly over the next 12 months.

The Company or one of its subsidiaries files 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 2003 and prior.

Note 9 – Pension and Other Postretirement Benefits

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

16 Weeks Ended October 4, 2008 and October 6, 2007


	Pension Benefits						Other Benefits
(In thousands)	2008			2007			2008			2007

Interest cost	$	693			585			14			14
Expected return on plan assets		(742	)		(577	)		—			—
Amortization of prior service cost		(1	)		(4	)		(198	)		(161	)
Recognized actuarial loss (gain)		166			59			(1	)		(2	)

Net periodic benefit cost	$	116			63			(185	)		(149	)

40 Weeks Ended October 4, 2008 and October 6, 2007


	Pension Benefits						Other Benefits
(In thousands)	2008			2007			2008			2007

Interest cost	$	1,732			1,755			36			42
Expected return on plan assets		(1,854	)		(1,731	)		—			—
Amortization of prior service cost		(2	)		(11	)		(496	)		(483	)
Recognized actuarial loss (gain)		415			178			(2	)		(6	)

Net periodic benefit cost	$	291			191			(462	)		(447	)

Weighted-average assumptions used to determine net periodic benefit cost for year-to-date 2008 and year-to-date 2007 were as follows:


	Pension Benefits						Other Benefits
	2008			2007			2008			2007

Weighted-average assumptions:
Discount rate		6.00	%		6.00	%		6.00	%		6.00	%
Expected return on plan assets		7.00	%		7.00	%		N/A			N/A
Rate of compensation increase		N/A			N/A			N/A			N/A

Total contributions to our pension plan in 2008 are expected to be $1.1 million.

Note 10 – Earnings Per Share

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


	Third Quarter				Year-to-Date
	Ended				Ended
	October 4,		October 6,		October 4,		October 6,
(In thousands, except per share amounts)	2008		2007		2008		2007

Net earnings	$	8,594		15,405		29,979		30,300


Net earnings per share-basic:
Weighted-average shares outstanding		12,839		13,524		12,893		13,490

Net earnings per share-basic	$	0.67		1.14		2.33		2.25


Net earnings per share-diluted:
Weighted-average shares outstanding		12,839		13,524		12,893		13,490
Dilutive impact of options		3		8		4		7
Shares contingently issuable		332		188		279		125

Weighted-average shares and potential dilutive shares outstanding		13,174		13,720		13,176		13,622


Net earnings per share-diluted	$	0.65		1.12		2.28		2.22


Anti-dilutive options excluded from calculation (weighted-average amount for period)		—		—		—		31

The senior subordinated convertible notes due 2035 will be convertible at the option of the holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.4164 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 $49.50 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.

Performance units granted during 2005 under the 2000 Plan for the LTIP were payable in shares of Nash Finch common stock or cash, or a combination of both, at the election of the participant. No recipients notified the Company by the required notification date for the 2005 awards that they wished to be paid in cash. Therefore, all units under the 2005 plan were settled in shares of common stock during the second quarter 2008. Other performance and RSUs granted during 2006, 2007 and 2008 pursuant to the 2000 Plan will pay out 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 SFAS No. 128, “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 2008, approximately 179,000 shares related to the LTIP and 153,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS. For the year-to-date period ended October 4, 2008, approximately 133,000 shares related to the LTIP and 146,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS.

Note 11 – Segment Reporting

We sell and distribute products that are typically found in supermarkets and operate three reportable operating segments. Our food distribution segment consists of 16 distribution centers that sell to independently operated retail food stores, our corporate owned stores and other customers. The military segment consists primarily of two distribution centers that distribute products exclusively to military commissaries and exchanges. The retail segment consists of corporate-owned stores that sell directly to the consumer.

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


	Third Quarter Ended
	October 4, 2008							October 6, 2007
	Sales from							Sales from		Inter-
	external		Inter-segment			Segment		external		segment			Segment
(In thousands)	customers		sales			profit		customers		sales			profit

Food distribution	$	839,894		94,245			30,028		810,281		91,330			28,601
Military		410,394		—			15,072		376,094		—			12,406
Retail		186,202		—			6,326		180,741		—			5,096
Eliminations		—		(94,245	)		—		—		(91,330	)		—

Total	$	1,436,490		—			51,426		1,367,116		—			46,103


	Year-to-Date Ended
	October 4, 2008							October 6, 2007
	Sales from							Sales from		Inter-
	external		Inter-segment			Segment		external		segment			Segment
(In thousands)	customers		sales			profit		customers		sales			profit

Food distribution	$	2,034,129		231,595			75,853		2,058,133		228,483			68,124
Military		1,012,329		—			36,925		948,359		—			32,048
Retail		454,330		—			15,643		456,841		—			16,735
Eliminations		—		(231,595	)		—		—		(228,483	)		—

Total	$	3,500,788		—			128,421		3,463,333		—			116,907

Reconciliation to Consolidated Statements of Income:


	Third Quarter						Year-To-Date
	Ended						Ended
	October 4,			October 6,			October 4,			October 6,
(In thousands)	2008			2007			2008			2007

Total segment profit	$	51,426			46,103			128,421			116,907
Unallocated amounts:
Adjustment of inventory to LIFO		(8,361	)		(1,077	)		(11,892	)		(2,692	)
Special charges		—			—			—			1,282
Unallocated corporate overhead		(28,545	)		(26,789	)		(69,699	)		(70,471	)

Earnings before income taxes	$	14,520			18,237			46,830			45,026

Note 12 – Share Repurchase Program

On November 13, 2007, we announced that our Board of Directors had authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock. The program took effect on November 19, 2007 and will continue until the earlier of (1) the close of trading on January 3, 2009 or (2) the date that the aggregate purchases under the repurchase program reaches 1,000,000 shares of our common stock. We did not repurchase any shares during the third quarter 2008. During year-to-date 2008 we have repurchased 429,082 shares at an average price per share of $33.44. Since the program took effect, we repurchased a total of 842,038 shares at an average price per share of $34.83. The average prices per share referenced above include commissions. As of October 4, 2008, there were 157,962 shares remaining on the Board-approved share repurchase authorization.

Note 13 – New Accounting Standard

In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (FSP APB 14-1), which will impact the accounting associated with our existing $150.1 million senior convertible notes. When adopted FSP APB 14-1 will require us to recognize non-cash interest expense based on the market rate for similar debt instruments without the conversion feature. Furthermore, it will require recognizing interest expense in prior periods pursuant to retrospective accounting treatment. It is expected that the cumulative effect upon adoption would be to record approximately $16.8 million in pretax non-cash interest expense for prior periods and $4.0 million to $6.0 million in additional pretax non-cash interest expense annually. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008.

Note 14 – Legal Proceedings

Senior Subordinated Convertible Notes Litigation

On September 10, 2007, the Company received a purported notice of default from certain hedge funds which are beneficial owners purporting to hold at least 25% of the aggregate principal amount of the Senior Subordinated Convertible Notes due 2035 (the “Notes”). The hedge funds alleged in the notice that the Company was in breach of Section 4.08(a)(5) of the Indenture governing the Notes (the “Indenture”) which provides for an adjustment of the conversion rate in the event of an increase in the amount of certain cash dividends to holders of the Company’s common stock.

On May 30, 2008, the Hennepin County District Court issued an order holding that the Company properly adjusted the conversion rate on the Notes after the Company increased the amount of dividends it paid to its shareholders. The Court ordered the Trustee of the Notes to execute the Supplemental Indenture which cured any ambiguity regarding the calculation of the conversion rate adjustments following the Company’s increase in quarterly dividends. The Supplemental Indenture was filed as Exhibit 4.1 to our Form 10-Q for the 12 weeks ended June 14, 2008. The Court also dissolved the Temporary Restraining Order, finding that the execution of the Supplemental Indenture obviated any default noticed by the investors.

On July 25, 2008, a hedge fund filed a Notice of Appeal from the order issued by the Hennepin County District Court on May 30, 2008. On September 23, 2008 the Minnesota Court of Appeals dismissed the appeal.

Roundy’s Supermarkets, Inc. v. Nash Finch

On February 11, 2008, Roundy’s Supermarkets, Inc. (“Roundy’s) filed suit against us claiming we breached the Asset Purchase Agreement (“APA”), entered into in connection with our acquisition of certain distribution centers and other assets from Roundy’s, by not paying approximately $7.9 million Roundy’s claims is due under the APA as a purchase price adjustment. We answered the complaint denying any payment was due to Roundy’s and asserted counterclaims against Roundy’s for, among other things, breach of contract, misrepresentation, and breach of the duty of good faith and fair dealing. In our counterclaim we demand damages from Roundy’s in excess of $18.0 million.

On or about March 25, 2008, Roundy’s filed a motion for judgment on the pleadings with respect to some, but not all, of the claims, asserted in our counterclaim. On May 27, 2008, we filed an amended counterclaim which rendered Roundy’s motion moot. The amended counterclaim asserts claims against Roundy’s for, among other things, breach of contract, fraud, and breach of the duty of good faith and fair dealing. Our counterclaim demands damages from Roundy’s in excess of $18.0 million. Roundy’s filed an answer to the counterclaims denying liability, and subsequently moved to dismiss our counterclaims. The Court has the motion under advisement. We intend to vigorously defend against Roundy’s complaint and to vigorously prosecute our claims against it.

Due to uncertainties in the litigation process, the Company is unable to with certainty estimate the financial impact or outcome of this lawsuit.

Securities and Exchange Commission Inquiry

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

Forward Looking Information and Cautionary Factors

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements relate to trends and events that may affect our future financial position and operating results. Any statement contained in this report that is not statements of historical fact may be deemed forward-looking statements. For example, words such as “may,” “will,” “should,” “likely,” “expect,” “anticipate,” “estimate,” “believe,” “intend, “ “potential” or “plan,” or comparable terminology, are intended to identify forward-looking statements. Such statements are based upon current expectations, estimates and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Important factors known to us that could cause or contribute to material differences include, but are not limited to the following:

•

the effect of competition on our distribution, military and retail businesses;

•

general sensitivity to economic conditions, including volatility in energy prices, food commodities and changes in market interest rates;

•

our ability to identify and execute plans to expand our food distribution, military and retail operations;

•

possible changes in the military commissary system, including those stemming from the redeployment of forces, congressional action and funding levels;

•

our ability to identify and execute plans to improve the competitive position of our retail operations;

•		the success or failure of strategic plans, new business ventures or initiatives;

•		changes in consumer buying and spending patterns;

•

risks entailed by future acquisitions, including the ability to successfully integrate acquired operations and retain the customers of those operations;

•

changes in credit risk from financial accommodations extended to new or existing customers;

•

significant changes in the nature of vendor promotional programs and the allocation of funds among the programs;

•

limitations on financial and operating flexibility due to debt levels and debt instrument covenants;

•

legal, governmental, legislative or administrative proceedings, disputes, or actions that result in adverse outcomes, such as adverse determinations or developments with respect to the litigation or Securities and Exchange Commission (“SEC”) inquiry discussed in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 29, 2007;

•		technology failures that may have a material adverse effect on our business;

•		severe weather and natural disasters that may impact our supply chain;

•		changes in health care, pension and wage costs and labor relations issues;

•

threats or potential threats to security or food safety; and

•

unanticipated problems with product procurement.

A more detailed discussion of many of these factors, as well as other factors, that could affect Nash-Finch Company and our subsidiaries’ (“Nash Finch” or “the Company”) results is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 29, 2007. You should carefully consider each of these factors and all of the other information in this report. We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes and that accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to revise or update these statements in light of subsequent events or developments. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in forward-looking statements. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the SEC.

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: food distribution, military food distribution and retail.

In November 2006, we announced the launch of a new strategic plan, Operation Fresh Start, designed to sharpen our focus and provide a strong platform to support growth initiatives. Built upon extensive knowledge of current industry, consumer and market trends, and formulated to differentiate the Company, the new strategy focuses activities on specific retail formats, businesses and support services designed to delight consumers. The strategic plan encompasses several important elements:

	•		Emphasis on a suite of retail formats designed to appeal to the needs of today’s consumers including an initial focus on everyday value, Hispanic and extreme value formats, as well as military commissaries and exchanges;

	•		Strong, passionate businesses in key areas including perishables, health and wellness, center store, pharmacy and military supply, driven by the needs of each format;

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

	•		Retail support services emphasizing best-in-class offerings in marketing, advertising, merchandising, store design and construction, store brands, market research, retail store support, retail pricing and license agreement opportunities;

	•		Store brand management dedicated to leveraging the strength of the Our Family brand as a regional brand through exceptional product development coupled with pricing and marketing support; and

	•		Integrated shared services company-wide, including IT support and infrastructure, accounting, finance, human resources and legal.

In addition to the strategic initiatives already in progress, our 2008 initiatives consist of the following:

	•		Invest in our retail formats, logistics capabilities and center store systems; and

	•		Pursue acquisitions that support our strategic plan.

Our food distribution segment sells and distributes a wide variety of nationally branded and private label products to independent grocery stores and other customers primarily in the Midwest and Southeast regions of the United States.

Our military segment contracts with manufacturers to distribute a wide variety of grocery products to military commissaries and exchanges located primarily in the Mid-Atlantic region of the United States, and in Europe, Puerto Rico, Cuba, the Azores and Egypt. We are the largest distributor of grocery products to U.S. military commissaries and exchanges, with over 30 years of experience acting as a distributor to U.S. military commissaries and exchanges.

Our retail segment operated 57 corporate-owned stores primarily in the Upper Midwest as of October 4, 2008. On April 1, 2008, we completed the acquisition of two stores located in Rapid City, SD and Scottsbluff, NE. Primarily due to highly competitive conditions in which supercenters and other alternative formats compete for price conscious customers, we closed or sold three retail stores in 2007 and four stores in 2008. 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 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

The following tables summarize our sales activity for the 16 weeks ended October 4, 2008 (third quarter 2008) compared to the 16 weeks ended October 6, 2007 (third quarter 2007) and the 40 weeks ended October 4, 2008 (year-to-date 2008) compared to the 40 weeks ended October 6, 2007 (year-to-date 2007):


	Third quarter 2008					Third quarter 2007					Increase/(Decrease)
			Percent of					Percent of
(In thousands)	Sales		Sales			Sales		Sales			$		%

Segment Sales:
Food distribution	$	839,894		58.4	%		810,281		59.3	%		29,613		3.7	%
Military		410,394		28.6	%		376,094		27.5	%		34,300		9.1	%
Retail		186,202		13.0	%		180,741		13.2	%		5,461		3.0	%

Total Sales	$	1,436,490		100.0	%		1,367,116		100.0	%		69,374		5.1	%


	Year-to-date 2008					Year-to-date 2007					Increase/(Decrease)
			Percent of					Percent of
(In thousands)	Sales		Sales			Sales		Sales			$			%

Segment Sales:
Food distribution	$	2,034,129		58.1	%		2,058,133		59.4	%		(24,004	)		(1.2	%)
Military		1,012,329		28.9	%		948,359		27.4	%		63,970			6.7	%
Retail		454,330		13.0	%		456,841		13.2	%		(2,511	)		(0.5	%)

Total Sales	$	3,500,788		100.0	%		3,463,333		100.0	%		37,455			1.1	%

The increase in food distribution sales in the third quarter 2008 as compared to the prior year was primarily due to increased comparable sales and new account gains. The decrease in food distribution sales for year-to-date 2008 is attributable to the loss of a significant customer which accounted for $72.8 million of additional sales in year-to-date 2007. However, excluding the impact of this customer, food distribution sales increased 2.5% during year-to-date 2008 compared to the comparable prior year period due primarily to new account gains and increased comparable sales.

Military segment sales increased 9.1% during the third quarter 2008 and 6.7% year-to-date 2008 versus the comparable 2007 periods. The sales increases in the third quarter 2008 reflected 7.6% stronger sales domestically and 12.8% stronger sales overseas and the year-to-date 2008 sales increases reflected 7.0% stronger sales domestically and 6.2% stronger sales overseas. Domestic and overseas sales represented the following percentages of military segment sales:


	Third Quarter						Year-to-date
	2008			2007			2008			2007

Domestic		70.0	%		71.0	%		70.0	%		69.8	%
Overseas		30.0	%		29.0	%		30.0	%		30.2	%

Retail sales for the third quarter and year-to-date 2008 were impacted by the acquisition of two new stores in the second quarter 2008 and the closure of four stores since the end of the third quarter 2007 when compared to the comparable prior year periods. Same store sales, which compare retail sales for stores which were in operation for the same number of weeks in the comparative periods, increased 0.7% and decreased 1.0% in the third quarter 2008 and year-to-date periods, respectively, versus the comparable 2007 periods.

During the third quarters of 2008 and 2007, our corporate store count changed as follows:


	Third quarter			Third quarter
	2008			2007
Number of stores at beginning of period		60			62
Acquired stores		—			—
Closed or sold stores		(3	)		(3	)

Number of stores at end of period		57			59

During year-to-date 2008 and 2007, our corporate store count changed as follows:


	Year-to-date			Year-to-date
	2008			2007
Number of stores at beginning of period		59			62
Acquired stores		2			—
Closed or sold stores		(4	)		(3	)

Number of stores at end of period		57			59

Gross Profit

Consolidated gross profit was 8.5% of sales for the third quarter 2008 versus 8.9% for the third quarter 2007. The third quarter 2008 gross profit margin was negatively impacted by additional year-over-year LIFO charges of 0.5% of sales, or $7.3 million, and a sales mix shift between our business segments of 0.1% of sales. The negative impact of the sales mix shift was due to a higher percentage of 2008 sales occurring in the military segment and a lower percentage in the retail and food distribution segments which have a higher gross profit margin. However, our gross profit margin increased by 0.2% of sales in the third quarter 2008 relative to the comparable prior year period as a result of gains achieved from initiatives that focused on better management of inventories and vendor relationships.

Consolidated gross profit was 8.8% of sales for year-to-date 2008 versus 8.9% for year-to-date 2007. Our year-to-date 2008 gross profit margin was negatively impacted by additional year-over-year LIFO charges of 0.3% of sales, or $9.2 million, and a sales mix shift between our business segments of 0.1% of sales. The negative impact of the sales mix shift was due to a higher percentage of 2008 sales occurring in the military segment and a lower percentage in the retail and food distribution segments which have a higher gross profit margin. However, our gross profit margin increased by 0.3% of sales in year-to-date 2008 relative to the comparable prior year period as a result of gains achieved from initiatives that focused on better management of inventories and vendor relationships.

Selling, General and Administrative Expenses

Consolidated SG&A for the third quarter 2008 was $89.9 million, or 6.3% of sales, as compared to $84.3 million, or 6.2% of sales, for the comparable prior year period. SG&A for year-to-date 2008 was $216.1 million, or 6.2% of sales, compared to $216.3 million, or 6.2% of sales, for the comparable prior year period. The increase in SG&A for the third quarter 2008 of 0.1% of sales in relation to the comparable prior year period was due primarily to increased professional service fees.

Special Charges

In the second quarter 2007, we reversed $1.6 million of previously established lease reserves for one location after subleasing the property earlier than anticipated. We also recorded an additional $0.3 million in charges due to revised lease commitment estimates for another property in the second quarter 2007. There were no special charges recognized during the third quarter and year-to-date 2008 periods.

Depreciation and Amortization Expense

Depreciation and amortization expense was $11.6 million for the third quarter 2008 compared to $11.9 million for the comparable prior year period. Depreciation and amortization expense was $29.4 million for year-to-date 2008 compared to $29.9 million for the comparable prior year period.

Interest Expense

Interest expense was $6.1 million for the third quarter 2008 versus $6.9 million for the comparable prior year period. Average borrowing levels were $334.7 million during the third quarter 2008 and 2007. The effective interest rate was 5.0% for the third quarter 2008 compared to 6.2% for the third quarter 2007.

Interest expense decreased to $16.8 million for year-to-date 2008 from $18.2 million in the same period of 2007. Interest expense for year-to-date 2008 included the write-off of deferred financing costs of $1.0 million associated with the refinancing of our senior secured bank credit facility. Average borrowing levels decreased to $342.5 million during the year-to-date 2008 from $350.7 million during year-to-date 2007. The effective interest rate was 5.6% for year-to-date 2008 as compared to 6.2% for year-to-date 2007. However, excluding the impact of the write-off of deferred financing costs in the second quarter 2008, the effective interest rate was 5.2% for year-to-date 2008.

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 changes 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 to changes in tax laws and regulations. The effective income tax rate was 40.8% and 15.5% for the third quarter 2008 and 2007, respectively. During the year-to-date periods of 2008 and 2007 the effective tax rates were 36.0% and 32.7% respectively.

During the third quarter 2008, the Company filed claims with and received refunds from various tax authorities. Accordingly, the Company reported the effect of these discrete events in the third quarter. However, the effective tax rate for the quarter was not materially affected by these discrete events. Discrete events totaling $4.9 million were reported in the third quarter 2007 and led to a reduction in our effective tax rate in the third quarter and year-to-date 2007. The effective rate for the third quarter 2008 differed from statutory rates due to anticipated pre-tax income relative to certain nondeductible expenses.

Net Earnings

Net earnings in the third quarter 2008 were $8.6 million, or $0.65 per diluted share, as compared to $15.4 million, or $1.12 per diluted share, in the third quarter 2007. Net earnings year-to-date 2008 were $30.0 million, or $2.28 per diluted share, opposed to net earnings of $30.3 million, or $2.22 per diluted share, for the same period of the previous year. Net earnings were negatively impacted by additional year-over-year LIFO charges of $7.3 million and $9.2 million, or $0.34 and $0.43 per diluted share, for the third quarter and year-to-date 2008, respectively. Net earnings for the third quarter and year-to-date 2007 benefited from the effect of resolving two Internal Revenue Service examinations, 2003 statute of limitations expiration and filing of various reports to settle potential tax liabilities resulting in a decrease to income tax expense of approximately $4.9 million, or $0.36 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:


	Year-to-date Ended
							Increase/
(In thousands)	October 4, 2008			October 6, 2007			(Decrease)

Net cash provided by operating activities		51,169			61,585			(10,416	)
Net cash used in investing activities		(40,643	)		(9,043	)		(31,600	)
Net cash used by financing activities		(10,577	)		(48,813	)		38,236

Net increase in cash and cash equivalents		(51	)		3,729			(3,780	)

Cash flows from operating activities decreased $10.4 million in year-to-date 2008 as compared to year-to-date 2007, primarily due to increased investment in inventory and a reduction in accrued expenses. Cash provided by operating activities included the effect of an increased investment in inventory due to inflationary increases of approximately $73.4 million in year-to-date 2008 compared to $47.2 million in the comparable prior year period. The cash flow impact of the increased inventory levels were partially offset by increases in accounts payable of $38.0 million and $32.8 million in year-to-date 2008 and 2007, respectively.

Net cash used in investing activities increased by $31.6 million in year-to-date 2008 as compared to year-to-date 2007. The most significant factors for the year-over-year variance were increased customer loans of $17.6 million in year-to-date 2008 as compared to $2.5 million in the comparable prior year period and the acquisition of two new retail stores in 2008 for $6.6 million. In addition, property, plant and equipment additions increased to $17.7 million for year-to-date 2008 compared to $10.4 million for year-to-date 2007.

Cash used by financing activities decreased by $38.2 million in year-to-date 2008 as compared to year-to-date 2007. The decrease in year-over-year cash used by financing activities is primarily attributable to net borrowings under our bank credit facilities in the 2008 period compared to net payments in 2007. Proceeds of long-term and revolving debt for year-to-date 2008 were $9.9 million as compared to payments of $41.6 million for year-to-date 2007. This impact was offset by $14.3 million used to repurchase shares of our common stock in year-to-date 2008.

During the remainder of fiscal 2008, 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 revolving credit line 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.

Asset-backed Credit Agreement

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 or LIBOR plus a margin. The LIBOR interest rate margin currently is 2.00% 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 ninety (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 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.

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 asset-backed 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 for the fiscal year ended December 29, 2007 for additional information.

Consolidated EBITDA (Non-GAAP Measurement)

The following is a reconciliation of EBITDA and Consolidated EBITDA to net income for the trailing four quarters ended October 4, 2008 and October 6, 2007 (amounts in thousands):


	2007			2008			2008			2008			Trailing
Trailing four quarters ended October 4, 2008:	Qtr 4			Qtr 1			Qtr 2			Qtr 3			4 Qtrs

Net income	$	8,480			11,277			10,108			8,594			38,459
Income tax expense		4,016			6,087			4,838			5,926			20,867
Interest expense		5,367			5,034			5,651			6,065			22,117
Depreciation and amortization		8,997			9,032			8,703			11,643			38,375

EBITDA		26,860			31,430			29,300			32,228			119,818
LIFO charge		2,399			1,134			2,397			8,360			14,290
Lease reserves		—			(2,094	)		99			480			(1,515	)
Asset impairments		87			395			401			694			1,577
Gains on sale of real estate		(1,720	)		—			—			—			(1,720	)
Share-based compensation		3,614			1,943			2,022			3,013			10,592
Subsequent cash payments on non-cash charges		(1,011	)		(2,184	)		(612	)		(787	)		(4,594	)

Total Consolidated EBITDA	$	30,229			30,624			33,607			43,988			138,448


	2006			2007			2007			2007			Trailing
Trailing four quarters ended October 6, 2007:	Qtr 4			Qtr 1			Qtr 2			Qtr 3			4 Qtrs

Net income (loss)	$	(26,368	)		5,288			9,607			15,405			3,932
Income tax expense		1,275			4,197			7,697			2,832			16,001
Interest expense		6,551			5,595			5,671			6,948			24,765
Depreciation and amortization		9,447			9,082			8,901			11,902			39,332

EBITDA		(9,095	)		24,162			31,876			37,087			84,030
LIFO charge		117			808			807			1,077			2,809
Lease reserves		2,675			(888	)		825			614			3,226
Goodwill impairment		26,419			—			—			—			26,419
Asset impairments		4,127			866			275			640			5,908
Losses (gains) on sale of real estate		37			—			(147	)		—			(110	)
Share-based compensation		486			956			1,584			1,632			4,658
Subsequent cash payments on non-cash charges		(686	)		(700	)		(663	)		(918	)		(2,967	)
Earnings from discontinued operations, net of tax		(160	)		—			—			—			(160	)
Special charges		—			—			(1,282	)		—			(1,282	)

Total Consolidated EBITDA	$	23,920			25,204			33,275			40,132			122,531

EBITDA and Consolidated EBITDA are measures used by management to measure operating performance. EBITDA is defined as net income 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 income 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. Neither EBITDA or Consolidated EBITDA are recognized terms under GAAP and do not purport to be an alternative to net income 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 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 and commodity 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. Deferred gains and losses are amortized as an adjustment to 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 SFAS No. 133 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.

As of October 4, 2008, we had two outstanding interest rate swap agreements with notional amounts totaling $52.5 million. The notional amounts of the two outstanding swaps are reduced annually over their three year terms as follows (dollars in thousands):


Notional	Effective Date		Termination Date		Fixed Rate

$30,000		10/15/2008		10/15/2009		3.49	%
20,000		10/15/2009		10/15/2010		3.49	%
10,000		10/15/2010		10/15/2011		3.49	%


Notional	Effective Date		Termination Date		Fixed Rate

$22,500		10/15/2008		10/15/2009		3.38	%
15,000		10/15/2009		10/15/2010		3.38	%
7,500		10/15/2010		10/15/2011		3.38	%

At October 6, 2007, we had four outstanding interest rate swap agreements with notional amounts totaling $90.0 million, which expired December 13, 2007.

From time-to-time we use commodity swap agreements to reduce price risk associated with anticipated purchases of diesel fuel. The agreements call for an exchange of payments with us making payments based on fixed price per gallon and receiving payments based on floating prices, without an exchange of the underlying commodity amount upon which the payments are made. Resulting gains and losses on the fair market value of the commodity swap agreement are immediately recognized as income or expense.

As of October 4, 2008, there were no commodity swap agreements in existence. Our only commodity swap agreement in place during 2008 expired during the first quarter and was settled for fair market value. Pre-tax losses of $0.1 million were recorded as an increase to cost of sales during the third quarter 2007 and pre-tax gains of $0.4 million were recorded as a reduction to cost of sales during year-to-date 2007.

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.

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 December 29, 2007, “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 4, 2008 with the exception of the following:

Goodwill

We maintain three reporting units for purposes of our Goodwill impairment testing, which are the same as our reporting segments disclosed in Part I, Item 1 in this report under Note (11) — “Segment Reporting”. Goodwill for each of our reporting units is tested for impairment in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” annually and/or when factors indicating impairment are present. Fair value is determined primarily based on valuation studies performed by us, which utilize a discounted cash flow methodology, where the discount rate reflects the weighted average cost of capital. Valuation analysis requires significant judgments and estimates to be made by management. Our estimates could be materially impacted by factors such as competitive forces, customer behaviors, changes in growth trends and specific industry conditions, with the potential for a corresponding adverse effect on financial condition and operating results potentially resulting in impairment of the goodwill. We have either met or exceeded assumptions used in prior year’s goodwill impairment models. None of the reporting units are more susceptible to economic conditions than others. The cash flow model used to determine fair value is most sensitive to the discount rate and the EBITDA margin rate applicable for each reporting segment as a percent of sales assumptions in the model. For example, we performed a sensitivity analysis on both of these factors and determined that the discount rate used could increase by a factor of 25.0% or EBITDA margin rate used could decrease by 1.0% from the EBITDA margin rate utilized and the goodwill of our reporting segments would not be impaired.

Recently Adopted and Proposed Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about instruments recorded at fair value. SFAS 157 does not require any new fair value measurements, but applies under other accounting pronouncements that require or permit fair value measurements. The effective date of SFAS 157 for non-financial assets and liabilities that are not recognized or disclosed on a recurring basis has been delayed to fiscal years beginning after November 15, 2008. Effective January 1, 2008, we adopted the provisions of SFAS 157 related to financial assets and liabilities recognized or disclosed on a recurring basis. The adoption of the effective portion of SFAS 157 had no impact on our financial statements as we do not have any financial assets or liabilities required to be recognized or disclosed on a recurring basis.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure in the financial markets consists of changes in interest rates relative to our investment in notes receivable, the balance of our debt obligations outstanding and derivatives employed from time to time to manage our exposure to changes in interest rates and diesel fuel prices. (See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 and Part I, Item 2 of this report under the caption Management’s Discussion and Analysis of our Financial Condition and Results of Operations-“Liquidity and Capital Resources”).

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

There was no change in our internal control over financial reporting that occurred during the period covered by this quarterly report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

Senior Subordinated Convertible Notes Litigation

Roundy’s Supermarkets, Inc. v. Nash Finch

Due to uncertainties in the litigation process, the Company is unable to with certainty estimate the financial impact or outcome of this lawsuit.

Securities and Exchange Commission Inquiry

In early 2006, we voluntarily contacted the SEC to discuss the results of an internal review that focused on trading in our common stock by certain of our officers and directors. The Board of Directors conducted the internal review with the assistance of outside counsel following an informal inquiry from the SEC in November 2005 regarding such trading. We offered to provide certain documents, and the SEC accepted the offer. We will continue to fully cooperate with the SEC.


	Page No.
Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Income		2

Consolidated Balance Sheets		3

Consolidated Statements of Cash Flows		4

Notes to Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		26

Item 4. Controls and Procedures		26

Part II — OTHER INFORMATION

Item 1. Legal Proceedings		27

Item 1A. Risk Factors		28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28

Item 3. Defaults upon Senior Securities		28

Item 4. Submission of Matters to a Vote of Security Holders		28

Item 5. Other Information		28

Item 6. Exhibits		29

SIGNATURES		30
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EX-12.1: EXHIBIT 12.1
EX-31.1: EXHIBIT 31.1
EX-31.2
EX-32.1


Exhibit
No.		Description

10.1		Amended Form of Change in Control Agreement for Senior and Executive Vice Presidents, effective November 3, 2008

10.2		New Form of Executive Restricted Stock Unit Agreement, effective July 14, 2008

10.3		Form of Amended and Restated Executive Restricted Stock Unit Agreement, effective July 14, 2008

31.1		Rule 13a-14(a) Certification of the Chief Executive Officer

31.2		Rule 13a-14(a) Certification of the Chief Financial Officer

32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer


		NASH-FINCH COMPANY Registrant

Date: November 6, 2008		by /s/ Alec C. Covington
		Alec C. Covington
		President and Chief Executive Officer

Date: November 6, 2008		by /s/ Robert B. Dimond
		Robert B. Dimond
		Executive Vice President and Chief Financial Officer


Exhibit		Method of
No.	Item	Filing

10.1	Amended Form of Change in Control Agreement for Senior and Executive Vice Presidents, effective November 3, 2008	Filed herewith

10.2	New Form of Executive Restricted Stock Unit Agreement, effective July 14, 2008	Filed herewith

10.3	Form of Amended and Restated Executive Restricted Stock Unit Agreement, effective July 14, 2008	Filed herewith

12.1	Calculation of Ratio of Earnings to Fixed Charges	Filed herewith

31.1	Rule 13a-14(a) Certification of the Chief Executive Officer	Filed herewith

31.2	Rule 13a-14(a) Certification of the Chief Financial Officer	Filed herewith

32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer	Filed herewith

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