Certain statements contained in this Form 10-Q (or otherwise made by the Company or on the Company's behalf from time to time in other reports, filings with the Securities and Exchange Commission, news releases, conferences, website postings or otherwise) that are not statements of historical fact constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended(the "Exchange Act"), notwithstanding that such statements are not specifically identified. Forward-looking statements include statements about the Company's financial position, business strategy and plans and objectives of management of the Company for future operations. These forward-looking statements reflect the best judgments of the Company about the future events and trends based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. Use of the words "may," "should," "continue," "plan," "potential," "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements reflect the current view of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those set forth under Item 1A-Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 as well as future growth rates and margins for certain of our products and services, future demand for our products and services, risks associated with the current recession and its impact on capital markets and liquidity, competitive factors, general economic conditions, cyclicality, market conditions in the new and used truck and equipment markets, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, one-time events and other factors described herein and in the Company's quarterly and other reports filed with the Securities and Exchange Commission (collectively, "Cautionary Statements"). Although the Company believes that its expectations are reasonable, it can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable Cautionary Statements. All forward-looking statements speak only as the date on which they are made and the Company undertakes no duty to update or revise any forward-looking statements. The following comments should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Note Regarding Trademarks Used in This Form 10-Q Peterbilt® is a registered trademark of Peterbilt Motors Company. PACCAR® is a registered trademark of PACCAR, Inc. GMC® is a registered trademark of General Motors Corporation. Hino® is a registered trademark of Hino Motors, Ltd. UD® is a registered trademark of Nissan Diesel Motor Co., Ltd. Isuzu® is a registered trademark of Isuzu Motors Limited. John Deere® is a registered trademark of Deere & Company. Kenworth® is a registered trademark of PACCAR, Inc. doing business as Kenworth Truck Company. Volvo® is a registered trademark of Volvo Trademark Holding AB. Freightliner® is a registered trademark of Freightliner Corporation. Mack® is a registered trademark of Mack Trucks, Inc. Navistar® is a registered trademark of Navistar International Corporation. Caterpillar® is a registered trademark of Caterpillar, Inc. Cummins® is a registered trademark of Cummins Engine Company, Inc. PacLease® is a registered trademark of PACCAR Leasing Corporation. CitiCapital® is a registered trademark of Citicorp. Ford® is a registered trademark of Ford Motor Company. Cummins® is a registered trademark of Cummins Intellectual Property, Inc. Eaton is a registered trademark of Eaton Corporation. Arvin Meritor® is a registered trademark of Meritor Technology, Inc.® Case is a registered trademark of Case Corporation. Komatsu® is a registered trademark of Kabushiki Kaisha Komatsu Seisakusho Corporation Japan. The CIT Group® is a registered trademark of CIT Group Holdings, Inc. JPMorgan Chase® is a registered trademark of JP Morgan Chase & Co. SAP® is a registered trademark of SAP Aktiengesellschaft. International® is a registered trademark of Navistar International Transportation Corp. Blue Bird® is a registered trademark of Blue Bird Investment Corporation.

General
Rush Enterprises, Inc. was incorporated in Texas in 1965 and currently consists of two operating segments: the Truck Segment and the Construction Equipment Segment. The Company conducts business through numerous subsidiaries, all of which it wholly owns, directly or indirectly. Its principal offices are located at 555 IH 35 South, New Braunfels, Texas 78130.
The Company is a full-service, integrated retailer of premium transportation and construction equipment and related services. The Company's Rush Truck Centers sell vehicles manufactured by Peterbilt Motors Company (a division of PACCAR, Inc.), International, Volvo, GMC, Hino, UD, Ford, Isuzu and Blue Bird. The Company also operates two John Deere construction equipment dealerships at its Rush Equipment Centers in Southeast Texas. The newest construction equipment dealership opened in Rose City, Texas in July 2008. Through its strategically located network of Rush Truck Centers and its Rush Equipment Centers, the Company provides one-stop service for the needs of its customers, including retail sales of new and used trucks and construction equipment, aftermarket parts sales, service and repair facilities, and financing, leasing and rental, and insurance products.
The Company's Rush Truck Centers are principally located in high traffic areas throughout the southern United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in 1966, the Company has grown to operate more than 50 Rush Truck Centers in Alabama, Arizona, California, Colorado, Florida, Georgia, New Mexico, North Carolina, Oklahoma, Tennessee and Texas. Our business strategy consists of providing our customers with competitively priced products supported with timely and reliable service through our integrated dealer network. We intend to continue to implement our business strategy, reinforce customer loyalty and remain a market leader by continuing to develop our Rush Truck Centers and Rush Equipment Centers as we extend our geographic focus through strategic acquisitions of new locations and expansions of our existing facilities and product lines. Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Company believes the following accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined by specific identification of new and used truck and construction equipment inventory and by the first-in, first-out method for tires, parts and accessories. An allowance is provided when it is anticipated that cost will exceed net realizable value.
Goodwill
The Company applies the provisions of ASC topic 350-20, "Intangibles - Goodwill and Other" (formerly SFAS No. 142, "Goodwill and Other Intangible Assets"), in accounting for goodwill. ASC topic 350-20 requires that goodwill and other intangible assets that have indefinite useful lives may not be amortized, but instead must be tested at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives. ASC topic 350-20 also provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. ASC topic 350-20 requires management to make certain estimates and assumptions in order to allocate goodwill to reporting units and to determine the fair value of a reporting unit's net assets and liabilities, including, among other things, an assessment of market condition, projected cash flows, interest rates and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. ASC topic 350-20 requires, in lieu of amortization, an annual impairment review of goodwill.
The Company performs an annual impairment review of goodwill during the fourth quarter of each year or when events or circumstances indicate a change may have occurred. An interim evaluation of goodwill was required during the second quarter of 2009 due to General Motors' decision to terminate production of medium-duty GMC trucks, which resulted in the winding-down of the Company's medium-duty GMC truck franchises.
Management is not aware of any additional impairment charge that may currently be required; however, a change in economic conditions, if one occurs, could result in an impairment charge in future periods.

Revenue Recognition Policies
Income on the sale of a truck or a piece of construction equipment is recognized when the customer executes a purchase contract with us, the unit has been delivered to the customer and there are no significant uncertainties related to financing or collectibility. Lease and rental income is recognized over the period of the related lease or rental agreement. Parts and service revenue is recognized at the time the Company sells the parts to its customers or at the time the Company completes the service work order related to service provided to the customer's unit. Payments received on prepaid maintenance plans are deferred as a component of accrued expenses and recognized as income when the maintenance is performed.
Finance and Insurance Revenue Recognition Finance income related to the sale of a unit is recognized when the finance contract is sold to a finance company. The Company arranges financing for customers through various retail funding sources and receives a commission from the lender equal to either the difference between the interest rates charged to customers over the predetermined interest rates set by the financing institution or a commission for the placement of contracts. The Company also receives commissions from the sale of various insurance products to customers. Revenue is recognized by the Company upon the sale of such finance and insurance contracts to the finance and insurance companies net of a provision for estimated repossession losses and interest charge-backs on finance contracts. The Company is not the obligor under any of these underlying contracts. In the case of finance contracts, a customer may prepay, or fail to pay, thereby terminating the underlying contract. If the customer terminates a retail finance contract or other insurance product prior to scheduled maturity, a portion of the commissions previously paid to the Company may be charged back to the Company depending on the terms of the relevant contracts. The estimate of ultimate charge-back exposure is based on the Company's historical charge-back expense arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on other insurance products. The actual amount of historical charge-backs has not been significantly different than the Company's estimates. Insurance Accruals
The Company is partially self-insured for medical, workers compensation, and property and casualty insurance and calculates a reserve for those claims that have been incurred but not reported and for the remaining portion of those claims that have been reported. The Company uses information provided by third-party administrators to determine the reasonableness of the calculations it performs.
Accounting for Income Taxes
Significant management judgment is required to determine the provisions for income taxes and to determine whether deferred tax assets will be realized in full or in part. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely than not that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. The Company has a valuation allowance related to deferred tax assets in certain states. Accordingly, the facts and financial circumstances impacting state deferred income tax assets are reviewed quarterly and management's judgment is applied to determine the amount of valuation allowance required in any given period.
Additionally, despite the Company's belief that its tax return positions are consistent with applicable tax law, management believes that certain positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations.

Effective January 1, 2007, the Company adopted ASC topic 740-10, "Income Taxes," (formerly Financial Accounting Standards Board Interpretation No. 48). ASC topic 740-10 clarified the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. ASC topic 740-10 prescribes how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. ASC topic 740-10 requires that only income tax benefits that meet the "more likely than not" recognition threshold be recognized or continue to be recognized on its effective date. The Company's income tax expense includes the impact of reserve provisions and changes to reserves that it considers appropriate, as well as related interest. Unfavorable settlement of any particular issue would require use of the Company's cash and a charge to income tax expense. Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution. Stock-Based Compensation Expense
The Company applies the provisions of ASC topic 718-10, "Compensation - Stock Compensation" (formerly SFAS No. 123 (revised 2004), "Share-Based Payment"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including grants of employee stock options and restricted stock and employee stock purchases under the Employee Stock Purchase Plan based on estimated fair values. The Company uses the Black-Scholes option-pricing model to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's Consolidated Statement of Operations.

Results of Operations
The following discussion and analysis includes the Company's historical results
of operations for the three months and nine months ended September 30, 2009 and
2008.
The following table sets forth for the periods indicated certain financial data
as a percentage of total revenues:


                                           Three Months Ended          Nine Months Ended
                                              September 30,              September 30,
                                            2009          2008          2009         2008

  New and used truck sales                     59.2 %       62.7 %         59.6 %      63.5 %
  Parts and service                            34.0         30.0           33.4        28.5
  Construction equipment sales                  1.5          2.8            1.8         3.7
  Lease and rental                              4.4          3.4            4.2         3.2
  Finance and insurance                         0.6          0.7            0.6         0.8
  Other                                         0.3          0.4            0.4         0.3

  Total revenues                              100.0        100.0          100.0       100.0
  Cost of products sold                        81.2         81.5           81.8        82.0

  Gross profit                                 18.8         18.5           18.2        18.0
  Selling, general and administrative          17.2         14.1           16.4        13.7
  Depreciation and amortization                 1.2          1.0            1.3         0.9

  Operating income                              0.4          3.4            0.5         3.4
  Interest expense, net                         0.5          0.4            0.5         0.4

  (Loss) income before income taxes            -0.1          3.0            0.0         3.0
  (Benefit) provision for income taxes         -1.1          1.0           -0.5         1.1

  Net Income                                    1.0 %        2.0 %          0.5 %       1.9 %

The following table sets forth the unit sales and revenue for new heavy-duty, new medium-duty, and used trucks and the absorption rate for the periods indicated (revenue in millions):

                                 Three Months Ended                          Nine Months Ended
                                   September 30,               %               September 30,              %
                                 2009           2008        Change           2009          2008        Change
Truck unit sales:
New heavy-duty trucks              1,030         1,350        (23.7 %)         3,016        4,281        (29.5 %)
New medium-duty trucks               637           919        (30.7 %)         2,029        2,870        (29.3 %)

Total new truck unit sales         1,667         2,269        (26.5 %)         5,045        7,151        (29.5 %)

Used truck unit sales                760           936        (18.8 %)         2,113        2,631        (19.7 %)

Truck revenue:
New heavy-duty trucks         $    116.2       $ 162.4        (28.4 %)    $    356.5      $ 515.6        (30.9 %)
New medium-duty trucks              37.1          54.2        (31.5 %)         126.6        166.5        (24.0 %)

Total new truck revenue       $    153.3       $ 216.6        (29.2 %)    $    483.1      $ 682.1        (29.2 %)

Used truck revenue            $     25.6       $  41.8        (38.8 %)    $     78.1      $ 122.8        (36.4 %)

Other truck revenue(1)        $      0.2       $   1.1        (81.8 %)    $      1.1      $   3.3        (66.7 %)

Absorption rate:                    96.4 %       108.6 %      (11.2 %)          96.3 %      106.3 %       (9.4 %)

(1) Includes sales of glider kits, truck bodies, trailers and other new equipment.

Key Performance Indicator
Absorption Rate
Management uses many performance metrics to evaluate the performance of its truck dealerships, but considers its "absorption rate" to be of critical importance. Absorption rate is calculated by dividing the gross profit from the parts, service and body shop departments by the overhead expenses of all of a truck dealership's departments, except for the selling expenses of the new and used truck departments and carrying costs of new and used truck inventory. When 100% absorption is achieved, then gross profit from the sale of a truck, after sales commissions and inventory carrying costs, directly impacts operating profit. In 1999, the Company's truck dealerships' absorption rate was approximately 80%. The Company has made a concerted effort to increase its absorption rate since 1999. The Company's truck dealerships achieved a 108.6% absorption rate for the third quarter of 2008, and 96.4% absorption rate for the third quarter in 2009.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
As expected, continued weak truck and aftermarket sales caused the third quarter of 2009 to be another challenging operating period. The Company's Class 8 truck deliveries increased in the third quarter of 2009 over the second quarter of 2009, as several large fleet customers took delivery of trucks. This helped mitigate the effect of continued depressed U.S. Class 8 retail truck sales, which were down 33.0% over the third quarter of 2008, while the Company's truck sales were down only 24.0% for the same time period.
The Company does not anticipate a significant truck pre-buy to occur in the fourth quarter of 2009 as lingering depressed conditions in the overall economy and tight credit continue to negatively impact freight movement, causing continued excess capacity and depressed trade values. These factors have forced both vocational and fleet buyers to lengthen their replacement cycles beyond historical norms, most likely extending any substantial upturn in new truck purchases well into the second half of 2010.
Aftermarket parts, service and body shop sales were negatively impacted by excess capacity again this quarter, as many customers have been able to put their excess truck capacity into service, allowing them to delay repair and maintenance and use parked trucks for replacement parts needs. A 21.0% decline in parts, service and body shop gross profit was offset by a reduction in general and administrative expenses of 9.0%, resulting in an absorption rate of 96.4% in the third quarter of 2009.
A.C.T. Research Co., LLC ("A.C.T. Research"), a truck industry data and forecasting service provider, currently predicts U.S. retail sales of Class 8 trucks of approximately 94,800 units in 2009, a 32.2% decline from the number of units sold in 2008. The Company believes the Class 8 truck market will remain weak until general economic conditions in the U.S. begin to improve. A.C.T. Research currently predicts U.S. retail sales of Class 8 trucks of approximately 119,500 units in 2010.
A.C.T. Research currently predicts U.S. retail sales of Class 4, 5, 6, and 7 medium-duty trucks of approximately 106,000 units in 2009, a 38.9% decline from the number of units sold in 2008. The Company believes the medium-duty truck market will remain weak until general economic conditions in the U.S. begin to improve. A.C.T. Research currently predicts U.S. retail sales of Class 4, 5, 6, and 7 medium-duty trucks of approximately 123,500 units in 2010.
The Company's overall parts, service and body shop sales decreased 17.2% in the third quarter of 2009 compared to the third quarter of 2008. We anticipate parts, service and body shop sales to remain weak until general economic conditions improve.
In the third quarter of 2009, the Company's construction equipment segment revenue decreased by 49.6% compared to the third quarter of 2008. This decrease is attributable to the weakening construction equipment market in the Houston area. Current industry forecasts suggest that construction equipment sales will decline approximately 50% in the Company's area of responsibility during 2009 due to lower housing starts, decreased oil and gas activity and general economic conditions.
During the second quarter of 2009, the Company incurred a $4.9 million pre-tax impairment charge related to General Motors' decision to discontinue manufacturing medium-duty trucks and to wind-down the Company's GMC Medium-Duty Truck Dealership Agreements. A significant portion of the impairment charge was an estimate of the inventory valuation allowance associated with the disposal of the Company's remaining GMC truck and parts inventories. During the third quarter, the Company adjusted the estimated impairment charge related to its GMC truck and parts inventory because it was able to sell some of the GMC inventory at higher prices than originally estimated, which resulted in an increase to pre-tax earnings of approximately $1.5 million, or $0.02 per diluted share, in the third quarter of 2009.

The Company earns federal income tax credits on the sale of alternative fuel vehicles to tax-exempt entities. These tax credits are reflected as tax benefits in the Company's Consolidated Statements of Operations. A portion of these tax credits are passed back to the tax-exempt customer and are reflected as SG&A expense to the Company in the quarter in which the trucks are sold. These alternative fuel tax credits and the amount passed back to the customers are directly attributable to the sale of a truck. Accordingly, the Company believes the tax credits and the amounts passed back to customers should be considered operating items when analyzing the financial performance of the Company. The Company believes its history of serving municipalities and other tax-exempt customers that cannot claim these federal tax credits, its ability to utilize tax credits and pass back savings to these tax-exempt customers, and its position as a leading dealer of alternative fuel vehicles provide the Company with a distinct advantage over its competition when offering alternative fuel vehicles to tax-exempt entities.
The ongoing weakness in the economy and tight credit markets continue to impact consumer confidence and spending, which have a direct impact on freight demand and, ultimately, our financial performance. Overall economic uncertainty continues to make it difficult for the Company to forecast future results of operations.
Revenues
Revenues decreased $111.3 million, or 26.9%, in the third quarter of 2009, compared to the third quarter of 2008. Sales of new and used trucks decreased $80.4 million, or 31.0%, in the third quarter of 2009, compared to the third quarter of 2008. Uncertain economic conditions, the weak freight environment, slowing construction markets and tight credit markets contributed to decreased demand for trucks and construction equipment as well as aftermarket service in the third quarter of 2009. The Company does not believe that demand for its products and services will increase until general economic conditions begin to improve and credit is made available on reasonable terms to a wider range of buyers. . . .