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McGrath RentCorp (NASDAQ:MGRC)
Q2 2021 Earnings Call
Aug 3, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Second Quarter 2021 Conference Call. [Operator Instructions] This conference call is being recorded today, Tuesday, August 3, 2021. Before we begin, note that the matters the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our full year 2021 financial outlook as well as statements relating to the company's expectations, strategies, prospects or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected.

In addition, the risk associated with the ongoing COVID-19 pandemic and related economic dynamics. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-Q and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended June 30, 2021. Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer.

I will now turn the call over to Mr. Hanna. Go ahead, sir.

Joseph F. Hanna -- President, Chief Executive Officer

Thank you, Frenzy. Good afternoon, and thank you, everyone, for joining us on today's call. I will start the call with some comments on our second quarter 2021 performance as well as our look ahead. Keith will provide additional detail in his financial review and outlook comments. Our second quarter was a very busy one for us. In addition to managing the business during our seasonally busier time of order bookings and preparation for summer deliveries, we completed two acquisitions and began our integration processes for both. Our core Rental business is running well with a 10% companywide rental revenue increase year-over-year. Mobile Modular rental revenues grew by 14%, with about half of that growth coming from the acquisitions of Design Space and Kitchens To Go. Portable Storage rental revenues were up 23%. Rental revenue also grew at TRS and Adler. I'm pleased to report that all of our business units are contributing to year-over-year expansion in rental growth for the corporation. So let's take a look at each of our businesses and our progress with the acquisitions.

At Mobile Modular, we saw across the board strength in our commercial rental business. Projects were broad-based across many different market verticals such as government, private business, general construction and infrastructure, to name a few. In terms of commercial business pipeline, our quote volume for the quarter was strong and the project inquiries were quality in nature. Our education business realized some benefit from the flow of Federal stimulus money into states and subsequently into education funding. In California, we saw some districts allot funds for classrooms to accommodate additional administrative staff, offices and teaching space. Nationwide, work to modernize facilities as well as accommodate student population growth continued. Funding has been generally available to continue projects. At TRS-RenTelco, our 7% rental revenue growth was driven by broad-based demand from the 5G, aerospace and defense and semiconductor segments. Testing work in the R&D labs was healthy for the quarter. In our communications segment, network improvements continued in the field. Contractors require test equipment with more demand for wired infrastructure expansion, but less for wireless segment activity.

At Adler, our teams achieved a 4% rental revenue increase, driven by increases in our Environmental Services and Industrial Services segments. four of our five Adler geographic regions realized rental revenue growth. Some plant and refinery projects that had been previously delayed were turned on in the general economic recovery during the quarter. Partially offsetting that was less pipeline work than the prior years as projects concluded and new ones did not replace them. We continue to manage the business to maximize cash flow. Now that I've reviewed rental revenues for our businesses, I would like to address another important revenue stream, and that is new equipment sales at Mobile Modular, Enviroplex, Design Space and Kitchens To Go. New building sales are often a viable option for customers seeking modular solutions, and it is a service we are enthusiastic to provide. As the economy recovers from the pandemic and construction activity increases, we are seeing some effect of supply chain disruptions and cost escalations, and this has impacted our sales for the second quarter and our new equipment sales outlook for the rest of the year. Some projects are being reduced in scope, put on a slower time line, and a few have been put on hold. We believe this is a reaction to the economy operating at a higher pace and believe the disruptions to be temporary in nature. The demand is there, and so is robust funding.

So project adjustments and timing accommodations are being made, but the overall sentiment is still very positive. Our pipelines and backlogs are healthy, and we are looking forward to continued activity as more and more customers value the typically lower cost and reduce time lines compared to conventional construction. The integration of Design Space and Kitchens To Go are progressing nicely and as planned. We acquired both companies to expand our geographic footprint and to provide a more complete solution to our customers with an expanded product line. These acquisitions represent long-term investments, and we're excited at the opportunities we have ahead of us. The teams have been working exceptionally hard at making the integration process advance swiftly, so we can realize benefits, and it is showing in our progress. We are already seeing positive synergies from combining resources. Foremost, is the cultural fit, which is critical for us to be able to implement operational improvements as we share better ways to serve our customers. We are sharing leads between each of the businesses and have already uncovered opportunities and have closed orders.

The Design Space team has access to our California Mobile Modular fleet, which should help improve utilization and our ability to provide the best building solution for our customers. Additionally, we are already handling leads for classroom rentals in our new Design Space locations. So this opens up additional revenue opportunities for us. Looking forward, the second half of the year is typically the stronger half. At Mobile Modular, our commercial business is healthy and quote activity is strong entering the third quarter. In particular, commercial activity has been a big positive driver of growth in our Portable Storage business, and we expect that to continue. Sentiment with our school districts is positive, and we are well-positioned to accommodate third quarter orders based on final student headcounts once classes resume. At TRS, 5G opportunities are expected to continue, both in the R&D labs and in the field. Expansion of bandwidth to accommodate more data traffic is a constant test equipment driver.

At Adler, we have weathered some turbulence and believe we are coming out the other side as sentiment has improved, and we are feeling more optimistic about opportunities across the business. Like many companies today, we are managing through supply chain issues, increased costs for materials and some wage pressures. We are carefully watching these trends and are adjusting pricing when possible using sophisticated tools to help in the process. Before I hand the call over to Keith for his remarks, I'd like to take a moment to sincerely thank our teams for their hard work and long hours spent making our integration of Design Space and Kitchens To Go move along as planned, while also delivering a solid quarter of organic growth. The combined efforts of all of our teams, new and old, and some signs of economic recovery have given us the confidence to increase our overall financial outlook for the year.

With that, I'm going to turn the call over to Keith, who will take you through our financial review.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Thank you, Joe. As Joe described, compared to the second quarter of 2020, we had solid performance from our core rental businesses, and we were encouraged by continued improving business demand trends over the course of the quarter. For today's review, I will provide highlights from our second quarter results, a discussion of the impact from our acquisitions and our outlook for full year performance. When comparing this year to last year, keep in mind that despite the initial impact from the pandemic, we had a very strong second quarter of 2020, helped by strong sales revenues, a modest decline in rental revenues and low inventory center and SG&A costs as the pandemic abruptly reduced activity levels. Our second quarter results include two acquisitions. On April 1, we closed Kitchens To Go for $18.3 million. On May 17, we closed the Design Space acquisition, which was an all-cash transaction with a purchase price of $266.5 million. So our second quarter results included a full quarter of Kitchens To Go and just six weeks of Design Space revenues, but included a significant portion of the related transaction and initial integration costs. Together, these acquisitions contributed $5.5 million total revenue, a $2.6 million increase to adjusted EBITDA and a $0.02 reduction to earnings per share for the quarter. Looking at the overall corporate results for the second quarter of 2021. Total revenues increased 6% to $146.4 million. A majority of the revenue increase was for rental and rental-related services at Mobile Modular, TRS-RenTelco and Adler, all of which I will discuss further in the segment reviews.

Each of our rental segments grew rental revenues year-over-year and sequentially, reflecting the generally improved business conditions Joe described earlier. The company's $3.1 million operating profit decline for the quarter was primarily the result of $5.7 million increased selling and administrative expenses and $5.1 million increased inventory center costs, identified as direct cost of rental operations other on our income statement. The higher SG&A costs were primarily the result of our two acquisitions, while the higher inventory center costs were the result of higher business activity levels, the addition of the acquired businesses and the impacts from cost inflation pressures for materials and labor. The second quarter adjusted EBITDA increased 1% to $58.5 million compared to a year ago. And consolidated adjusted EBITDA margin was 40% compared to 42% a year ago. Now I will break the results down by reviewing rental division operating results and performance compared to the second quarter of 2020. Mobile Modular total revenues increased $7.8 million or 10% to $84.6 million. The primary driver was $6.6 million higher rental revenues, with approximately $4 million of the increase attributed to rental revenues earned during the quarter from new Design Space and Kitchens To Go customers. The average monthly rental rate for the quarter was 2.59%, which was 7% higher than a year ago, primarily due to mix changes, including the impact of the acquisitions. Overall, market pricing conditions were stable.

Average fleet utilization for the second quarter decreased to 75.5% from 77.7%, reflecting the softer market demand conditions from the effects of the pandemic during most of the last 12 months. Higher rental revenues, partially offset by 28% higher inventory center costs and 23% higher depreciation expense resulted in rental margins of 57% compared to 61% a year ago. As mentioned earlier, the higher inventory center costs reflect higher business activity levels, the addition of the acquired businesses and some impact from cost inflation pressures for materials and labor. Sales revenues decreased $0.5 to $14.8 million, primarily due to lower new equipment sales. At TRS-RenTelco, total revenues increased $0.7 million or 2% to $33.8 million on higher rental revenues, partly offset by lower sales revenues. Rental revenues for the quarter increased 7%. We saw continued strength in general purpose test equipment rentals, which grew 9%. Communications equipment rentals were flat compared to a year ago and continue to be impacted by less field work on communications infrastructure, partly as a result of delays caused by the pandemic. The average monthly rental rate for the quarter was 3.93%, down 2% compared to a year ago. This lower average rental rent reflects a continued mix shift toward more general purpose equipment rentals that tend to have longer-term transactions and longer asset lives compared to communications.

Overall, market pricing conditions continue to be stable. Average utilization for the second quarter increased to 67.7% from 63.9% a year ago. And rental margins were 40% compared to 41% a year ago. Sales revenues declined 20% year-over-year to $4.8 million, with gross profit increasing 3% due to higher gross margins on sale of 62%. At Adler Tank Rentals, total revenues increased $1.3 million or 7% to $20 million on higher rental, rental-related services and sales revenues. Rental revenues for the quarter increased 4%, reflecting improved demand in multiple geographies and end markets compared to a year ago. The average monthly rental rate for the quarter was 3.27%, up 5% compared to a year ago, primarily due to mix changes during the quarter. Overall, market pricing conditions continue to be competitive. Average utilization for the first quarter decreased slightly to 44% from 44.3%, and rental margins were 49% compared to 51% a year ago. Moving on, the remainder of my second quarter comments will be on a total company basis. Selling and administrative expenses increased $5.7 million or 19% to $36.3 million, primarily a result of the acquisitions. Employee salaries and benefit costs increased by $3 million, mostly due to increased headcount from the addition of Design Space and Kitchens To Go employees.

The acquisitions also resulted in $1.7 million, higher amortization of intangible assets and $0.9 million of transaction costs. Interest expense was $2.3 million, an increase of 3% as a result of higher average debt levels, partly offset by lower average interest rates. The second quarter provision for income taxes was based on an effective tax rate of 24.6% compared to 26.4% a year earlier. The lower rent this year was in part due to increased excess tax benefits from stock-based compensation. For full year 2021, we currently expect an effective tax rate of between 25% and 26%. Next, I'd like to turn to our year-to-date cash flow highlights. Net cash provided by operating activities was $98 million, an increase of $0.5 million. We paid $284.3 million for the acquisition of substantially all of the assets of the Design space and Kitchens To Go businesses. Rental equipment purchases were $58.9 million compared to $57.5 million last year. This excludes the $186.6 million estimated fair value of Design Space and Kitchen To Go rental assets acquired this year.

Healthy cash generation allowed us to pay $21.1 million in dividends. Total borrowings on bank lines of credit and private placement notes increased $250 million. At quarter end, we had net borrowings of $473 million, comprised of $160 million notes outstanding and $313 million under our credit facility with capacity to borrow an additional $119 million under our lines of credit. The ratio of funded debt to the last 12 months actual adjusted EBITDA was 2.01:1. Finally, turning to our financial outlook. The recent positive rental demand trends across each of our business segments are encouraging. Challenges for the remainder of the year will include the fact that supply chain delays, labor shortages and higher material costs are starting to extend project time lines and causing some new modular equipment sales to push out to later in the year or into next year, which could impact new sales for our Modular business, including Enviroplex and our acquisitions. We currently expect total revenue between 610 and $640 million, which is up from our previous outlook of $570 million to $610 million. Adjusted EBITDA between 245 and $260 million, which is up from $232 million to $247 million previously. Gross rental equipment capital expenditures between 100 and $120 million, which is up from $90 million to $110 million previously. While the potential for pandemic related disruption remains, we are encouraged by the overall improving business activity levels we have recently seen.

That concludes our prepared remarks. Frenzy, you may now open the lines for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Scott Schneeberger from Oppenheimer. Your line is now open.

Scott Schneeberger -- Oppenheimer -- Analyst

Thank you. Good afternoon. I guess, for my first question, could you remind us, last year in the second quarter, sales were elevated. And they were comparable this year within $2 million in the second quarter. Could you remind us what was driving the elevation last year? And then transitioning to the look ahead, if you could provide a little bit more color about what's going to happen in the second half for sales, why you think that's going to be down? It sounds like you think it's going to be pushed out, but just curious about that. And then a follow-up on that subject. Thanks.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. A lot of things to impact there, Scott. But a year ago, Enviroplex sales were very strong in the second quarter, and that was one of the contributors to a good second quarter for us last year. And I also think projects that were completed in the second quarter of last year, in a way, they were pre-pandemic, in it the machinery, if you will, was underway, that the units were built, the installations were occurring before too much impact from the pandemic occurred. So that's really looking in the rearview mirror. And looking ahead or really reflecting on the comments we just made, what we're seeing now when we talk to the people in the business, and as Joe mentioned, across all parts of the business, our traditional Modular side of the business, our Enviroplex part of the business where we actually manufacture units and then the two acquisitions, really seeing the common theme of harder to get material than it was, more expensive to get materials, anecdotes, such as it used to take three weeks to order a door or a window.

Today, it can take two to three months to get that same piece of material, which is critical to having timely completion of a project. So those are just some of the comments regarding the supply chain issues. I think it's important to point out, we actually think we're going to have a very good sales year. It's just not going to be quite as good as we might have expected just a couple of months ago. And I think that's really what we're trying to convey here. If you look at my prepared remarks, and I know we covered a lot, but we actually think, overall, sales will be up year-over-year. That's partly because we had a good pipeline ourselves. And it's partly because the acquired businesses, both have a significant sales component in their overall revenue mix. So I'll kind of pause there. Is that helping address your question, I'm happy to provide any other color.

Scott Schneeberger -- Oppenheimer -- Analyst

Yes. Is it your supply chain that slowed, you're not able to get parts to create the product for sale, or -- well, on the Enviroplex side, but also for your manufacturers who you resell? Or is it your customers where they're delayed on projects and their projects are starting later? Just if you could differentiate there, please.

Joseph F. Hanna -- President, Chief Executive Officer

Yes, Scott, it's -- the impact on our own production is not the real driver. It's more customers delaying because they're having their own supply issues on their own site. Does that make sense?

Scott Schneeberger -- Oppenheimer -- Analyst

Yes, it does. That's what I wanted. Thanks Joe. And then just within this in the context of the guidance, what is the contribution of the acquisitions, I guess when we speak in terms of the midpoint of the guidance, what's the contribution from Design Space for the balance of the year? And then on the organic side, it appears that you have a lower guide on the legacy side of the business. Is that purely from the sales? Or is there another component on that part of it?

Joseph F. Hanna -- President, Chief Executive Officer

Yes. I'll say a few words and then turn it over to Keith. I think what's really important to make sure everyone understands, and that is the rental business is quite healthy. And so we're very pleased with how that's been progressing for the year. And we're projecting to have a nice growth on a year-over-year basis once we finish the year. And so that's the real driver in the company. And I think what we're seeing here right now and as we're trying to convey a little bit, and Keith can give you some more details on it. It's just the sales, lumpiness in sales, some of these push-outs are affecting our total revenue stream. But I'll also mention that, as Keith said, even though our sales we're projecting that actually being up on a year-over-year basis. It's just not as much as we had anticipated just a few months ago. So Keith, I don't know if you have anything you want to add to that.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes, sure. Let me try and say a few things, Scott, just to help you sort of wrap your arms around it. One of the things we shared when we announced the two acquisitions was the revenue that they each experienced in full year 2020, and that was $81 million for Design Space and around $17 million for Kitchens To Go. So if you put your arms around that in terms of the kind of year they had last year, I would say if you take the combined acquisitions and look at this year, Design Space, feel very good about. I think Kitchens To Go has experienced a little bit more of the project push-out and delays that we referenced earlier, but still getting good pipeline, good momentum in terms of the things they see on the horizon. Now one important thing to keep in mind is, not only will there be the potential for some of the sales component of those businesses to slide a little bit, which means some projects we might have expected in the third quarter may go to fourth. Some we were expecting in fourth may slide into next year. In addition, keep in mind that as is fairly typical when you complete an acquisition, there'll be a few areas where the accounting policies and revenue recognition may be a little different. And I'll just take a moment on this, because it does impact some of the revenues we'll experience during a sort of transition period of the next few quarters.

And as you know, with our own business, and we see this in the two acquisitions, our three big revenue streams are the rental revenues, rental-related services and sales. And each of the two acquired businesses have those revenue streams. In each case they, relatively speaking, have a higher percentage of their total revenue in the sales and rental-related services buckets as compared to rents. That's just their nature of their business. So for all these businesses, the revenue recognition around rental revenue is essentially the same. So no issues there. On rental-related services, which is mainly delivering product and setting it up, at McGrath, we recognize that revenue ratably over the life of the contract. The other two businesses actually recognize that revenue at time of completion. So it's a little bit of a difference. So on our books, those rental-related revenue streams are going to build up gradually over the next few quarters, because again, they're going to be recognized ratably over the life of the respective contracts. So that causes a little bit of a sort of less revenue in the near-term till we build up to the normal run rate. And we have a similar issue with sales revenues.

The other businesses recognize sales based on percent complete, whereas we recognize all the revenue when the full project is finished and accepted by the customer. So for us, if during this transition period, we have some sales that were in the pipeline where perhaps 70% of the revenue is already being recognized by the acquired company, when we actually get it finished, we won't be getting $100 of the 100% revenue recognition. We may get the remainder. It might just be 30% on a project. So again, these are kind of details in the transition period. But the big picture here is rent side looks very good, if anything, a little ahead of where we would have expected to be. Sales side, we've got some accounting transition issues, and we've seen some delays in the marketplace that could cause some things to slide a bit in the second half of the year. And again, having said all of that, it's going to be a good year for sales. We expect it to be up compared to a year ago, not just quite as much as we have been hoping for just a few months ago before a lot of these supply chain issues became more evident.

Scott Schneeberger -- Oppenheimer -- Analyst

Okay. Thanks. Can you break out in the guidance, what -- specifically in the EBITDA line, what contribution is from acquisition and what contribution is organic in the change?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. Scott, I would say we haven't got that visibility just to share today, and that's partly because these businesses are not functioning in a very integrated way, especially with Design Space in California. So it's not as easy to break that out, but they're definitely going to contribute to the second half of the year, and do so strongly with the caveats I mentioned earlier about some of those revenue streams and some of the sales items.

Scott Schneeberger -- Oppenheimer -- Analyst

Okay. So on the -- well, on the overall everything together, it's purely in the sales and accounting issues, not rental at all, rental, if anything, is a little better-than-expected across all segments?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Correct.

Joseph F. Hanna -- President, Chief Executive Officer

That's accurate. Yes.

Scott Schneeberger -- Oppenheimer -- Analyst

Okay. And then -- and just curious, like looking specifically at TRS, I noticed rental revenue grew sequentially first quarter to second, 2% this year, in '18 and '19, it had grown a little bit more sequentially. Is it a slow seasonal ramp this year? You sound bullish on the rental prospects in TRS. I'm just curious, what -- it looks a little bit, obviously, less sequential build. So I'm just curious what gives you the confidence it's coming in stronger in the second half, if we just had a delay?

Joseph F. Hanna -- President, Chief Executive Officer

Yes. I think there's -- I think generally, market conditions are improving. Things are -- there's more demand now than there was before. And I think that's what's really given us our confidence. We've anticipated that more field work is going to take place as folks -- as we exit this pandemic and that has occurred to a certain degree, but really hasn't taken off in a significant way yet. And we're just anticipating that to get more active as time passes.

Scott Schneeberger -- Oppenheimer -- Analyst

Okay. Lastly for me. I think I heard four to five geographies better in Adler, and historically, you've talked to end markets. I think you have six of them on how they're doing better or worse. If you said it, I missed it, but could we get an update on how the end markets are doing? You gave some color earlier, but just curious on the six that you track, how are they looking year-over-year and sequential, because it sounds like looking a little bit better on the oil and gas side?

Joseph F. Hanna -- President, Chief Executive Officer

Yes. You're right, Scott. We have six end markets. I believe four of them were positive of the six. And as I mentioned in the prepared comments, Environmental Services, Industrial Services were really driving our growth there. Oil and gas, I think, it's really only upstream, is really only 5%, which we reported before, and that's kind of maintained. And so we saw a decrease with some of the pipeline work that we had done last year did not recur this year. And I just think that's more of an uncertainty than cancellations that we're seeing in that work. Some of it's political. Some of it's just -- there's been quite a bit of capacity that's been put on in the last year or so. And so some of those projects just haven't taken off yet. And so -- but overall, we think as I'd said, we're coming out the other side. We're encouraged. Our customers are talking more about projects that have been delayed, that are going to come online. And so that's what's causing us to feel more confident at this point.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. And Scott, just your question on the sequential performance at Adler, all five of the regions were up sequentially, and all six of the vertical markets that we track were up sequentially. So some good trends there. We hope that continues to build as we go into the third quarter.

Scott Schneeberger -- Oppenheimer -- Analyst

Great. Got it, guys. Thanks very much.

Joseph F. Hanna -- President, Chief Executive Officer

Thanks, Scott.

Operator

Your next question comes from the line of Sam Ingot of Berenberg Capital. Your line is now open.

Alex -- Berenberg Capital -- Analyst

Hi guys. It's Alex [Phonetic] on for for Sam. Just looking at the capex guide, is that down to sort of the inflation in the value of the assets you're buying? Or is that increased volume of units being bought as demand strengthens?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. Alex, the key reason for the increase is we're going to put more capital into the newly acquired Design Space regions outside of California. We think there's opportunity there. The teams are doing a great job. They've got a good position in the market. So we want to continue to invest and grow that part of the business. That's really the key change from last quarter, and that's roughly another $10 million or so. And we hope if we're successful with the business, we'll be doing more of that going forward.

Alex -- Berenberg Capital -- Analyst

Okay. Great. And how does the M&A pipeline look after the Design Space deal? And do you have any limits to where you would take leverage to do any further deals?

Joseph F. Hanna -- President, Chief Executive Officer

Well, I'll just make a comment real quick, and Keith can comment on leverage. We're always looking at opportunities, and we're going to continue to do so. And we have additional capacity if we need to. So that's very much a part of our strategy going forward, and we're interested if the right opportunities present themselves.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. And from the point of view of leverage, as we reported, our leverage reported was just over two times. On a pro forma basis, it's closer to 1.8. And with our loan covenants, we can go as high as 2.75, but we have very supportive lenders. And if there was a key strategic opportunity where we needed to make adjustments, that's something we could do.

Alex -- Berenberg Capital -- Analyst

Okay, great. All right, thanks guys.

Joseph F. Hanna -- President, Chief Executive Officer

Thanks, Sam.

Operator

[Operator Instructions] Your next question comes from the line of Marc Riddick from Sidoti. Your line is now open.

Marc Riddick -- Sidoti -- Analyst

Thank you. Good evening.

Joseph F. Hanna -- President, Chief Executive Officer

Hi, Mark.

Marc Riddick -- Sidoti -- Analyst

So why don't you talk a little bit about the pacing of utilization across the businesses throughout the quarter? Because it seems as though it was sort of grinding a little higher if I'm reading commentary properly, and at least from the bullishness of general trends wise. So I was wondering if you could sort of talk about that pacing and what we might be seeing?

Joseph F. Hanna -- President, Chief Executive Officer

Sure. I'll just start with Modulars. And we were actually down, if you look on a year-over-year basis, our average utilization. But the encouraging thing with that is at quarter end and on a sequential basis, I mean, utilization has improved. So we're seeing positive trends there. And so that's been encouraging. At TRS, utilization is 67%. That was up considerably over last year, and that's really running in a very, very good place at this point. We're very pleased with that business and the utilization level that we have there now. In Adler. Adler was at 44%, that was down just slightly on a year-over-year basis. So we definitely have room to improve there. And with our managing cash in that business, we have not been putting capital in. And so we have plenty of room to invest in just getting our fleet that we have out on rent. And so that's been our focus there. Keith, anything you want to add at all?

Marc Riddick -- Sidoti -- Analyst

Just a quick follow-up there. But Adler, that was up sequentially, right?

Joseph F. Hanna -- President, Chief Executive Officer

Utilization.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Correct.

Joseph F. Hanna -- President, Chief Executive Officer

Yes. So that is correct. Correct.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

And again, you'll see all this when you look at the public filings in the Q in particular, you'll see we ended the quarter at Adler at 45.8%. So again, gradual improvement. We realized that there's a lot of work still to be done and hoping for some of those recent market trends to continue with better demand conditions for the business. But those are all positive metrics, up Q2 over Q1 and ended the quarter more strongly than the average for the quarter. So those are healthy data points.

Marc Riddick -- Sidoti -- Analyst

Okay. That's where I was going. That's very helpful. I wanted to switch gears around to -- back to education and maybe what you're seeing at this point from a timing perspective and the kind of feedback that you're getting? Is it -- obviously, it was a very different year. But I was wondering if you could give a little bit more color around what you're seeing, and maybe if it's -- from a visibility standpoint or the way or the demand might play out, how that looks? How should we think about this year versus, not necessarily last year, but going back to more normal times?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. Yes. I think we're -- I'm feeling good about it. I mean we're actually seeing districts that had put off capital investments and capital projects in modernization and growth, actually bringing those projects back online. And with the fact that students are really going to be returning to classrooms this fall, we just don't anticipate that not happening anywhere where we're operating. That's also a positive for us. We'll have to see what happens. I think student counts will be off because we've actually gone a year in between having kids in classrooms and on a full basis back in the classrooms, again that will have this fall. So I think student counts will be off, and that might cause a little bit of last-minute ordering for us, but I don't anticipate that to be a big needle mover. But overall, we're feeling good about where our education business is right now, considering all the disruption that had taken place over the past year. So we're diligently working through and helping districts at this point. And we've got classrooms that are available if there are last minute needs.

Marc Riddick -- Sidoti -- Analyst

Great. And then I guess, the last one for me. I was wondering if you could talk a little bit about the labor side of things and sort of how that plays into the services opportunities and maybe what you're seeing there? And then maybe you can speak in a little bit commentary around pricing?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Sure, sure. Sure. I can talk about the labor issue. It is tough to find people. And I would say our most challenged area in recruiting and filling positions is with drivers. I don't think that should be any news to anyone, that's just been tough for the last several years, but it's even worse now. And in our production centers, finding folks is a challenge. We have had to make some wage adjustments. But overall, we're well staffed, and we're not experiencing internal significant openings in positions that are affecting our production rate. So I think we just need to keep working it. And we've got plenty of internal resources that are working on helping us make sure our hiring pipelines are in good shape. So tighter than we'd like to see it, but manageable. And then I can talk about pricing a little bit, too, if you'd like to. Rates have been...

Marc Riddick -- Sidoti -- Analyst

Absolutely. Thank you.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Great. Yes. And I know you mentioned that. Rates are hanging in there. And we actually in Modulars were up 7% year-over-year. Now some of that's based on the integration of Design Space. They had very nice rates. And so we're seeing some of that assistance there. But overall, in terms of talking to the teams, our commercial pricing is good. Our education pricing has been good. We're not seeing any degradation there at all. And customers have been relatively open when we've had to pass along price increases, which we are doing to account for cost increases that we are seeing in some of the service offerings that we have. And let me give you an example. We may do modifications on a modular building to customize it for a customer. We raised all our prices there. And customers are understanding of that. And that's just one of the things that folks are dealing with right now in terms of getting product. They need the product, they want to customize according to their use, and they're willing to pay a higher price for it. So we've been encouraged, and we're hopeful that reception to those higher prices will continue as time progresses here.

Marc Riddick -- Sidoti -- Analyst

Right. No, that makes sense. I appreciate. Thank you.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yeah. Thanks, Mark.

Operator

Ladies and gentlemen, that appears to be the last question. Let me now turn the call back over to Mr. Hanna for any closing remarks.

Joseph F. Hanna -- President, Chief Executive Officer

Thank you very much. I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We wish you all health and safety in the months ahead, and we look forward to speaking with you again in late October 2021 to review our third quarter results.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Joseph F. Hanna -- President, Chief Executive Officer

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Scott Schneeberger -- Oppenheimer -- Analyst

Alex -- Berenberg Capital -- Analyst

Marc Riddick -- Sidoti -- Analyst

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