Leases

12 Months Ended

Feb. 29, 2024

10. Leases

We are a lessee under various leases for facilities and equipment. See Note 1 for a description of our accounting policy for leases.

As of February 29, 2024, we were the lessee for 162 operating leases and 42 finance leases with terms of 12 months or more. These leases are reflected on our balance sheet in "Right-of-use assets," "Lease liability - short-term" and "Lease liability - long-term."

Our operating leases are primarily for (i) operating facilities, (ii) vehicles and equipment used in operations, (iii) facilities used for back-office functions and (iv) equipment used for back-office functions, and (v) temporary storage. The majority of our vehicle and equipment leases have both a fixed and variable component.

Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and we recognize lease expense for these leases on a straight-line basis over the lease term. We have has a significant number of short-term leases, including month-to-month agreements. Our short-term lease agreements include expenses incurred hourly, daily,

monthly and for other durations of time of one year or less. Our future lease commitments as of February 29, 2024 do not reflect all of our short-term lease commitments.

The following table outlines the classification of right-of-use asset and lease liabilities in the consolidated balance sheets for fiscal 2024 and 2023 (in thousands):


	Balance Sheet Classification	As of February 29/28,
		2024		2023
Assets
Operating right-of-use assets	Right-of-use assets	$	19,808	$	25,076
Finance right-of-use assets	Right-of-use assets	3,931		1,316
Liabilities
Operating lease liabilities ― short-term	Lease liability - short-term	$	5,893	$	6,119
Operating lease liabilities ― long-term	Lease liability - long-term	14,606		19,659
Finance lease liabilities ― short-term	Lease liability - short-term	766		284
Finance lease liabilities ― long-term	Lease liability - long-term	3,221		1,045

Supplemental information related to AZZ's operating leases was as follows (in thousands, except years and percentages):


	2024			2023
Operating cash flows from operating leases included in lease liabilities	$	7,270		$	5,832
Lease liabilities obtained from new ROU assets - operating	$	2,321		$	3,986
Weighted-average remaining lease term - operating leases	4.12 years			5.04 years
Weighted-average discount rate - operating leases	4.49		%	4.31		%
Decrease in ROU assets related to lease terminations	$	(1,294)		$	—
Financing cash flows from finance leases included in lease liabilities	$	425		$	186
Operating cash flows from finance leases included in lease liabilities	$	109		$	33
Lease liabilities obtained from new ROU assets - finance leases	$	3,083		$	420
Weighted-average remaining lease term - finance leases	5.21 years			4.61 years
Weighted-average discount rate - finance leases	6.70		%	5.15		%

The following table outlines the classification of lease expense related to operating and finance leases in the consolidated statements of operations for fiscal 2024, 2023, and 2022 (in thousands):


	Year Ended February 29/28,
	2024		2023		2022
Operating lease expense:
Cost of sales	$	11,877	$	12,210	$	6,744
Selling, general and administrative	2,000		1,858		1,264
Total operating lease expense	$	13,877	$	14,068	$	8,008
Financing lease expense:
Cost of sales	$	468	$	199	$	93
Interest expense	109		33		13
Total financing lease expense	$	577	$	232	$	106
Total lease expense	$	14,454	$	14,300	$	8,114

As of February 29, 2024, maturities of our lease liabilities were as follows (in thousands):


Fiscal year:	Operating Leases		Finance Leases		Total
2025	$	6,667	$	1,004	$	7,671
2026	5,686		927		6,613
2027	4,500		888		5,388
2028	2,475		801		3,276
2029	1,871		584		2,455
Thereafter	1,251		532		1,783
Total lease payments	$	22,450	$	4,736	$	27,186
Less imputed interest	(1,951)		(749)		(2,700)
Total	$	20,499	$	3,987	$	24,486

We sublease multiple buildings in Columbia, South Carolina to multiple subtenants. The Columbia sublease agreements are by and between AZZ Precoat Metals and multiple subtenants. Sublease income is recognized over the term of the sublease on a straight-line basis and is reported in the consolidated statement of operations as a reduction to "Cost of sales." We recognized $1.0 million of income from subleases during fiscal year 2024.