Leases

3 Months Ended

May 31, 2024

11. Leases

We are a lessee under various leases for facilities and equipment. As of May 31, 2024, we were the lessee for 149 operating leases and 46 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 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 May 31, 2024 do not reflect all of our short-term lease commitments.

The following table outlines the classification of right-of-use ("ROU") asset and lease liabilities in the consolidated balance sheets as of May 31, 2024 and February 29, 2024 (in thousands):


	Balance Sheet Classification	As of
		May 31, 2024		February 29, 2024
Assets
Operating right-of-use assets	Right-of-use assets	$	18,474	$	19,808
Finance right-of-use assets	Right-of-use assets	4,118		3,931
Liabilities
Operating lease liabilities ― short-term	Lease liability - short-term	$	5,729	$	5,893
Operating lease liabilities ― long-term	Lease liability - long-term	13,429		14,606
Finance lease liabilities ― short-term	Lease liability - short-term	829		766
Finance lease liabilities ― long-term	Lease liability - long-term	3,372		3,221

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


	Three Months Ended May 31,
	2024		2023
Operating cash flows from operating leases included in lease liabilities	$	1,779	$	1,825
Lease liabilities obtained from new ROU assets - operating	217		1,509

Financing cash flows from finance leases included in lease liabilities	196		70
Operating cash flows from finance leases included in lease liabilities	68		16
Lease liabilities obtained from new ROU assets - finance leases	410		—


	As of
	May 31, 2024		February 29, 2024
Weighted-average remaining lease term - operating leases	3.97 years		4.12 years
Weighted-average discount rate - operating leases	4.55	%	4.49	%
Weighted-average remaining lease term - finance leases	5.08 years		5.21 years
Weighted-average discount rate - finance leases	6.86	%	6.70	%

The following table outlines the classification of lease expense related to operating and finance leases in the statements of operations (in thousands):


	Three Months Ended May 31,
	2024		2023
Operating lease expense:
Cost of sales	$	3,003	$	3,026
Selling, general and administrative	489		499
Total operating lease expense	3,492		3,525
Financing lease expense:
Cost of sales	223		76
Interest expense	68		16
Total financing lease expense	291		92
Total lease expense	$	3,783	$	3,617

As of May 31, 2024, maturities of our lease liabilities were as follows (in thousands):


Fiscal year:	Operating Leases		Finance Leases		Total
2025	$	4,940	$	816	$	5,756
2026	5,740		1,015		6,755
2027	4,552		976		5,528
2028	2,529		889		3,418
2029	1,917		672		2,589
2030	462		447		909
Thereafter	796		170		966
Total lease payments	$	20,936	$	4,985	$	25,921
Less imputed interest	(1,778)		(784)		(2,562)
Total	$	19,158	$	4,201	$	23,359