Leases

6 Months Ended

Aug. 31, 2024

11. Leases

We are a lessee under various leases for facilities and equipment. As of August 31, 2024, we were the lessee for 148 operating leases and 55 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 leases are primarily for (i) operating facilities, (ii) vehicles and equipment used in operations, (iii) facilities used for back-office functions, (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 August 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 August 31, 2024 and February 29, 2024 (in thousands):


	Balance Sheet Classification	As of
		August 31, 2024		February 29, 2024
Assets
Operating right-of-use assets	Right-of-use assets	$	17,194	$	19,808
Finance right-of-use assets	Right-of-use assets	4,859		3,931
Liabilities
Operating lease liabilities ― short-term	Lease liability - short-term	$	5,579	$	5,893
Operating lease liabilities ― long-term	Lease liability - long-term	12,284		14,606
Finance lease liabilities ― short-term	Lease liability - short-term	995		766
Finance lease liabilities ― long-term	Lease liability - long-term	3,979		3,221

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


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Operating cash flows from operating leases included in lease liabilities	$	1,794	$	1,834	$	3,561	$	3,654
Lease liabilities obtained from new ROU assets - operating	410		373		628		1,895
Decrease in ROU assets related to lease terminations	—		(1,294)		—		(1,302)
Financing cash flows from finance leases included in lease liabilities	236		92		432		162
Operating cash flows from finance leases included in lease liabilities	83		21		151		37
Lease liabilities obtained from new ROU assets - finance leases	1,009		599		1,419		599


	As of
	August 31, 2024		February 29, 2024
Weighted-average remaining lease term - operating leases	3.8 years		4.12 years
Weighted-average discount rate - operating leases	4.62	%	4.49	%
Weighted-average remaining lease term - finance leases	4.84 years		5.21 years
Weighted-average discount rate - finance leases	7.08	%	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 August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Operating lease expense:
Cost of sales	$	3,026	$	3,035	$	6,029	$	6,060
Selling, general and administrative	488		506		977		1,005
Total operating lease expense	3,514		3,541		$	7,006	$	7,065
Financing lease expense:
Cost of sales	269		101		492		177
Interest expense	83		21		151		37
Total financing lease expense	352		122		643		214
Total lease expense	$	3,866	$	3,663	$	7,649	$	7,279

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


Fiscal year:	Operating Leases		Finance Leases		Total
2025	$	3,259	$	665	$	3,924
2026	5,912		1,263		7,175
2027	4,598		1,224		5,822
2028	2,542		1,137		3,679
2029	1,918		920		2,838
2030	462		499		961
Thereafter	796		170		966
Total lease payments	$	19,487	$	5,878	$	25,365
Less imputed interest	(1,624)		(904)		(2,528)
Total	$	17,863	$	4,974	$	22,837

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." Sublease income for the three and six months ended August 31, 2024 and 2023 was as follows (in thousands):


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Sublease income	$	254	$	248	$	509	$	488