Cash Conversion

Cash Conversion

Over a full cycle Maximus turns accounting profit into cash and spends little to do it: operating cash flow has run about 1.5x net income since fiscal 2020, and free cash flow about 1.3x, on capital spending of roughly 1–2% of revenue. But "non-wavering" overstates it. Annual free cash flow has swung between $204M and $481M, the reported year-end collection metric and the trailing cash figure now lean on a receivables facility drawn near its raised $350M ceiling, and fiscal-2026 guidance rests on a large federal collection landing in the September quarter.

The durability case rests as much on whether this revenue reliably becomes cash as on whether the contracts renew.

Earnings do convert to cash — over a full year

Across fiscal 2020–2025, every dollar of net income arrived as more than a dollar of operating cash flow. The addbacks are real and recurring — depreciation plus amortization of acquired intangibles runs roughly $135M a year — and because the work is people-and-software rather than plant, capital spending is light: $63M in fiscal 2025, about 1.2% of revenue [1]. The result is a business whose reported free cash flow has exceeded net income in five of the last six years.

Source: FY2025 10-K Free Cash Flow reconciliation [2]; FY2021 10-K [3]; FY2022 10-K [4]; FY2023 10-K [5].

Source: derived from reported cash-flow and income statements, FY2020–FY2025 10-Ks [6].

On the accrual test the picture is reassuring: over six years cumulative operating cash flow of $2.31B against $1.50B of net income is not the signature of earnings unsupported by cash. Where the reader's concern is warranted is not whether the profit is real, but when the cash shows up — and, increasingly, what helps it show up on time.

The lumpiness is intra-year, and it is large

Maximus runs a September fiscal year, and its government customers pay on their own calendar. The annual number smooths over quarterly swings that are anything but smooth. In fiscal 2025 operating cash flow ran negative through the first three quarters — a net outflow of $183M in the June quarter alone — before a large fourth-quarter recovery took the full year to $429M as delayed collections landed [7] [8]. Fiscal 2026 opened the same way: a $244M outflow in the December quarter, partly recovered to a $190M inflow in March, leaving first-half free cash flow at negative $72M [9].

Source: derived from reported quarterly and annual Consolidated Statements of Cash Flows, FY2024 10-K through Q2 FY2026 10-Q [10] [11].

A fiscal-year-end collection cycle explains most of it. The fourth quarter is when Maximus catches up, and the annual figure it books is genuinely positive and large. But it means the full-year cash number is decided in a single quarter, and any slippage in year-end collections lands directly on the reported figure — a point management itself makes each year [12].

The receivables facility is doing more work than the headline DSO shows

Maximus reports Days Sales Outstanding using billed and unbilled receivables over revenue per day. On that measure fiscal 2025 ended at a steady-looking 62 days, up one day from 61 [13]. That steadiness is partly engineered. Under a Receivables Purchase Agreement with Wells Fargo — expanded during fiscal 2026 from a $250M ceiling to $350M — Maximus sells U.S.-originated receivables for cash, removing them from the balance sheet [14]. Management discloses the effect directly: excluding the facility, DSO would have been 73 days at September 30, 2025 rather than 62, and 102 days at March 31, 2026 rather than the reported 78 [15].

Source: Q2 FY2026 10-Q, Liquidity and Capital Resources [16].

Translated into dollars, the March-2026 gap of 24 days on quarterly revenue implies roughly $340M of receivables sold and off the balance sheet — essentially the full raised $350M capacity. In other words, the facility was drawn near its old $250M ceiling, and the ceiling was lifted to $350M to keep absorbing the same collection delay. That accelerates cash into reported operating flow and holds down reported DSO, and management frames it plainly as "a helpful and low-cost tool to help manage short-term liquidity needs" [17].

The underlying cause is a single relationship. Reported DSO peaked at 96 days in the June 2025 quarter — well above the historical low-60s range — driven by two programs: a major federal program on which Maximus collected more than $300M the following month, and a state program where a delayed contract extension moved $224M from unbilled to billed receivables once signed [18] [19]. The state issue cleared. The federal one did not: the same customer drove DSO back to 78 days through the first half of fiscal 2026, on a program management describes as having "extremely complex and data-intensive invoicing requirements," many of them retroactive and requiring rework of prior-period invoices [20].

Two things temper the concern. The receivables are owed by U.S. government agencies under funded contracts, so this is slow payment, not doubtful payment — the allowance for credit losses, though doubled year-on-year, is $9.8M against roughly $908M of gross receivables, near 1% [21]. And Maximus discloses the facility's DSO impact rather than burying it. The honest read is that reported cash conversion is real but flattered: the year-end DSO that looks stable owes about 11 of its days to the facility, and the trailing free cash flow the market capitalizes is accelerated by it.

What the guidance requires

Management reiterated fiscal-2026 free cash flow guidance of $450–500M, above the $366M booked in fiscal 2025, built on operating cash flow of $485–535M less about $35M of capital spending [22]. With first-half free cash flow at negative $72M, the full year implies more than $520M in the second half, concentrated as usual in the September quarter, and hinges on DSO finishing the year below 70 days as the federal invoices are collected [23]. This is the same shape as fiscal 2025, which also ran negative through mid-year before a large Q4 recovery — the mechanism has worked each year, but it is a collection-timing bet, not an annuity.

The balance-sheet questions a cash-focused reader asks

Several items the reader flagged resolve cleanly, and are worth stating so they can be set aside.

Deferred revenue is small and shrinking — not a growth signal, and not debt. Total deferred revenue was $97.5M at September 30, 2025 (current plus non-current), about 6.6 days of revenue, and it fell to $75.6M by March 2026 [24]. Well under the 30-day threshold that would mark customer prepayments as a demand tailwind, it mostly reflects amounts billed ahead of performance and recognized as revenue as the work is delivered [25]. Net debt is calculated the conventional way — interest-bearing debt of $1.33B less cash of $222M, near $1.11B — and this contract liability is not treated as debt; given its size and the fact that it is discharged by performing services rather than paying cash, that is the right treatment.

Payables show no stretching. Accounts payable and accrued liabilities were $296.9M at year-end, down from $303.3M, and accrued compensation was flat — days-payable near 26 with no rise that would flag cash being conserved by slow-paying suppliers [26]. There is no inventory in a services model, so a days-inventory trend does not apply; the working-capital story is entirely receivables, covered above.

Debt is termed out, with covenant room to spare. The principal facilities are a Term Loan A of $853M maturing May 2029 and a Term Loan B of $494M maturing May 2031, alongside a $750M revolving credit facility [27], at a blended effective rate near 5.4% with roughly half the balance hedged [28]. Scheduled amortization is modest until a $667M Term Loan A maturity in fiscal 2029 — the one real refinancing point, three years out [29]. Net leverage of 1.8x sits well below the 4.0x maximum-leverage covenant [30], so the year-end borrowings that fund the DSO gap are a liquidity-management matter, not a solvency one [31].

Tangible book value is negative — the balance sheet holds no asset backing. Equity of $1.67B sits beneath $1.78B of goodwill and $0.54B of intangibles, leaving tangible book near negative $650M [32]. Tangible price-to-book is therefore not a usable gauge here. That is characteristic of an acquisition-built services roll-up — the value is in contracts and people, not property — but a reader who anchors on asset coverage should register that there is none.

One accounting flag is worth naming and sizing. Maximus took a $6.9M non-cash impairment of capitalized software in the second quarter of fiscal 2026 after a client decision left the asset unrecoverable [33]. It is specific and small — under 1% of adjusted EBITDA — and does not carry the marks of a big-bath write-off; the remaining $32.9M of software tied to those new U.S. Services offerings is the balance to keep an eye on.

The read

Cash conversion is genuinely strong over a full cycle and cheap to sustain: operating cash flow near 1.5x net income, free cash flow near 1.3x, capital spending around 1% of revenue, and no sign that reported earnings are unsupported by cash. "Consistent" is fair; "non-wavering" is not. Annual free cash flow has ranged from $204M to $481M, the reported figure is now accelerated by a receivables facility drawn close to its raised ceiling, and each year's number is decided by whether the September-quarter collections arrive. The strongest fact on the other side is that the delay is a paperwork problem at a funded federal customer, not a credit problem, and management surfaces the facility's effect rather than hiding it. What would change the read: if fiscal-2026 free cash flow lands in the $450–500M range with year-end DSO back below 70 days and facility usage easing, the wavering is timing and the franchise converts; if DSO stays near 78, the facility stays pinned at $350M, and the year-end catch-up slips, then the reported cash generation has been leaning on an accelerant, and the underlying trend is the one shown ex-facility.