Boeing is negotiating with the U.S. Department of Defense on the impact of the guilty plea, a source says By Reuters

By David Shepardson and Tim Hepher

WASHINGTON/PARIS (Reuters) – Boeing is in talks with the U.S. Defense Department over how the planemaker's planned guilty plea could affect its extensive government contracts, a person briefed on the matter said.

On Sunday, the Justice Department said in a court filing that Boeing (NYSE:) had agreed to plead guilty to one count of criminal fraud conspiracy to resolve an investigation tied to two fatal 737 MAX crashes in 2018 and 2019 that killed 346 people.

A guilty plea could threaten the company's ability to secure lucrative government contracts with agencies such as the U.S. Department of Defense and NASA, although government agencies can waive any restrictions. Final details of the settlement are expected to be submitted by July 19.

Pentagon spokesman Air Force Maj. Gen. Patrick Ryder told reporters the agency will conduct an assessment to decide the impact of the guilty plea on Boeing's contracts. He did not address whether the agency was in talks with the planemaker.

“The Department of Defense will evaluate the company's remediation plans and agreement with the Department of Justice to determine what steps are necessary and appropriate to protect the federal government,” Ryder said, adding that any action would fall under U.S. government contracting regulations.

Boeing and the Justice Department did not immediately comment. NASA declined to comment.

Boeing shares pared early gains to close 0.6% higher.

Boeing's defense and space unit is vital to its business, with $7 billion in first-quarter sales, up 6 percent from a year ago.

In its annual report, Boeing said U.S. government contracts accounted for 37% of last year's revenue, including foreign military sales. A government report said Boeing had $14.8 billion in contracts with the Pentagon in 2022.

The financial costs associated with the guilty plea appear “manageable relative to the company's scale and overall liabilities,” said Ben Tsocanos, director of airlines at S&P Global Ratings.

“We expect Boeing will likely continue to be a key supplier of defense and space products following the guilty plea,” he added.

The deal is also likely to be scrutinized outside the United States, where Boeing is a key player in global markets, defense industry experts said.

The Canadian government said it is “awaiting a decision on these legal proceedings and will assess the implications once confirmed” and said the planned acquisition of the Poseidon P-8A is on track.

All this is happening at a time when geopolitical tensions are rising, driving up defense spending.

On paper, Boeing faces potential restrictions on future exports to a wide range of international markets, though its actual exclusion could depend on the discretion allowed to local agencies and the realities of the defense market, they added.

FOREIGN SALES

For example, Britain, which operates Boeing's P-8A maritime patrol aircraft, and the European Union have rules that prohibit contractors with final criminal convictions from bidding for public contracts in many sectors for certain periods.

“That's the letter of the law,” said Keith Hayward, a fellow of the U.K.'s Royal Aeronautical Society whose published research includes work on localization in the defense industry.

“The worst case analysis is that they would simply be banned from bidding, but this is a highly political and not legally defined business,” Hayward said.

“It depends on how much the customer wants the product and whether Boeing controls a particular product line (the P-8 is a good example) where there aren't many alternatives.”

As part of the plea agreement, Boeing will pay a criminal fine of $243.6 million, doubling a previous settlement.

Boeing also agreed to invest at least $455 million over three years to strengthen safety and compliance programs and to have the Justice Department appoint an independent monitor to oversee compliance for three years.

On Monday, the Justice Department opposed a proposal by the families of the deceased to force the government to immediately appoint a monitor to oversee Boeing for five years.

The Justice Department said it typically takes “several months” to identify and evaluate candidates.

Under Sunday's agreement, Boeing will plead guilty to knowingly making false statements to the FAA about expanding a key software feature used on the MAX to operate at low speeds that was linked to both fatal crashes.

The families intend to appear at a future hearing to challenge the plea deal. Paul Cassell, an attorney for the families, described the proposed deal as the result of “astute negotiation between Boeing and the Justice Department” and called for a public trial.

In 2023, U.S. District Judge Reed O'Connor, who will decide whether to accept the plea, sharply criticized Boeing, citing what he called “egregious criminal conduct.” But he said it was limited in the actions it could take.

U.S. Sen. Tammy Duckworth said Monday that despite the expected guilty plea, Congress “should not abandon its own oversight of both Boeing and the FAA, and that's something I plan to continue to push for.”

Boeing bonds were trading higher on Monday. Their credit spreads, or premiums over risk-free bonds, were trading slightly tighter than their levels last week, according to data from BondCliq, which tracks secondary trading in corporate bonds.