* Agreement buys out royalty deals with Canada
* To make four payments annually to Canadian government
* Total payment, including accrued amounts, $965 mln
* Shares down nearly 2 pct in afternoon trading (Adds details about agreement, analyst downgrade; updates share price)
By Ankit Ajmera
Jan 6 (Reuters) - United Technologies Corp said on Wednesday it would take a pretax charge of about $870 million in the fourth quarter to buy out some royalty payments to Canada.
The surprise announcement came a month after the diversified manufacturer of Pratt & Whitney engines and Otis elevators updated its investor outlook. Shares were down 1.8 percent at $93.97 in early afternoon trading.
Agreements signed on Dec. 30 buy out royalty payments UTC was required to make in anticipation of future aircraft engine sales, UTC said. The payments to Canada’s federal government and Quebec’s provincial government were in exchange for research and development funds.
Pratt & Whitney Canada makes turbofan, turboprop and turboshaft engines for business jets, other small aircraft and helicopters.
The Canadian unit does not make the Geared Turbofan engine used in jetliners such as the Airbus Group’s A320neo, Bombardier Inc’s CSeries or Embraer SA’s E-Jet. It also does not make the Pratt F135 engine used in the F-35 Joint Strike Fighter.
UTC said Pratt & Whitney Canada will make four annual payments in the form of royalties, beginning this month, to “fully settle and terminate” its contractual obligations.
The four payments total about $965 million, including amounts UTC had already accounted for, UTC said.
The impact on 2015 results was not immediately clear. UTC is due to report earnings on Jan. 27 and the company declined to comment, citing a pre-results quiet period.
While UTC will book higher profits on Pratt & Whitney Canada’s engine programs after it makes the four payments, the cost will strain cash flow for the next few years, RBC Capital Markets analyst Robert Stallard wrote in a research note.
“This puts a bit more additional pressure on the already lower-than-average free cashflow conversion,” Stallard wrote.
Sterne Agee downgraded the company’s stock to “neutral” from “buy,” saying the share price will be pressured by limited growth in the coming year.
In December, UTC Chief Executive Gregory Hayes announced a three-year, $1.5 billion restructuring program to reduce costs, as UTC expects slowing growth in China, Latin America and Europe to hurt results.
UTC also said on Wednesday that Pratt & Whitney Canada would spend about $8 million per year in research and development through initiatives with “post-secondary institutions,” and key industry associations in Canada over a 14-year period.
The company’s stock has fallen about 14 percent in the past 12 months, compared with a 5 percent increase in the Dow Jones U.S. Aerospace & Defense index. (Reporting by Ankit Ajmera in Bengaluru, additional reporting by Alwyn Scott in New York; editing by Maju Samuel and G Crosse)