By Zacks Equity Research

Based on the company's debt reduction measures, Fitch Ratings Services has boosted the ratings of BorgWarner Inc. (BWA) to "BBB+" from "BBB". The increase applies to both the issuer default rating as well as unsecured revolving credit facility of $650 million and senior unsecured notes of $655 million.

Apart from the debt reduction measures, the agency is also optimistic about the modest growth in worldwide auto production. It is also impressed with the company's solid liquidity position and potential free cash flow generation.

 
BorgWarner recorded a $148.7 million increase in total debt to $1.3 billion as of December 31, 2011 from $1.2 billion as of December 31, 2010. The rise in debt was attributable to the acquisition of the Traction Systems division of Haldex and share repurchases. Debt (net of cash) to capitalization ratio was 28.3% as of December 31, 2011 compared with 24.0% as of December 31, 2010.

However, the company will settle all Convertible senior notes of 3.50%, which are due in 2012, by issuing shares of the company. The process of note settlement entails delivery of about 11.4 million shares after conversion of all outstanding notes at initial conversion rate. This will result in the reduction of the company's debt and increase in stockholders equity by almost $374 million.

In 2011, the company's cash flow from operating activities rose to $708.2 million from $538.9 million in the prior year. The increase was mainly attributable to the increase in profit.

BorgWarner is a leading manufacturer of powertrain products for the world's major automakers. The company operates in two segments -- engine and drivetrain. Its products include four-wheel-drive and all-wheel-drive transfer cases (primarily for light trucks and sport utility vehicles or SUVs), as well as automatic transmission and timing chain systems.

These products are manufactured and sold worldwide, primarily to original equipment manufacturers of passenger cars, SUVs, trucks and commercial transportation products. Its production and technical facilities are spread over 60 locations across 19 countries in North America, South America, Europe and Asia. The company's largest customers include Volkswagen AG (VLKAY) and Ford Motor Co. (F).

BorgWarner recorded a 34% increase in profit to $1.19 per share (excluding special items of 19 cents per share) in the fourth quarter of 2011 compared with 89 cents per share in the corresponding quarter of last year. The profit surpassed the Zacks Consensus Estimate by 3 cents per share.

Revenues in the quarter rose 16% to $1.7 billion. The increase was driven by strong global demand for the company's products. The quarter recorded a $6 million reduction in net sales due to unfavorable impact of foreign currencies, primarily the Euro. 

Currently, the stock currently retains a Zacks #1 Rank, which implies a "strong buy" rating for the short-term.

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