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Network storage provider NetApp Inc. (NTAP - Snapshot Report) issued 3.375% convertible senior notes of $500 million in aggregate principal amount. The notes are set to mature in 2021. The offering is expected to close on Jun 5, 2014 subject to customary closing conditions.

The $500 million senior notes carry coupon yields of 3.426% to compensate investors for the associated risk. The net proceeds from the issuance will be utilized for general corporate purposes.

Goldman, Sachs & Co., J.P. Morgan Securities LLC, and Morgan Stanley & Co. LLC will act as joint book-running managers for the offering while Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Wells Fargo Securities, LLC will be acting as co-managers.
 
During the fourth quarter of fiscal 2014, NetApp’s interest expense was $6.4 million, down from $6.7 million reported in the previous quarter. However, the current debt offering will increase its interest expense.

Despite the given scenario, the company has a very strong balance sheet with cash, cash equivalents and investments of $5.00 billion and a long-term debt balance of $995.5 million. The issuance of these notes will increase the company’s total debt to $1.49 billion from $995.5 million.

NetApp remains well positioned given the strong demand for its storage operating system — Data ONTAP — and flash solutions. The company’s workforce reduction initiatives could also pave the way for operating cost rationalization that would support margins. In the recently reported quarter, the company spent $49.2 million on dividends and used $374 million to repurchase its common stock.

We believe that the strong balance sheet will help NetApp to capitalize on investment opportunities and make strategic acquisitions, further improving its growth prospects. We also believe that the senior notes offering will bring down its cost of capital, thus strengthening the balance sheet and supporting future growth.

However, soft demand from the U.S. federal agencies and constricted IT spending remain headwinds. Competition from EMC Corp. (EMC - Analyst Report) also poses a challenge for the company.

Currently, NetApp has a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the technology sector are Micron Technology Inc. (MU - Analyst Report) and Juniper Networks, Inc. (JNPR - Analyst Report), both carrying a Zacks Rank #2 (Buy).

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