Texas Instruments 10-Q 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-03761
TEXAS INSTRUMENTS INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
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Number of shares of Registrant’s common stock outstanding as of
June 30, 2006
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Income
(Millions of dollars, except per-share amounts)
See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Millions of dollars)
See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(Millions of dollars, except share amounts)
See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Millions of dollars)
See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes to Financial Statements
Acquisitions - In January 2006, we acquired 100 percent of the equity of Chipcon Group ASA (Chipcon), a leading company in the design of short-range, low-power wireless radio frequency semiconductors, based in Oslo, Norway, for $183 million in cash. The acquisition will enhance our ability to offer customers complete short-range wireless solutions for consumer, home and building automation applications. The acquisition was accounted for as a purchase business combination, and the results of operations of this business have been included in the Semiconductor segment of our consolidated statements of income from the date of acquisition. Pro forma information has not been presented as it would not be materially different from amounts reported. As a result of the acquisition, we recorded a $5 million charge for in-process R&D in Corporate. We also recognized $115 million of goodwill and $86 million of other acquisition-related intangible assets, acquired $6 million of cash and assumed $29 million of other net liabilities. The following table contains a summary of the other intangible assets acquired:
In the second quarter of 2006, we also made an acquisition, which was not material, that was integrated into the Semiconductor business segment.
Dispositions - In January 2006, we entered into a definitive agreement to sell substantially all of our Sensors & Controls segment, excluding the radio frequency identification (RFID) systems operations that had been operated as a part of that segment, to an affiliate of Bain Capital, LLC, a leading global private equity investment firm, for $3 billion in cash. The sale was completed on April 27, 2006. The operations and cash flows of the former Sensors & Controls business have been eliminated from the ongoing operations of TI and we have no significant continuing involvement in the operations of the sold business. Beginning in the first quarter of 2006, the former Sensors & Controls business is presented as a discontinued operation and the RFID operations retained are included within the Semiconductor business segment. Prior period financial statements, including segment information, have been reclassified to reflect these changes for all periods presented (see Note 2 for detailed information on discontinued operations and Note 6 for restated segment information).
Change in Capitalization - During the second quarter of 2006, TI’s Japan subsidiary prepaid $275 million of variable-rate bank notes. A portion of this debt had been due in 2008 and the remainder had been due in 2010.
Basis of Presentation - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (US GAAP) and, except for the adoption of a change in depreciation method in the first quarter of 2006 and the presentation of discontinued operations, on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2005. The consolidated statements of income, statements of comprehensive income and statements of cash flows for the periods ended June 30, 2006 and 2005, and the balance sheet as of June 30, 2006, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. The consolidated balance sheet at December 31, 2005, was derived from the audited consolidated balance sheet at that date and restated to reflect discontinued operations. Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation. Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Because the consolidated interim financial statements do not include all of the information and notes required by US GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2005. The results for the six-month period are not necessarily indicative of a full year's results.
The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in the notes, except share and per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated.
Effective January 1, 2006, as a result of a study made of the pattern of usage of our long-lived depreciable assets, we adopted the straight-line method of depreciation for all property, plant and equipment. Under the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections,” which became effective as of January 1, 2006, a change in depreciation method is treated on a prospective basis as a change in estimate. Prior period results will not be restated. The effect of the change in depreciation method for the three months and six months ended June 30, 2006, was to reduce depreciation expense by about $40 million and about $69 million, and increase both income from continuing operations and net income by about $21 million ($0.01 per share) and about $26 million ($0.02 per share), respectively.
Changes in Accounting Standards - Beginning as of January 1, 2006, we implemented SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” The primary impact of this change to our inventory valuation methodology was to change how the fixed production overhead costs included in inventory are calculated. The effect of this change for the six months ended June 30, 2006, on inventory and net income was not material
In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation).” This standard allows companies to present in their statements of income any taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between a seller and a customer, such as sales, use, value-added, and some excise taxes, on either a gross (included in revenue and costs) or a net (excluded from revenue) basis. This standard will be effective for us in interim and fiscal years beginning after December 15, 2006. We are currently evaluating the potential impact of this issue on our financial position and results of operations, but do not believe the impact of the adoption of this standard will be material.
The results of operations of the former Sensors & Controls business are being presented as discontinued operations. The following summarizes results from the discontinued operations of the former Sensors & Controls business for the periods ended June 30, 2006 and 2005, included in the consolidated statements of income:
Earnings per share amounts from continuing and discontinued operations may not add to net income per share due to rounding.
As of June 30, 2006, the remaining assets and liabilities of the former Sensors & Controls business, included in assets and liabilities of discontinued operations, are primarily attributable to obligations under pension and other postretirement benefit plans that are expected to be settled by the end of 2006 as well as other contingencies.
Continuing involvement - Upon closing of the sales transaction, we entered into a Transition Services Agreement (TSA) with Sensata to provide various temporary support services that are reasonably necessary to facilitate the continuation of the normal conduct of business of the former Sensors & Controls business such as finance and accounting, human resources, information technology, warehousing and logistics, and records retention and storage. Such services are expected to be provided for approximately six to twelve months, although certain information technology-related services may be provided for up to two years. The fees for these services will be generally equivalent to our cost. In addition, we entered into certain cross-license agreements to allow each party to continue to use the associated technology and intellectual property in the conduct of their respective business. However, these cross-license agreements generally do not involve the receipt or payment of any royalties and therefore are not considered to be a component of continuing involvement.
Although the services provided under the TSA generate continuing cash flows between us and Sensata, the amounts are not considered to be significant to the ongoing operations of either entity. In addition, we have no contractual ability through the TSA or any other agreement to significantly influence the operating or financial policies of Sensata. Under the provisions of EITF Issue No. 03-13, "Applying the Conditions of Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations," we therefore have no significant continuing involvement in the operations of the former Sensors & Controls business and have classified the historical results of that business as discontinued operations.
Indemnification - In connection with the sale, we have agreed to indemnify Sensata for certain specified litigation matters, as well as other liabilities, including environmental liabilities. Our indemnification obligations with respect to breaches of representations and warranties and the specified litigation matters are, generally, subject to a total deductible of $30 million and our maximum potential exposure is limited to $300 million. As of June 30, 2006, there were no significant liabilities recorded under these indemnification obligations.
Effective July 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payments,” using the modified prospective application method. Under this transition method, compensation cost recognized for the periods ended June 30, 2006, includes the applicable amounts of: (a) compensation cost of all stock-based payments granted prior to, but not yet vested as of, July 1, 2005 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and previously presented in pro forma footnote disclosures), and (b) compensation cost for all stock-based payments granted subsequent to July 1, 2005 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123(R)). Results for periods prior to July 1, 2005, have not been restated.
The amounts of stock-based compensation expense recognized in the periods presented are as follows:
The amounts above include the impact of recognizing compensation expense related to nonqualified stock options, RSUs and stock options offered under the employee stock purchase plan. For 2005, before implementation of SFAS No. 123(R), only compensation expense related to RSUs was recognized and included in SG&A. Stock-based compensation expense has not been allocated to the various segments, but is reflected in Corporate.
Under the modified prospective application method, results for periods prior to July 1, 2005, have not been restated to reflect the effects of implementing SFAS No. 123(R). The following pro forma information, as required by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123,” is presented for comparative purposes and illustrates the pro forma effect on income from continuing operations and related earnings per common share for the periods ended June 30, 2005, as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for that period:
In the first quarter of 2005, we reduced the attribution period used for certain grants of nonqualified stock options to recognize fair value-based compensation expense for pro forma disclosure purposes for those stock option recipients who are retirement eligible or become retirement eligible following the grant of the awards. Our nonqualified stock options have 10-year terms and generally vest over a four-year service period from the date of grant. Effective January 1, 2005, stock-based compensation expense for retirement-eligible employees is recognized over a six-month period, and for non-retirement-eligible employees, over the shorter of the period from grant date to the date they become retirement eligible (but not less than the six-month required service period) or the normal four-year vesting period. As a result, we included in our first quarter 2005 pro forma footnote disclosures a $93 million ($0.05 per share) inception-to-date adjustment of fair value-based compensation expense for both retirement-eligible employees and employees who became retirement eligible since the date of grants, to reflect the reduced attribution period.
Settlement and curtailment (gains)/losses and special termination benefits for continuing operations were not material.
Discretionary contributions of $74 million were made to our U.S. and Japan post-employment benefit plans during the second quarter of 2006.
Business segment information for continuing operations follows:
* Semiconductor profit from operations in the second quarter of 2006 includes a benefit of $60 million from a royalty settlement (see Note 8). Also included is a benefit of $57 million from a $77 million net sales tax refund that was due to the settlement of an audit of Texas sales taxes paid on various purchases over a nine year period. The $57 million effect on profit from operations is reflected as $31 million in cost of revenue, $21 million in R&D and $5 million in SG&A. The remaining $20 million of the net sales tax refund is reflected in Other income (expense) net.
** Corporate profit from operations includes stock-based compensation expense of $84 million, $5 million, $175 million, and $10 million respectively. Also included in 2005 is a gain of $23 million in the first quarter on sales of assets related primarily to the disposition of a sales facility and the sale of our commodity liquid crystal driver product line.
We routinely sell products with a limited intellectual property indemnification included in the terms of sale. Historically, we have had only minimal and infrequent losses associated with these indemnities. Consequently, any future liabilities brought about by the intellectual property indemnities cannot reasonably be estimated or accrued.
We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability, and historically we have experienced a low rate of payments on product claims. Consistent with general industry practice, we enter into formal contracts with certain customers in which the parties define warranty remedies. Typically, our warranty for semiconductor products covers three years, an obligation to repair, replace or refund, and a maximum payment obligation tied to the price paid for our products. In some cases, product claims may be disproportionate to the price of our products.
On February 6, 2006, a jury in the U.S. District Court for the District of New Jersey determined that GlobespanVirata (Globespan), a subsidiary of Conexant Systems, Inc. (Conexant), had infringed two TI patents and one Stanford University (Stanford) patent relating to digital subscriber line (DSL) technology. The jury awarded $112 million in damages to TI. In June 2003, before Globespan's merger with Conexant, Globespan had sued TI and Stanford claiming that the TI and Stanford patents were invalid and not being infringed by Globespan, and alleging violations of the antitrust law. In response, TI and Stanford brought counterclaims of patent infringement against Globespan. On May 5, 2006, the companies announced a settlement resolving this litigation. Under the settlement, Conexant paid TI $70 million and TI granted Conexant a license to essential patents relating to DSL technology. Under an agreement with Stanford, TI will be required to make a payment of $10 million to Stanford related to the royalty amount received by TI from Conexant.
We are subject to various other legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect upon our financial condition, results of operations or liquidity.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document. Except as noted, financial results are for continuing operations. Our former Sensors & Controls business is reported as discontinued operations. The divestiture of this business closed on April 27, 2006.
Texas Instruments makes, markets and sells high-technology components; more than 50,000 customers all over the world buy our products. We have two separate business segments: Semiconductor and Educational & Productivity Solutions. Semiconductor is by far the largest of these business segments. It accounted for 96 percent of our revenue from continuing operations in 2005, and historically it averages a higher growth rate than the other business segment, although the semiconductor market is characterized by wide swings in growth rates from year to year. We were the world’s third-largest semiconductor company in 2005 as measured by revenue, according to iSuppli Corporation, an industry analyst.
In our Semiconductor segment, we focus primarily on technologies that make it possible for a variety of consumer and industrial electronic equipment to process both analog and digital signals in real time. These technologies are known as analog semiconductors and digital signal processors, or DSPs, and together they account for about three-fourths of our Semiconductor revenue. Almost all of today’s digital electronic equipment requires some form of analog or digital signal processing.
Analog semiconductors process “real world” inputs, such as sound, temperature, pressure and visual images, conditioning them, amplifying them and converting them into digital signals. They also assist in the management of power distribution and consumption, aspects critical to today’s portable electronic devices. Generally, analog products require less capital-intensive factories to manufacture than digital products.
Our analog semiconductors consist of custom products and standard products. Custom products are designed for specific applications for specific customers. Standard products include application-specific standard products (designed for a specific application and usable by multiple customers) and high-performance standard catalog products (usable in multiple applications by multiple customers). These standard products are characterized by differentiated features and specifications, as well as relatively high margins. Standard analog products tend to have long life spans. Many custom and standard products are proprietary and difficult for competitors to imitate. Analog products also include commodity products, which are sold in high volume and into a broad range of applications, and generally are differentiated by price and availability. We are the world’s largest supplier of analog semiconductors.
DSPs use complex algorithms and compression techniques to alter and improve a data stream. These products are ideal for applications that require precise, real-time processing of real-world signals that have been converted into digital form. Their power efficiency is important for battery-powered devices.
Our DSP portfolio includes custom, application-specific and standard products. Custom products are designed for specific customers with very high volumes in established markets. Application-specific products are implementations crafted for specific applications like wireless infrastructure, VoIP (Voice over Internet Protocol) gateways, digital still cameras and residential gateways, to name a few. Our standard DSP products are sold into a broad range of applications and seed the next generation of signal-processing innovation. We are the world’s largest supplier of DSPs.
We own and operate semiconductor manufacturing sites in the Americas, Japan, Europe and Asia. Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation. Because we own most of our manufacturing capacity, a significant portion of our operating costs is fixed. In general, these costs do not decline with reductions in customer demand or our utilization of our manufacturing capacity, and can adversely affect profit margins as a result. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased output, which should improve profit margins.
As part of our manufacturing strategy, we outsource a portion of our product manufacturing to outside suppliers (foundries and assembly/test subcontractors), which reduces both the amount of capital expenditures and subsequent depreciation required to meet customer demands, and fluctuations in profit margins. Outside foundries provided about 20 percent of our total wafers produced in 2005. (A wafer is a thin slice of silicon on which an array of semiconductor devices has been fabricated.)
The semiconductor market is characterized by constant and typically incremental innovation in product design and manufacturing technologies. We make significant investments in research and development (R&D). Typically, products resulting from our R&D investments in the current period do not contribute materially to revenue in that period, but should benefit us in future years. In general, new semiconductor products are shipped in limited quantities initially and will then ramp into high volumes over time. Prices and manufacturing costs tend to decline over time.
Our Educational & Productivity Solutions (E&PS) segment is a leading supplier of graphing handheld calculators. It also provides our customers with business and scientific calculators and a wide range of advanced classroom tools and professional development that enables students and teachers to interactively explore math and science. Our products are marketed primarily through retailers and to schools through instructional dealers. This business segment represented 4 percent of our revenue from continuing operations in 2005. Prices of E&PS products tend to be stable.
In early 2006, we entered into an agreement to sell substantially all of our Sensors & Controls business, which had been a separate business segment before 2006, to an affiliate of Bain Capital, LLC, for $3 billion. This sale was completed on April 27, 2006. The financial results of this business are accounted for as discontinued operations and for the three- and six-month periods ended June 30, 2006, include operations during the periods prior to the date of sale, as well as the actual gain on sale. The amounts in comparison for the 2005 periods include operations of the sold business for the full three and six months (see Note 2 to the Financial Statements for additional information). Products manufactured and sold by this business included sensors, and electrical and electronic controls. The primary markets were automotive and industrial. Other targeted markets included heating, ventilation, air conditioning, refrigeration and industrial control systems.
In the third quarter of 2005, we implemented the Financial Accounting Standards Board’s Statement of Financial Accounting Standard (SFAS) No. 123(R), “Share-Based Payments.” The financial results of 2005 include the effects of adopting this new accounting rule for stock options effective July 1, 2005. Before July 1, 2005, our financial results include the expense of restricted stock units, but not stock options. Consequently, our financial results for periods after July 1, 2005, are not fully comparable to our prior financial results. For the second quarter of 2006, the total stock-based compensation expense was $84 million, or 2.3 percent of revenue. The distribution of this expense was $43 million to selling, general and administrative (SG&A) expense, $25 million to R&D expense and $16 million to cost of revenue. For the first half of 2006, the total stock-based compensation expense was $175 million, or 2.5 percent of revenue. The distribution of this expense was $88 million to SG&A expense, $53 million to R&D expense and $34 million to cost of revenue.
As a result of a study of the pattern of usage of long-lived depreciable assets, we adopted the straight-line method of depreciation for all property, plant and equipment on a prospective basis effective January 1, 2006, as allowed for under SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” See Financial Condition below and Note 1 to the Financial Statements for additional information.
We operate in a number of tax jurisdictions and are subject to several types of taxes including taxes based on income, capital, property and payroll, and sales and other transactional taxes. The timing of the final determination of our tax liabilities varies among these jurisdictions and their taxing authorities. As a result, during any particular reporting period, we might reflect (in either income before income taxes, the provision for income taxes or both) one or more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities.
Second-Quarter 2006 Results
Our revenue for the second quarter of 2006 was $3.70 billion, 11 percent higher sequentially and 24 percent higher than the same quarter a year ago due to higher shipments, as demand for our semiconductors continued to strengthen. Sequential growth also benefited from seasonal demand for graphing calculators, as retailers began to stock for the upcoming back-to-school season. Additionally, we received a $70 million royalty settlement in the quarter that was included in revenue.
Earnings per share (EPS) from continuing operations in the quarter were $0.47, up 42 percent sequentially and 34 percent from a year ago. EPS included an expense of $0.03 from stock-based compensation, a benefit of $0.03 from a state sales tax refund, and a benefit of $0.02 from the royalty settlement. We began expensing stock options in the third quarter of 2005 and, therefore, equivalent stock-based compensation expense was not reflected in the year-ago quarter, when we earned $0.35 per share from continuing operations.
This was another excellent quarter. All regions of the world showed strong revenue growth from a year ago. Revenue from our wireless semiconductors grew 27 percent, including more than 70 percent growth in 3G; revenue from high-performance analog semiconductors grew 32 percent; and revenue from our DLP® picture technology grew 34 percent.
Strategically, our focus on open wireless standards was reinforced by the actions of operators around the world, who are accelerating their infrastructure transitions to GSM (Global System for Mobile communication) because of its cost effectiveness and the wide range of choices it offers.
Going into the third quarter, our backlog of orders is up, and our outlook is for seasonal growth. As always, we will pay close attention to the world’s economies and to our inventory in the various market channels.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Statements of Income - Selected Items
(Millions of dollars, except per-share amounts)
Details of Financial Results
Our gross profit for the second quarter of 2006 was $1.91 billion, or 51.6 percent of revenue, an increase of $235 million from the prior quarter and an increase of $481 million from the year-ago quarter. The increases over both periods reflect higher revenue in our two segments, Semiconductor and E&PS.
In the second quarter of 2006 we received a royalty settlement of $70 million and a $77 million net sales tax refund. Similar to other royalties, the royalty settlement was included in Semiconductor revenue (see Note 8 to Financial Statements). The net sales tax refund was due to the settlement of an audit of Texas sales taxes paid on various purchases over a nine-year period.
The royalty settlement and sales tax refund benefit included in our second-quarter 2006 results are detailed as follows (all items are in the Semiconductor segment results except the $20 million in other income (expense) net (OI&E), which is in Corporate):
R&D expense for the second quarter of $536 million, or 14.5 percent of revenue, increased $3 million from the prior quarter due to higher spending for development of new semiconductor devices, particularly associated with wireless applications. The higher spending was largely offset by a $21 million reduction from the sales tax refund. R&D expense increased $51 million from the year-ago quarter primarily due to higher spending for development of new semiconductor devices, particularly associated with wireless applications, and, to a lesser extent, the inclusion of $25 million of stock-based compensation in the second quarter of 2006. The increase was partially offset by the refund of state sales tax.
SG&A expense for the second quarter was $418 million, or 11.3 percent of revenue. SG&A expense decreased $3 million from the prior quarter and was up $79 million from the year-ago quarter. The increase from a year ago was primarily due to the combination of increased stock-based compensation expense ($43 million in second-quarter 2006 for stock options and restricted stock units as compared to $5 million for only restricted stock units in second-quarter 2005) and, to a lesser extent, higher spending for consumer advertising of our DLP semiconductors used in high-definition televisions.
Operating profit for the second quarter was $953 million, or 25.8 percent of revenue. This increase of $235 million from the prior quarter was primarily due to higher gross profit in both of our segments. Operating profit increased $351 million from the year-ago quarter due to higher gross profit in the Semiconductor segment. As previously mentioned, operating profit in the second quarter of 2006 included both $57 million of the sales tax refund and $60 million from the royalty settlement, partially offset by total stock-based compensation expense of $84 million.
OI&E of $88 million in the second quarter of 2006 increased $36 million sequentially and $32 million from the year-ago quarter, primarily due to the combination of the sales tax refund and increased interest income on higher cash balances resulting from the receipt of the cash proceeds from the sale of our former Sensors & Controls business.
Quarterly income taxes are calculated using an estimate of the effective tax rate for the full year and are based on the tax laws in effect at the end of the quarter. The calculation of the effective tax rate, by definition, does not include discrete tax items. In the second quarter of 2005, we recognized net discrete items of $78 million associated with favorable developments on certain outstanding income tax matters that were partially offset by an accrual for taxes on dividends repatriated under the American Jobs Creation Act of 2004. The effective tax rate for continuing operations for the second quarter of 2006 was approximately 30 percent. This compares with 30 percent for the first quarter and 23 percent for the year-ago quarter. The increase in the effective rate for the second quarter of 2006 from the prior-year quarter was due to, in decreasing order, higher income before income taxes, the expiration of the federal research tax credit, and the effect of non-U.S. tax rates.
As of June 30, 2006, the estimated annual effective tax rate for continuing operations for 2006 is approximately 30 percent. This rate differs from the 35 percent statutory corporate tax rate primarily due to the effects of non-U.S. tax rates and, to a lesser extent, the expected utilization of various tax benefits such as deductions for export sales and U.S. manufacturing.
Income from continuing operations for the second quarter was $739 million, or $0.47 per share, compared with $542 million in the first quarter and $584 million for the year-ago quarter. Net income, which includes continuing and discontinued operations, was $2.39 billion, or $1.50 per share, compared with $585 million in the first quarter and $628 million in the year-ago quarter. Income from discontinued operations was $1.65 billion due to the gain on the sale of our former Sensors & Controls business, compared with $43 million in the first quarter and $44 million in the year-ago quarter.
Our orders for continuing operations were $3.91 billion. This was an increase of $302 million from the prior quarter and an increase of $767 million from the year-ago quarter. Both increases were primarily due to higher demand for our semiconductor products.
Semiconductor revenue in the second quarter was $3.51 billion. This was an increase of 7 percent from the prior quarter primarily due to increased shipments resulting from higher demand for our analog products and, to a lesser extent, the $70 million royalty settlement. Semiconductor revenue increased 26 percent from the year-ago quarter primarily due to increased shipments resulting from higher demand for our DSP and analog products.
Analog revenue was up 8 percent from the prior quarter and 23 percent from the year-ago quarter, primarily due to increased shipments resulting from higher demand for our high-performance analog products and analog products for broadband applications. Revenue from high-performance analog products grew 5 percent from the prior quarter and 32 percent from a year ago, due to increased shipments resulting from higher demand across almost all product lines.
DSP revenue was about even with the prior quarter, and was up 24 percent from the year-ago quarter primarily due to increased shipments resulting from higher demand from the wireless market.
Remaining Semiconductor revenue increased 17 percent from the prior quarter primarily due to the royalty settlement and, to a lesser extent, increased shipments resulting from higher demand for, in decreasing order, RISC (Reduced Instruction Set Computing) microprocessors, DLP products, standard logic products and microcontrollers. Compared with a year ago, remaining Semiconductor revenue increased 31 percent primarily due to a combination of the royalty settlement and increased shipments resulting from higher demand for DLP products. Contributing to a lesser extent were increased shipments resulting from higher demand for RISC microprocessors, standard logic products and microcontrollers.
Royalty revenue for the second quarter reflected the expiration of several licenses since