As the automotive supply industry becomes increasingly global, certain of our European and Asian competitors have begun to establish a stronger presence in North America, which is likely to increase competition in this region.

Seasonality

Our principal operations are directly related to the automotive industry. Consequently, we may experience seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when plants close for model year changeovers and vacations or during periods of high vehicle inventory. Historically, our sales and operating profit have been the strongest in the second and fourth calendar quarters. See Note 13, “Quarterly Financial Data,” to the consolidated financial statements included in this Report.

Employees

As of December 31, ~~2004,~~2005, Lear employed approximately ~~110,000~~115,000 people worldwide, including approximately ~~28,000~~29,000 people in the United States and Canada, ~~34,000~~approximately 40,000 in Mexico ~~35,000~~and Central America, approximately 33,000 in Europe and approximately 13,000 in other regions of the world. A substantial number of our employees are members of unions. We have collective bargaining agreements with several unions, including: the United Auto Workers; the Canadian Auto Workers; UNITE; the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America; and the International Association of Machinists and Aerospace Workers. Virtually all of our unionized facilities in the United States and Canada have a separate agreement with the union that represents the workers at such facilities, with each such agreement having an expiration date that is independent of other collective bargaining agreements. The majority of our European and Mexican employees are members of industrial trade union organizations and confederations within their respective countries. Many of these organizations and confederations operate under national contracts, which are not specific to any one employer. We have occasionally experienced labor disputes at our plants. We have been able to resolve all such labor disputes and believe our relations with our employees are generally good.

See Item ~~7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements” and “— Risk~~1A, “Risk Factors — A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could reduce our sales and harm our ~~profitability.~~profitability,”

~~Sales Backlog~~

~~For information related to our sales backlog, see~~ and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — ~~Sales Backlog.~~Forward-Looking Statements.”

Available Information on our Website

Our website address is http://www.lear.com. We make available on our website, free of charge, the periodic reports that we file with or furnish to the Securities and Exchange Commission (the “SEC”), as well as all amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. We also make available on our website, or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics (which includes specific provisions for our executive officers), charters for the committees of our Board of Directors and other information related to the Company.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at ~~450 Fifth~~100 F Street, ~~N.W.~~N.E., Washington D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information related to issuers that file electronically with the SEC.

ITEM 1A — RISK FACTORS

Our business, financial condition, operating results and cash flows may be impacted by a number of factors. In addition to the factors affecting specific business operations identified in connection with the description of these operations and the financial results of these operations elsewhere in this Report, the most significant factors affecting our operations include the following:


•	*A decline in the production levels of our major customers could reduce our sales and harm our profitability.*

Demand for our products is directly related to the automotive vehicle production by our major customers. Automotive sales and production can be affected by general economic or industry conditions, labor relations issues, regulatory requirements, trade agreements and other factors. Automotive industry conditions in North America and Europe continue to be challenging. In North America, the industry is characterized by significant overcapacity, fierce competition and significant pension and healthcare liabilities for the domestic automakers. In Europe, the market structure is more fragmented with significant overcapacity, and several of our key platforms have experienced production declines.

General Motors and Ford, our two largest customers, together accounted for approximately 44% of our net sales in 2005, excluding net sales to Saab, Volvo, Jaguar and Land Rover, which are affiliates of General Motors and Ford. Inclusive of their respective affiliates, General Motors and Ford accounted for approximately 28% and 25%, respectively, of our net sales in 2005. North American automotive production by General Motors and Ford has declined between 2000 and 2005, and these two customers have recently announced facility closures and other restructuring actions that will negatively impact future production levels for several of our key platforms. While we have been aggressively seeking to expand our business with Asian automotive manufacturers to offset these declines, no assurances can be given as to how successful we will be in doing so. As a result, any decline in the automotive production levels of our major customers, particularly with respect to models for which we are a significant supplier, could materially reduce our sales and harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.


~~ITEM 2 —~~ •	*~~PROPERTIES~~The financial distress of our major customers and within the supply base could harm our profitability.*

During 2005, General Motors and Ford lowered production levels on several of our key platforms in an effort to reduce inventory levels. In addition, these customers have experienced declining market shares in North America and have recently announced significant restructuring actions in an effort to improve profitability. The domestic automotive manufacturers are also burdened with substantial structural costs, such as pension and healthcare costs, that have impacted their profitability and labor relations. Several other global automotive manufacturers are also experiencing operating and profitability issues, as well as labor concerns. In this environment, it is difficult to forecast or assess future customer production schedules, the potential for labor disputes or the success or sustainability of any strategies undertaken by any of our major customers in response to the current industry environment. In addition, cuts in production schedules are also sometimes announced by our customers with little advance notice, making it difficult to respond with corresponding cost reductions.

Our supply base has also been adversely affected by industry conditions. Lower production levels for our key customers and increases in certain raw material, commodity and energy costs have resulted in severe financial distress among many companies within the automotive supply base. Several large suppliers have filed for bankruptcy protection or ceased operations. The continuation of financial distress within the supply base may lead to increased commercial disputes and possible supply chain interruptions. In addition, the adverse industry environment has required us to provide financial support to distressed suppliers or take other measures to ensure uninterrupted production. While we have taken certain actions to mitigate these factors, we have offset only a portion of their overall impact on our operating results.

The continuation or worsening of these industry conditions would harm our profitability.


•	The discontinuation of, the loss of business with respect to or a lack of commercial success of a particular vehicle model for which we are a significant supplier could reduce our sales and harm our profitability.

Although we have purchase orders from many of our customers, these purchase orders generally provide for the supply of a customer’s annual requirements for a particular model and assembly plant, renewable on ayear-to-year basis, rather than for the purchase of a specific quantity of products. Therefore, the discontinuation of, the loss of business with respect to or a lack of commercial success of a particular vehicle model for which we are a

significant supplier could reduce our sales and harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.


•	*Our substantial international operations make us vulnerable to risks associated with doing business in foreign countries.*

As a result of our global presence, a significant portion of our revenues and expenses are denominated in currencies other than U.S. dollars. In addition, we have manufacturing and distribution facilities in many foreign countries, including countries in Asia, Eastern and Western Europe and Central and South America. International operations are subject to certain risks inherent in doing business abroad, including:


	•	exposure to local economic conditions;

	•	expropriation and nationalization;

	•	foreign exchange rate fluctuations and currency controls;

	•	withholding and other taxes on remittances and other payments by subsidiaries;

	•	investment restrictions or requirements;

	•	export and import restrictions; and

	•	increases in working capital requirements related to long supply chains.

Expanding our business in Asian markets and our business relationships with Asian automotive manufacturers are important elements of our strategy. In addition, our strategy includes expanding our European market share and expanding our manufacturing operations in lower-cost regions. As a result, our exposure to the risks described above may be greater in the future. The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. However, any such occurrences could be harmful to our business and our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.


•	*High raw material costs may continue to have a significant adverse impact on our profitability.*

Higher costs for certain raw materials and commodities, principally steel, resins and other oil-based commodities, as well as higher energy costs, had a material adverse impact on our operating results in 2005 and will continue to negatively impact our profitability in 2006. While we have developed strategies to mitigate or partially offset the impact of higher raw material, energy and commodity costs, we cannot assure you that such measures will be successful. In addition, no assurances can be given that the magnitude and duration of these cost increases or any future cost increases will not have a larger adverse impact on our profitability and consolidated financial position than currently anticipated.


•	*A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could reduce our sales and harm our profitability.*

Most of our employees and a substantial number of the employees of our largest customers and suppliers are members of industrial trade unions and are employed under the terms of collective bargaining agreements. Virtually all of our unionized facilities in the United States and Canada have a separate agreement with the union that represents the workers at such facilities, with each such agreement having an expiration date that is independent of other collective bargaining agreements. Collective bargaining agreements covering approximately 57% of our unionized workforce of approximately 92,000 employees, including approximately 16% of our unionized workforce in the United States and Canada, are scheduled to expire during 2006. The current collective bargaining agreements of our three largest customers in the United States expire in 2007. A labor dispute involving us or any of our customers or suppliers or that could otherwise affect our operations could reduce our sales and harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock. A labor dispute involving another supplier to our customers that results in a slowdown or closure of our customers’ assembly plants where our products are included in assembled vehicles

could also have a material adverse effect on our business. In addition, the inability by us or any of our suppliers, our customers or our customers’ other suppliers to negotiate an extension of a collective bargaining agreement covering a large number of employees upon its expiration could reduce our sales and harm our profitability. Significant increases in labor costs as a result of the renegotiation of collective bargaining agreements could also be harmful to our business and our profitability.


•	*Adverse developments affecting one or more of our major suppliers could harm our profitability.*

We obtain components and other products and services from numerous tier II automotive suppliers and other vendors throughout the world. In certain instances, it would be difficult and expensive for us to change suppliers of products and services that are critical to our business. In addition, in some cases, our customers designate our tier II suppliers and as a result, we do not always have the flexibility or authority to change suppliers. Certain of our suppliers are financially distressed or may become financially distressed. In addition, an increasing number of our suppliers are located outside of North America or Western Europe. Any significant disruption in our supplier relationships, including certain relationships with sole-source suppliers, could harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.


•	*A significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers could harm our profitability.*

In the event that our products fail to perform as expected and such failure results in, or is alleged to result in, bodily injuryand/or property damage or other losses, we may be subject to product liability lawsuits and other claims. In addition, we are a party to warranty-sharing and other agreements with our customers related to our products. These customers may seek contribution or indemnification from us for all or a portion of the costs associated with product liability and warranty claims, recalls or other corrective actions involving our products. These types of claims could significantly harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.


•	*We are involved from time to time in legal proceedings and commercial or contractual disputes, which could have an adverse impact on our profitability and consolidated financial position.*

We are involved in legal proceedings and commercial or contractual disputes that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our suppliers, intellectual property matters, personal injury claims and employment matters. No assurances can be given that such proceedings and claims will not have a material adverse effect on our profitability and consolidated financial position.


•	We depend upon cash from our subsidiaries. Therefore, if we do not receive dividends or other distributions from our subsidiaries, it could be more difficult for us to make payments under our indebtedness.

A substantial portion of our revenue and operating income is generated by our wholly-owned subsidiaries. Accordingly, we are dependent on the earnings and cash flows of, and dividends and distributions or advances from, our subsidiaries to provide the funds necessary to meet our debt service obligations. We utilize certain cash flows of our foreign subsidiaries to satisfy obligations locally. Our obligations under our primary credit facility and senior notes are currently guaranteed by certain of our subsidiaries, but such guarantees may be released under certain circumstances.


•	*Risks related to Arthur Andersen LLP.*

Our consolidated financial statements for the year ended December 31, 2001, were audited by Arthur Andersen LLP, independent public accountants. On June 15, 2002, Arthur Andersen LLP was convicted of federal obstruction of justice charges. On August 31, 2002, Arthur Andersen LLP ceased practicing before the SEC.

Holders of our securities may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in any of our financial statements audited by Arthur Andersen LLP.

Arthur Andersen LLP did not participate in the preparation of this Report and did not reissue its audit report with respect to the financial information included in this Report. As a result, holders of our securities may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in the financial information audited by Arthur Andersen LLP. In addition, even if such holders were able to assert such a claim, as a result of its conviction on federal obstruction of justice charges and other lawsuits, Arthur Andersen LLP may fail or otherwise have insufficient assets to satisfy claims made by investors that might arise under federal securities laws or otherwise with respect to the financial information it has audited.

ITEM 1B — UNRESOLVED STAFF COMMENTS

None.

ITEM 2 — PROPERTIES

As of December 31, ~~2004,~~2005, our operations were conducted through ~~271~~282 facilities, some of which are used for multiple purposes, including ~~165~~174 production/manufacturing facilities, 5251 administrative/technical support facilities, 4547 assembly sites, six advanced technology centers and ~~three~~four distribution centers, in 34 countries. We also have warehouse facilities in the regions in which we operate. Our corporate headquarters is located in Southfield, Michigan. Our facilities range in size up to 1,148,000 square feet.

Of our ~~271~~282 total facilities, which include facilities owned or leased by our consolidated subsidiaries, ~~126~~128 are owned and ~~145~~154 are leased with expiration dates ranging from ~~2005~~2006 through 2053. We believe that substantially all of our property and equipment is in good condition and that we have sufficient capacity to meet our current and expected manufacturing and distribution needs. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Financial Condition.”

The following table presents the locations of our operating facilities and the operating ~~segments~~⁽¹⁾segments(1) that use such facilities:

Argentina

Escobar, ~~BA (S)~~BA(S)

Pacheco, ~~BA (E)~~BA(E)

Austria

~~Koeflach (S)~~Graz(S)

Koeflach(S)

Belgium

~~Genk (S)~~Genk(S)

Brazil

~~Betim (S)~~Betim(S)

~~Cacapava (S)~~Cacapava(S)

~~Camacari (S)~~Camacari(S)

~~Gravatai (S)~~Gravatai(S)

Sao ~~Paulo (S)~~Paulo(S)

Canada

Ajax, ~~ON (S)~~ON(S)

Concord, ~~ON (I)~~ON(I)

Kitchener, ~~ON (S)~~ON(S)

Mississauga, ~~ON (I)~~ON(I)

St. Thomas, ~~ON (S)~~ON(S)

Whitby, ~~ON (S)~~ON(S)

Windsor, ~~ON (S)~~ON(S)

China

~~Beijing (A/~~ Beijing(A/T)

~~Changchun (S)~~Changchun(S)

~~Chongqing (S)~~Chongqing(S)

~~Liuzhou (S)~~Liuzhou(S)

North ~~Point (A/~~ Point(A/T)

~~Shanghai (I)~~Shanghai(I)

~~Wuhan (E)~~Shenyang(I)

Wuhan(E)

Czech Republic

~~Kolin (S)~~Kolin(S)

~~Prestice (I)~~Prestice(I)

~~Vyskov (E)~~Vyskov(E)

England

~~Bicester, OX (S)~~Coventry, CV(S)

Coventry, ~~CV (S)~~

~~Coventry, WM (S)~~WM(S)

Liverpool, ~~ME (S)~~ME(S)

Nottingham, ~~NG (S)~~NG(S)

France

~~Cergy (S)~~Cergy(S)

~~Courbouton (S)~~Feignies(S)

~~Feignies (S)~~Garches(E)

~~Garches (E)~~Guipry(S)

~~Lagny-Le-Sec (S)~~Lagny-Le-Sec(S)

~~Offranville (I)~~Offranville(I)

~~Rueil-Malmaison (A/~~ Rueil-Malmaison(A/T)

Germany

~~Allershausen-Leonhardsbuch (S)~~Allershausen-

~~Bersenbruck (E)~~

~~Besigheim (S)~~ Leonhardsbuch(S)

~~Boeblingen (S)~~Bersenbruck(E)

~~Bremen (S)~~Besigheim(S)

~~Ebersberg (I)~~Boeblingen(S)

~~Eisenach (S)~~Bremen(S)

~~Garching-Hochbruck (S)~~Ebersberg(I)

~~Ginsheim-Gustavsburg (M)~~Eisenach(S)

~~Koln (E)~~Garching-Hochbruck(S)

~~Kranzberg (A/~~ Ginsheim-Gustavsburg(M)

Koln(E)

Kranzberg(A/T)

~~Kronach (E)~~Kronach(E)

~~Munich (S)~~Munich(S)

~~Plattling (I)~~Plattling(I)

~~Quakenbruck (S)~~Quakenbruck(S)

~~Remscheid (E)~~Remscheid(E)

~~Rietberg (S)~~Rietberg(S)

~~Saarlouis (E)~~Saarlouis(E)

~~Wackersdorf (S)~~Wackersdorf(S)

~~Wismar (E)~~Wismar(E)

~~Wuppertal (E)~~Wuppertal(E)

~~Zwiesel (I)~~Zwiesel(I)

Honduras

Naco, ~~SB (E)~~SB(E)

San Pedro Sula, ~~CA (E)~~CA(E)

Hungary

~~Godollo (E)~~Godollo(E)

~~Gyongyos (E)~~Gyongyos(E)

~~Gyor (S)~~Gyor(S)

~~Mor (S)~~Mor(S)

India

~~Halol (S)~~Halol(S)

~~Mumbai (S)~~Mumbai(S)

~~Nasik (S)~~Nasik(S)

New ~~Delhi (S)~~Delhi(S)

~~Thane (A/~~ Thane(A/T)

Italy

Caivano, ~~NA (S)~~NA(S)

Cassino, ~~FR (M)~~FR(M)

Grugliasco, ~~TO (S)~~TO(S)

Melfi, ~~PZ (M)~~PZ(M)

Montelabate, ~~PS (I)~~

~~Paderno Dugnano, MI (A/ T)~~PS(I)

Pianfei, ~~CN (I)~~CN(I)

Pozzo d’Adda, ~~MI (S)~~MI(S)

Termini Imerese, ~~PA (S)~~PA(S)

Japan

~~Atsugi-shi (A/~~ Atsugi-shi(A/T)

~~Hiroshima (A/~~ Hiroshima(A/T)

~~Tokyo (E)~~Tokyo(E)

Toyota ~~(A/~~ City(A/T)

~~Utsunomiya (A/~~ Utsunomiya(A/T)

Mexico

~~Arteaga, CO (S)~~

Chihuahua, ~~CH (E)~~CH(E)

Hermosillo, ~~SO (S)~~SO(S)

Juarez, ~~CH (M)~~CH(M)

Mexico City, DF(I)

Puebla, ~~PU (S)~~PU(S)

Ramos Arizpe, ~~CO (S)~~CO(S)

Saltillo, ~~CO (S)~~CO(S)

Santa Catarina, ~~NL (I)~~NL(I)

Silao, ~~GO (S)~~GO(S)

Tlahuac, ~~DF (I)~~DF(I)

Toluca, ~~MX (I)~~MX(I)

Morocco

~~Tangier (E)~~Tangier(E)

Netherlands

~~Weesp (A/~~ Weesp(A/T)

Philippines

LapuLapu City, ~~CE (E)~~CE(E)

Poland

~~Mielec (E)~~Mielec(E)

~~Tychy (S)~~Jaroslaw(S)

Teresin(I)

Tychy(S)

Portugal

Palmela, ~~SL (S)~~

~~Povoa de Lanhoso, BA (E)~~SL(S)

Valongo, ~~PO (E)~~PO(E)

Romania

~~Pitesti (E)~~Pitesti(E)

Russia

Nizhny ~~Novgorod (S)~~Novgorod(S)

Singapore

~~Singapore (S)~~Wisma Atria(S)

Slovakia

~~Lozorno (I)~~Lozorno(I)

South Africa

East ~~London (S)~~London(S)

Port ~~Elizabeth (S)~~Elizabeth(S)

~~Rosslyn (S)~~Rosslyn(S)

South Korea

~~Cheonan (S)~~Cheonan(S)

~~Gyeongju (S)~~Gyeongju(S)

~~Seoul (A/~~ Seoul(A/T)

Spain

~~Almussafes (E)~~Almussafes(E)

~~Avila (E)~~Avila(E)

~~Epila (S)~~Epila(S)

~~Logrono (S)~~Logrono(S)

~~Roquetes (E)~~Roquetes(E)

~~Valdemoro (S)~~Valdemoro(S)

~~Valls (E)~~Valls(E)

Sweden

~~Fargelanda (I)~~Fargelanda(I)

~~Gothenburg (M)~~Gothenburg(M)

~~Tanumshede (I)~~Tanumshede(I)

~~Tidaholm (I)~~Tidaholm(I)

~~Trollhattan (S)~~Trollhattan(S)

Thailand

~~Bangkok (S)~~Bangkok(S)

Muang ~~Nakornratchasima (S)~~

~~Rayong (S)~~Nakornratchasima(S)

Rayong(S)

Tunisia

Bir El ~~Bey (E)~~Bey(E)

Turkey

~~Bostanci-Istanbul (E)~~Bostanci-Istanbul(E)

~~Bursa (S)~~Bursa(S)

United States

Alma, ~~MI (I)~~MI(I)

Arlington, ~~TX (S)~~TX(S)

Atlanta, ~~GA (S)~~GA(S)

Berne, IN(S)

Bridgeton, ~~MO (S)~~MO(S)

Brownstown, MI(S)

Canton, ~~MS (I)~~MS(I)

Carlisle, ~~PA (I)~~PA(I)

Chicago, ~~IL (I)~~IL(I)

Columbus, OH(E)

Covington, ~~VA (I)~~VA(I)

Dayton, ~~TN (I)~~TN(I)

Dearborn, ~~MI (M)~~MI(M)

Detroit, ~~MI (M)~~MI(M)

Duncan, ~~SC (S)~~SC(S)

Edinburgh, ~~IN (I)~~IN(I)

El Paso, ~~TX (M)~~TX(E)

Elsie, ~~MI (S)~~MI(S)

Farwell, ~~MI (S)~~MI(S)

Fenton, ~~MI (S)~~MI(S)

Frankfort, ~~IN (S)~~IN(S)

Fremont, ~~OH (I)~~

~~Grand Rapids, MI (S)~~OH(I)

Greencastle, ~~IN (I)~~IN(I)

Hammond, ~~IN (S)~~IN(S)

Hazelwood, ~~MO (S)~~MO(S)

Hebron, ~~OH (S)~~OH(S)

Highland Park, MI(I)

Holt, ~~MI (I)~~MI(I)

Huron, ~~OH (I)~~OH(I)

Iowa City, ~~IA (I)~~IA(I)

Janesville, ~~WI (S)~~WI(S)

Lebanon, ~~OH (I)~~OH(I)

Lebanon, ~~VA (I)~~VA(I)

Liberty, ~~MO (S)~~MO(S)

Louisville, ~~KY (S)~~

~~Madison, AL (E)~~KY(S)

Madison Heights, ~~MI (S)~~MI(S)

Madisonville, ~~KY (I)~~KY(I)

Manteca, ~~CA (I)~~CA(I)

Marshall, ~~MI (I)~~MI(I)

Mason, ~~MI (S)~~MI(S)

Mendon, ~~MI (I)~~MI(I)

Monroe, ~~MI (S)~~MI(S)

Montgomery, ~~AL (S)~~AL(S)

Morristown, ~~TN (S)~~TN(S)

Newark, ~~DE (S)~~DE(M)

Northwood, ~~OH (I)~~OH(I)

Plymouth, ~~IN (E)~~IN(E)

Plymouth, ~~MI (S)~~MI(S)

Pontiac, ~~MI (A/~~ MI(A/T)

Port Huron, ~~MI (I)~~MI(I)

Rochester Hills, ~~MI (S)~~MI(S)

Romulus, ~~MI (S)~~MI(S)

Roscommon, ~~MI (S)~~MI(S)

Saline, ~~MI (S)~~MI(S)

Selma, ~~AL (S)~~AL(S)

Sheboygan, ~~WI (I)~~WI(I)

Sidney, ~~OH (I)~~OH(I)

Southfield, ~~MI (A/~~ MI(A/T)

Strasburg, ~~VA (I)~~VA(I)

Tampa, ~~FL (E)~~FL(E)

Taylor, ~~MI (E)~~MI(E)

Traverse City, ~~MI (E)~~MI(E)

Troy, ~~MI (A/~~ MI(A/T)

Walker, ~~MI (S)~~MI(S)

Warren, ~~MI (M)~~MI(M)

Warren, ~~OH (I)~~OH(S)

Wauseon, ~~OH (I)~~OH(I)

Wentzville, ~~MO (S)~~

~~Winchester, VA (I)~~MO(S)

Zanesville, ~~OH (E)~~OH(E)

Venezuela

~~Valencia (S)~~Valencia(S)

(1) Legend

S — Seating

I — Interior

~~E — Electronic and electrical~~


E —	Electronic and electrical

M — Multiple segments

~~A/ T — Administrative/ technical~~

~~Certain administrative/technical facilities are included within the operating segments.~~


~~ITEM 3~~A/T —	*~~LEGAL PROCEEDINGS~~*Administrative/technical

Certain administrative/

technical facilities are

included within the

operating segments.

~~Commercial Disputes~~ITEM 3 — LEGAL PROCEEDINGS

Commercial Disputes
We are involved from time to time in legal proceedings and claims, ~~relating to~~including, without limitation, commercial or contractual disputes ~~including~~with our suppliers and competitors. Largely as a result of generally unfavorable industry conditions and financial distress within the automotive supply base, we experienced an increase in commercial and contractual disputes, particularly with our suppliers. ~~We will continue to vigorously defend ourselves against these claims. Based on present information, including our assessment of~~These disputes vary in nature and are usually resolved by negotiations between the merits of the particular claims, we do not expect that these legal proceedings or claims, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations, although the outcomes of these matters are inherently uncertain.parties.

17

On January 29, 2002, Seton Company (“Seton”), one of our leather suppliers, filed a suit alleging that we had breached a purported agreement to purchase leather from Seton for seats for the life of the General Motors GMT 800 program. ~~This suit presently is pending~~Seton filed the lawsuit in the U.S. District Court for the Eastern District of ~~Michigan. Seton seeks~~Michigan seeking compensatory and exemplary damages totaling approximately $97 million, plus interest, on breach of contract and promissory estoppel claims. In May 2005, this case proceeded to trial, and the jury returned a $30 million verdict against us. On September 27, 2005, the Court denied our post-trial motions challenging the judgment and granted Seton’s motion to award prejudgment interest in the amount of approximately $5 million. We are appealing the judgment and the interest award.

On January 26, 2004, we filed a patent infringement lawsuit against Johnson Controls Inc. and Johnson Controls Interiors LLC (together, “JCI”) in the U.S. District Court for the Eastern District of Michigan alleging that JCI’s garage door opener products infringed certain of our radio frequency transmitter patents. JCI counterclaimed seeking a declaratory judgment that the subject patents are invalid and unenforceable, and that JCI is not infringing these patents. JCI also has filed motions for summary judgment asserting that its garage door opener products do not infringe our patents. We are vigorously pursuing our claims against JCI and ~~has submitted a revised report now alleging up to $97 million~~discovery is on-going. A trial in ~~damages;~~the case is currently scheduled for the second quarter of 2006.

After we ~~will challenge several~~filed our patent infringement action against JCI, affiliates of JCI sued one of our vendors and certain of the ~~assumptions~~vendor’s employees in Ottawa Circuit Court, Michigan, on July 8, 2004, alleging misappropriation of trade secrets. The suit alleges that the defendants misappropriated and ~~bases for~~shared with us trade secrets involving JCI’s universal garage door opener product. JCI seeks to enjoin the defendants from selling or attempting to sell a competing product. We are not a defendant in this ~~revised report.~~lawsuit; however, the agreements between us and the defendants contain customary indemnification provisions. We ~~continue to~~do not believe that our garage door opener product benefited from any allegedly misappropriated trade secrets or technology. However, JCI has sought discovery of certain information which we believe is confidential and proprietary, and we have ~~meritorious defenses~~intervened in the case for the limited purpose of protecting our rights with respect to ~~Seton’s liability~~JCI’s discovery efforts. Discovery has been extended to July 2006. A trial date has not yet been scheduled.

On June 13, 2005, The Chamberlain Group (“Chamberlain”) filed a lawsuit against us and ~~damages~~Ford Motor Company (“Ford”) in the Northern District of Illinois alleging patent infringement. Two counts were asserted against us and Ford based upon Chamberlain’s rolling code security system patent and a related product which operates transmitters to actuate garage door openers. Two additional counts were asserted against Ford only (not us) based upon different Chamberlain patents. The Chamberlain lawsuit was filed in connection with the marketing of our universal garage door opener system, which competes with a product offered by JCI. JCI obtained technology from Chamberlain to operate its product. In October 2005, JCI joined the lawsuit as a plaintiff along with Chamberlain, and Chamberlain dismissed its infringement claims against Ford based upon its rolling security system patent. JCI and ~~intend to~~Chamberlain have filed a motion for a preliminary injunction, which we are contesting. We are vigorously ~~defend~~defending the claims asserted in this lawsuit. ~~The~~A trial ~~is expected to begin in the March/ April 2005 timeframe.~~date has not yet been scheduled.

Product Liability Matters

In the event that use of our products results in, or is alleged to result in, bodily injuryand/or property damage or other losses, we may be subject to product liability lawsuits and other claims. In addition, we are a party to warranty-sharing and other agreements with our customers relating to our products. These customers may pursue claims against us for contribution of all or a portion of the amounts sought in connection with product liability and warranty claims. We can provide no assurances that we will not experience material claims in the future or that we will not incur significant costs to defend such claims. In addition, if any of our products are, or are alleged to be, defective, we may be required or requested by our customers to participate in a recall or other corrective action involving such products. Certain of our customers have asserted claims against us for costs related to recalls or other corrective actions involving our products. In certain instances, the allegedly defective

products were supplied by tier II suppliers against whom we have sought or will seek contribution. We carry insurance for certain legal matters, including product liability claims, but such coverage may be limited. We do not maintain insurance for product warranty or recall matters.

Environmental Matters

We are subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for ~~the~~clean-up costs ~~of cleaning up certain damages~~ resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. Our policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance. However, we currently are, have been and in the future may become the subject of formal or informal enforcement actions or procedures.

We have been named as a potentially responsible party at several third-party landfill sites and are engaged in the cleanup of hazardous waste at certain sites owned, leased or operated by us, including several properties acquired in our 1999 acquisition of UT Automotive, Inc. (“UT Automotive”). Certain present and former properties of UT Automotive are subject to environmental liabilities which may be significant. We obtained agreements and indemnities with respect to certain environmental liabilities from United Technologies Corporation (“UTC”) in connection with our acquisition of UT Automotive. UTC manages and directly funds these environmental liabilities pursuant to its agreements and indemnities with us.

While we do not believe that the environmental liabilities associated with our current and former properties will have a material adverse effect on our business, consolidated financial position or results of operations, no assurances can be given in this regard.

One of our subsidiaries and certain predecessor companies were named as defendants in an action filed by three plaintiffs in August 2001 in the Circuit Court of Lowndes County, Mississippi, asserting claims stemming from alleged environmental contamination caused by an automobile parts manufacturing plant located in Columbus, Mississippi. The plant was acquired by us as part of ~~the~~our acquisition of UT Automotive ~~acquisition~~ in May 1999 and sold almost immediately thereafter, in June 1999, to Johnson Electric Holdings Limited (“Johnson Electric”). In December 2002, 61 additional cases were filed by approximately 1,000 plaintiffs in the same court against us and other defendants relating to similar claims. In September 2003, we were dismissed as a party to these cases. In the first half of 2004, we were named again as a defendant in these same 61 additional cases and were also named in five new actions filed by approximately 150 individual plaintiffs related to alleged environmental contamination from the same facility. The plaintiffs in these actions are persons who allegedly were either residentsand/or owned property near the facility or worked at the facility. In November 2004, two additional lawsuits were filed by 28 plaintiffs (individuals and organizations), alleging property damage as a result of the alleged contamination. Each of these complaints seeks compensatory and punitive damages.

~~Most~~

All of the ~~original~~ plaintiffs have ~~recently filed motions to dismiss~~dismissed their claims for health effects and personal injury damages; therefore, approximately three-fourths of the plaintiffs should be voluntarily dismissed from these lawsuits. Upon the completion of these dismissals, we anticipate that there will be approximately 300 plaintiffs remaining in the case to proceed with property damage claims only.damages without prejudice. There is the potential that ~~the dismissed~~these plaintiffs could seek separate counsel to re-file their personal injury claims. ~~To date,~~Currently, there ~~has been limited discovery in these cases and the probability of liability and the amount of damages~~are approximately 270 plaintiffs remaining in the ~~event~~lawsuits who are proceeding with property damage claims only. In March 2005, the venue for these lawsuits was transferred from Lowndes County, Mississippi, to Lafayette County, Mississippi. In April 2005, certain plaintiffs filed an amended complaint alleging negligence, nuisance, intentional tort and conspiracy claims and seeking compensatory and punitive damages. In April 2005, the court scheduled the first trial date for the first group of ~~liability are unknown.~~ plaintiffs to commence March 2006. The March 2006 trial date has since been continued until a date to be set by the court, and discovery has extended into the first quarter of 2006.

UTC, the former owner of UT Automotive, and Johnson Electric have each sought indemnification for losses associated with the Mississippi claims from us under the respective acquisition agreements, and we have claimed indemnification from them under the same agreements. To date, no company admits to, or has been found to have, an obligation to fully defend and indemnify any other. We intend to vigorously defend against these claims and believe that we will eventually be indemnified by either UTC or Johnson Electric for a substantial portion of the resulting losses, if any. However, the ultimate outcome of these matters is unknown.

Other Matters

In January 2004, the Securities and Exchange Commission (the “SEC”) commenced an informal inquiry into our September 2002 amendment of our 2001Form 10-K. The amendment was filed to report our employment of

~~Other Matters~~
relatives of certain of our directors and officers and certain related party transactions. The SEC’s inquiry does not relate to our consolidated financial statements. In February 2005, the staff of the SEC informed us that it proposed to recommend to the SEC that it issue an administrative “cease and desist” order as a result of our failure to disclose the related party transactions in question prior to the amendment of our 2001Form 10-K. We expect to consent to the entry of the order as part of a settlement of this matter.

In February 2006, we received a subpoena from the SEC in connection with an ongoing investigation of General Motors Corporation by the SEC. This investigation has been previously reported by General Motors as involving, among other things, General Motors’ accounting for payments and credits by suppliers. The SEC subpoena seeks the production of documents relating to payments or credits by us to General Motors from 2001 to the present. We are cooperating with the SEC in connection with this matter.
Prior to our acquisition of UT Automotive from UTC in May 1999, one of our subsidiaries purchased the stock of a UT Automotive subsidiary. In connection with the acquisition, we agreed to indemnify UTC for certain tax consequences if the Internal Revenue Service (the “IRS”) overturned UTC’s tax treatment of the transaction. The IRS proposed an adjustment to UTC’s tax treatment of the transaction seeking an increase in tax of approximately $88 million, excluding interest. In April 2005, a protest objecting to the proposed adjustment was filed with the IRS. The case was then referred to the Appeals Office of the IRS for an independent review. There have been several meetings and discussions with the IRS Appeals personnel in an attempt to resolve the case. Although we believe that valid support exists for UTC’s tax positions, we and UTC are currently in settlement negotiations with the IRS. An indemnity payment by us to UTC for the ultimate amount due to the IRS would constitute an adjustment to the purchase price and resulting goodwill of the UT Automotive acquisition, if and when made, and would not be expected to have a material effect on our reported earnings.
Although we record reserves for legal, product warranty and environmental matters in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” the outcomes of these matters are inherently uncertain. Actual results may differ significantly from current estimates. See Item 1A, “Risk Factors.”
We are involved in certain other legal actions and claims arising in the ordinary course of business, including, without limitation, commercial disputes, intellectual property matters, personal injury claims, tax claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, we do not believe that any of these other legal proceedings or matters in which we are currently involved, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations. See Item ~~7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Matters” and “— Risk~~1A, “Risk Factors — We are involved from time to time in legal proceedings and commercial or contractual disputes, which could have an adverse impact on our profitability and consolidated financial ~~position.~~position,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Matters.”
ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In January 2004, the Securities and Exchange Commission (the “SEC”) commenced an informal inquiry into our September 2002 amendment of our 2001 Form 10-K. The amendment was filed to report our employment of relatives of certain of our directors and officers and certain related party transactions. The SEC’s inquiry does not relate to our financial statements. In February 2005, the staff of the SEC informed us that it proposed to recommend to the SEC that it issue an administrative “cease and desist” order as a result of our failure to disclose the related party transactions in question prior to the amendment of our 2001 Form 10-K. We expect to consent to the entry of the order as part of a settlement of this matter.
~~ITEM 4 —~~ ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~
No matters were submitted to a vote of security holders during the fourth quarter of ~~2004.~~2005.

20

SUPPLEMENTARY ITEM — EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names, ages and positions of our executive officers. Executive officers are elected annually by our Board of Directors and serve at the pleasure of our Board.

Name

Age

Position

Shari L. Burgess 4647 Vice President and Treasurer
Douglas G. DelGrosso 4344 President and Chief Operating Officer ~~— Americas~~
~~William C. Dircks~~ 44 ~~Vice President and Corporate Controller~~
Roger A. Jackson 5859 Senior Vice President — Human Resources
James L. Murawski 54 Vice President and Corporate Controller
Daniel A. Ninivaggi 4041 Senior Vice President, Secretary and General Counsel
Robert E. Rossiter 5960 Chairman and Chief Executive Officer
~~Donald J. Stebbins~~Raymond E. Scott 4740 Senior Vice President and ~~Chief Operating Officer — Europe, Asia and Africa~~President, North American Customer Group
Matthew J. Simoncini 45 Vice President of Global Finance
James H. Vandenberghe 5556 Vice Chairman
David C. Wajsgras 4546 Executive Vice President and Chief Financial Officer
P. Joseph Zimmer 47 Senior Vice President and ~~Chief Financial Officer~~President, Global Seating Systems Product Group

Set forth below is a description of the business experience of each of our executive officers.
Shari L. Burgess Ms. Burgess is our Vice President and Treasurer, a position she has held since August 2002. Previously, she served as our Assistant Treasurer since July 2000 and in various financial positions since November 1992.

Douglas G. DelGrosso Mr. DelGrosso is our President and Chief Operating Officer, ~~— Americas,~~ a position he has held since ~~August 2004.~~May 2005. Previously, he served as our President and Chief Operating Officer — Americas since August 2004, our President and Chief Operating Officer — Europe, Asia and Africa since August 2002, our Executive Vice ~~Presi-~~
17
~~dent~~President — International since September 2001, our Senior Vice President — Product Focus Group since October 2000 and our Senior Vice President and President — North American and South American Operations since May 1999, our Senior Vice President — Interior Systems Group and Seat Trim Division since January 1999, our Vice President and President — GM Division since May 1997 and our Vice President and President — Chrysler Division since December 1995.
~~William C. Dircks~~ ~~Mr. Dircks is our Vice President and Corporate Controller, a position he has held since May 2002. Previously, he served as our Assistant Corporate Controller since May 2000.~~1999. Prior to ~~joining~~this, Mr. DelGrosso held several senior operational positions and has been employed by Lear ~~Mr. Dircks was employed in various financial positions at Honeywell International Inc., including Corporate Finance Director for Enterprise Resource Planning.~~since 1984.

Roger A. Jackson Mr. Jackson is our Senior Vice President — Human Resources, a position he has held since October 1995. Prior to joining Lear, he was employed as Vice President — Human Resources at Allen Bradley, a ~~wholly—owned~~wholly-owned subsidiary of Rockwell International, since 1991. Mr. Jackson was employed by Rockwell International or one of its subsidiaries from December 1977 until September 1995.
James L. Murawski Mr. Murawski is our Vice President and Corporate Controller, a position he has held since March 2005. Previously, he served as our Vice President of Internal Audit since June 2003. Prior to joining Lear, Mr. Murawski was employed in public accounting at Deloitte & Touche for fourteen years and in various financial positions at Collins & Aikman Corporation, TRW Automotive and LucasVarity.

Daniel A. Ninivaggi Mr. Ninivaggi is our Senior Vice President, Secretary and General Counsel. He has been Senior Vice President since June 2004 and

21


		joined Lear as our Vice President, Secretary and General Counsel in July 2003. Prior to joining Lear, Mr. Ninivaggi was a partner since 1998 in the New York office of Winston & Strawn LLP, specializing in corporate finance, securities law and mergers and acquisitions.

Robert E. Rossiter		Mr. Rossiter is our Chairman and Chief Executive Officer, a position he has held since January 2003. Mr. Rossiter has served as our Chief Executive Officer since October 2000, as our President from 1984 until December 2002 and as our Chief Operating Officer from 1988 until April 1997 and from November 1998 until October 2000. Mr. Rossiter also served as our Chief Operating Officer — International Operations from April 1997 until November 1998. Mr. Rossiter has been a director of Lear since 1988.

~~Donald J. Stebbins~~Raymond E. Scott		Mr. ~~Stebbins~~Scott is our Senior Vice President and ~~Chief Operating Officer — Europe, Asia and Africa,~~President, North American Customer Group, a position he has held since August ~~2004.~~2005. Previously, he served as our President, General Motors Division since June 2005, our President, European Customer Focused Division since June 2004 and ~~Chief Operating Officer — Americas~~our President, General Motors Division since ~~August 2002, our Executive Vice President — Americas since September 2001, our Senior Vice President and Chief Financial Officer since April 1997 and~~November 2000.

Matthew J. Simoncini		Mr. Simoncini is our Vice President of Global Finance, a position he has held since February 2006. Previously, he served as our Vice President of Operational Finance since June 2004, our Vice President of Finance — Europe since 2001 and ~~Treasurer since 1992.~~prior to 2001, in various senior financial positions for both Lear and United Technologies Automotive, which was acquired by Lear in 1999.

James H. Vandenberghe		Mr. Vandenberghe is our Vice Chairman, a position he has held since November ~~1998.~~1998, and effective March 10, 2006, will become our interim Chief Financial Officer. Mr. Vandenberghe also served as our President and Chief Operating Officer — North American Operations from April 1997 until November 1998, our Chief Financial Officer from 1988 until April 1997 and as our Executive Vice President from 1993 until April 1997. Mr. Vandenberghe has been a director of Lear since 1995.


David C. Wajsgras		Mr. Wajsgras is our ~~Senior~~Executive Vice President and Chief Financial Officer, a position he has held since ~~January 2002.~~August 2005. Previously, he served as our Senior Vice President and Chief Financial Officer since January 2002 and our Vice President and Corporate Controller since September 1999. Prior to joining Lear, Mr. Wajsgras served as Corporate Controller of Engelhard Corporation from September 1997 until August 1999 and was employed in various senior financial positions at AlliedSignal Inc. (now Honeywell International Inc.), including Chief Financial Officer of the Global Shared Services organization, from March 1992 until September 1997. Mr. Wajsgras is also a director of 3Com Corporation. Effective March 10, 2006, Mr. Wajsgras will resign as Executive Vice President and Chief Financial Officer of Lear to become Senior Vice President and Chief Financial Officer of Raytheon Company, a provider of defense and aerospace systems.


P. Joseph Zimmer		Mr. Zimmer is our Senior Vice President and President, Global Seating Systems Product Group, a position he has held since August 2005. Previously, he served as our President, Interior Products Division —Europe since December 2003 and our President, Seating Systems Division since October 2000.

PART II
ITEM 5 —    MARKET FOR THE COMPANY’S COMMON ~~STOCK,~~EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Lear’s common stock is listed on the New York Stock Exchange under the symbol “LEA.” The Transfer Agent and Registrar for Lear’s common stock is The Bank of New York, located in New York, New York. On February ~~25, 2005,~~28, 2006, there were ~~1,352~~1,387 holders of record of Lear’s common stock.
~~A summary~~
The high and low sales prices per share of ~~2004~~our common stock, as reported on the New York Stock Exchange, and ~~2003~~the amount of our dividend declarations isfor 2005 and 2004 are shown below:
~~Dividend Amount~~ ~~Declaration Date~~ ~~Record Date~~ ~~Payment Date~~
~~$0.20~~ ~~November 13, 2003~~ ~~December 15, 2003~~ ~~January 9, 2004~~
~~$0.20~~ ~~February 3, 2004~~ ~~February 18, 2004~~ ~~March 8, 2004~~
~~$0.20~~ ~~May 13, 2004~~ ~~May 28, 2004~~ ~~June 14, 2004~~
~~$0.20~~ ~~August 12, 2004~~ ~~August 27, 2004~~ ~~September 13, 2004~~
~~$0.20~~ ~~November 11, 2004~~ ~~November 26, 2004~~ ~~December 13, 2004~~

Price Range of

Common Stock Cash Dividend

For the Year Ended December 31, 2005:
High Low per Share

4^th Quarter
$ 33.50 $ 27.09 $ 0.25
3^rd Quarter
$ 42.77 $ 32.43 $ 0.25
2^nd Quarter
$ 44.29 $ 33.89 $ 0.25
1^st Quarter
$ 60.05 $ 43.96 $ 0.25

Price Range of

Common Stock Cash Dividend

For the Year Ended December 31, 2004:
High Low per Share

4^th Quarter
$ 61.26 $ 49.73 $ 0.20
3^rd Quarter
$ 58.24 $ 52.08 $ 0.20
2^nd Quarter
$ 65.90 $ 54.60 $ 0.20
1^st Quarter
$ 68.88 $ 58.15 $ 0.20
We did not pay cash dividends prior to January 9, 2004.

On ~~January 13, 2005,~~February 9, 2006, our Board of Directors declared a cash dividend of $0.25 per share of common stock, payable on March ~~14, 2005,~~13, 2006, to shareholders of record at the close of business on February ~~25, 2005. We expect to pay quarterly~~24, 2006. The payment of cash dividends in the future ~~although such payment~~ is dependent upon our financial condition, results of operations, capital requirements, alternative uses of capital and other factors. Also, we are subject to the restrictions on the payment of dividends contained in our amended and restated primary credit facility and in certain other contractual obligations. Under our amended and restated primary credit facility, payment of a quarterly dividend is permitted if at the time our Board of Directors declares such dividend, no default under our primary credit facility has occurred, is occurring or would occur as a result of such dividend. In addition, such dividends (and other similar payments) are not to exceed, in the aggregate, in any fiscal quarter, the greater of (i) $25,000,000; or (ii) (a) 100% of our (and our subsidiaries’) consolidated net income (as defined in our primary credit facility) for the four consecutive quarters immediately prior to the payment quarter (50% if we are less than “investment grade status” as defined in our primary credit facility) less (b) the cash amount of all dividends (and other similar payments) paid and redemptions made with respect to our common stock during the same four quarters.
19

As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capitalization — Common Stock Repurchase Program,” in November 2004, our Board of Directors approved a new common stock repurchase program which replaced ~~our~~the prior program. ~~Our~~The current program permits the discretionary repurchase of up to 5,000,000 shares of our common stock through November 15, 2006. As of December 31, ~~2004, there~~2005, we had ~~been no repurchases~~repurchased 490,900 shares of our outstanding common stock under this program. ~~A summary of the~~There were no shares ~~of our common stock~~ repurchased under ~~our prior~~this program during the quarter ended December 31, ~~2004, is shown below:~~2005.

Maximum Number of Shares
Total Number Average Total Number of Shares that May Yet be
of Shares Price Paid Repurchased as Part of Publicly Repurchased Under the
Period Repurchased per Share Announced Plans or Programs Prior Program

October 3, 2004 through October 30, 2004 899,400 $ 52.31 * 899,400 1,433,900
October 31, 2004 through November 27, 2004 — N/A — —
November 28, 2004 through December 31, 2004 — N/A — —

Total 899,400 $ 52.31 899,400 —

23
*~~Excludes commissions of $0.03 per share.~~
      ~~The high and low sales prices per share of our common stock, as reported on the New York Stock Exchange, are shown below:~~

Price Range of
Common Stock

For the Year Ended December 31, 2004: High Low

4^thQuarter
$ 61.26 $ 49.73
3^rdQuarter
$ 58.24 $ 52.08
2^ndQuarter
$ 65.90 $ 54.60
1^stQuarter
$ 68.88 $ 58.15

Price Range of
Common Stock

For the Year Ended December 31, 2003: High Low

4^thQuarter
$ 63.12 $ 52.64
3^rdQuarter
$ 56.47 $ 46.02
2^ndQuarter
$ 47.56 $ 35.35
1^stQuarter
$ 41.66 $ 33.06
20
ITEM 6 — SELECTED FINANCIAL DATA
~~ITEM 6 —~~ ~~SELECTED FINANCIAL DATA~~

The following ~~income~~ statement of operations, balance sheet and cash flow statement data were derived from our consolidated financial statements. Our consolidated financial statements for the years ended December 31, 2005, 2004, 2003 and 2002, have been audited by Ernst & Young LLP. Our consolidated financial statements for the ~~years~~year ended December 31, 2001, ~~and 2000,~~ have been audited by Arthur Andersen LLP. The selected financial data below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the notes thereto included in this Report. For a discussion of the risks related to Arthur Andersen LLP’s audit of our financial statements, ~~please~~ see Item ~~7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk~~1A, “Risk Factors — Risks related to Arthur Andersen LLP.”

For the Year Ended December 31,

2004 2003 2002 2001 (1) 2000 (2)

(In millions (3))
Statement of Income Data:

Net sales $ 16,960.0 $ 15,746.7 $ 14,424.6 $ 13,624.7 $ 14,072.8
Gross profit 1,402.1 1,346.4 1,260.3 1,034.8 1,450.1
Selling, general and administrative expenses 633.7 573.6 517.2 514.2 524.8
Amortization of goodwill — — — 90.2 89.9
Interest expense 165.5 186.6 210.5 254.7 316.2
Other expense, net (4) 52.7 52.0 64.1 85.8 47.2

Income before provision for income taxes and cumulative effect of a change in accounting principle 550.2 534.2 468.5 89.9 472.0
Provision for income taxes 128.0 153.7 157.0 63.6 197.3

Income before cumulative effect of a change in accounting principle 422.2 380.5 311.5 26.3 274.7
Cumulative effect of a change in accounting principle, net of tax (5) — — 298.5 — —

Net income $ 422.2 $ 380.5 $ 13.0 $ 26.3 $ 274.7

Basic net income per share $ 6.18 $ 5.71 $ 0.20 $ 0.41 $ 4.21
Diluted net income per share (6) $ 5.77 $ 5.31 $ 0.29 $ 0.40 $ 4.17
Weighted average shares outstanding — basic 68,278,858 66,689,757 65,365,218 63,977,391 65,176,499
Weighted average shares outstanding — diluted (6) 74,727,263 73,346,568 71,289,991 65,305,034 65,840,964
Dividends per share $ 0.80 $ 0.20 $ — $ — $ —
Balance Sheet Data:

Current assets $ 4,372.0 $ 3,375.4 $ 2,507.7 $ 2,366.8 $ 2,828.0
Total assets 9,944.4 8,571.0 7,483.0 7,579.2 8,375.5
Current liabilities 4,647.9 3,582.1 3,045.2 3,182.8 3,371.6
Long-term debt 1,866.9 2,057.2 2,132.8 2,293.9 2,852.1
Stockholders’ equity 2,730.1 2,257.5 1,662.3 1,559.1 1,600.8
Statement of Cash Flows Data:

Cash flows from operating activities $ 675.9 $ 586.3 $ 545.1 $ 829.8 $ 753.1
Cash flows from investing activities $ (472.5 ) $ (346.8 ) $ (259.3 ) $ (201.1 ) $ (225.1 )
Cash flows from financing activities $ 166.1 $ (158.6 ) $ (295.8 ) $ (645.5 ) $ (523.8 )
Capital expenditures $ 429.0 $ 375.6 $ 272.6 $ 267.0 $ 322.3
Other Data (unaudited):

Ratio of earnings to fixed charges (7) 3.7 x 3.4 x 3.0 x 1.3 x 2.4 x
Employees as of year end 110,083 111,022 114,694 113,577 121,636
North American content per vehicle (8) $ 588 $ 593 $ 579 $ 572 $ 553
North American vehicle production (9) 15.7 15.9 16.4 15.5 17.2
European content per vehicle (10) $ 354 $ 310 $ 247 $ 233 $ 224
European vehicle production (11) 18.7 18.2 18.1 18.3 18.4
Western European content per vehicle (12) $ 379 $ 324 $ 257 $ 240 $ 235
Western European vehicle production (13) 16.3 16.3 16.4 16.7 16.5

For the Year Ended December 31,
2005(1) 2004 2003 2002 2001(2)
(In millions(3))

Statement of Operations Data:

Net sales $ 17,089.2 $ 16,960.0 $ 15,746.7 $ 14,424.6 $ 13,624.7
Gross profit 736.0 1,402.1 1,346.4 1,260.3 1,034.8
Selling, general and administrative expenses 630.6 633.7 573.6 517.2 514.2
Goodwill impairment charges 1,012.8 — — — —
Amortization of goodwill — — — — 90.2
Interest expense 183.2 165.5 186.6 210.5 254.7
Other expense, net(4) 38.0 38.6 51.8 52.1 78.3

Income (loss) before provision for income taxes, minority interests in consolidated subsidiaries, equity in net (income) loss of affiliates and cumulative effect of a change in accounting principle (1,128.6 ) 564.3 534.4 480.5 97.4
Provision for income taxes 194.3 128.0 153.7 157.0 63.6
Minority interests in consolidated subsidiaries 7.2 16.7 8.8 13.3 11.5
Equity in net (income) loss of affiliates 51.4 (2.6 ) (8.6 ) (1.3 ) (4.0 )

Income (loss) before cumulative effect of a change in accounting principle (1,381.5 ) 422.2 380.5 311.5 26.3
Cumulative effect of a change in accounting principle, net of tax(5) — — — 298.5 —

Net income (loss) $ (1,381.5 ) $ 422.2 $ 380.5 $ 13.0 $ 26.3

Basic net income (loss) per share $ (20.57 ) $ 6.18 $ 5.71 $ 0.20 $ 0.41
Diluted net income (loss) per share(6) $ (20.57 ) $ 5.77 $ 5.31 $ 0.29 $ 0.40
Weighted average shares outstanding — basic 67,166,668 68,278,858 66,689,757 65,365,218 63,977,391
Weighted average shares outstanding — diluted(6) 67,166,668 74,727,263 73,346,568 71,289,991 65,305,034
Dividends per share $ 1.00 $ 0.80 $ 0.20 $ — $ —

24

For the Year Ended December 31,
2005(1) 2004 2003 2002 2001(2)
(In millions(3))

Balance Sheet Data:

Current assets $ 3,846.4 $ 4,372.0 $ 3,375.4 $ 2,507.7 $ 2,366.8
Total assets 8,288.4 9,944.4 8,571.0 7,483.0 7,579.2
Current liabilities 4,106.7 4,647.9 3,582.1 3,045.2 3,182.8
Long-term debt 2,243.1 1,866.9 2,057.2 2,132.8 2,293.9
Stockholders’ equity 1,111.0 2,730.1 2,257.5 1,662.3 1,559.1
Statement of Cash Flows Data:

Cash flows from operating activities $ 560.8 $ 675.9 $ 586.3 $ 545.1 $ 829.8
Cash flows from investing activities (531.3 ) (472.5 ) (346.8 ) (259.3 ) (201.1 )
Cash flows from financing activities (347.0 ) 166.1 (158.6 ) (295.8 ) (645.5 )
Capital expenditures 568.4 429.0 375.6 272.6 267.0
Other Data (unaudited):

Ratio of earnings to fixed charges(7) — 3.7 x 3.4 x 3.0 x 1.3 x
Employees as of year end 115,113 110,083 111,022 114,694 113,577
North American content per vehicle(8) $ 586 $ 588 $ 593 $ 579 $ 572
North American vehicle production(9) 15.8 15.7 15.9 16.4 15.5
European content per vehicle(10) $ 347 $ 351 $ 310 $ 247 $ 233
European vehicle production(11) 18.9 18.9 18.2 18.1 18.3
(1) ~~(1)~~ Results include the effect of $1,012.8 million of goodwill impairment charges, $82.3 million of fixed asset impairment charges, $104.4 million of restructuring and related manufacturing inefficiency charges (including $15.1 million of fixed asset impairment charges), $39.2 of litigation-related charges, $46.7 million of charges related to the divestitureand/or capital restructuring of joint ventures, $300.3 million of tax charges, consisting of a U.S. deferred tax asset valuation allowance of $255.0 million and an increase in related tax reserves of $45.3 million, and a tax benefit related to a tax law change in Poland of $17.8 million.
(2) Results include the effect of $149.2 million of restructuring and other charges, ~~($110.2 million after tax),~~ $90.2 million of goodwill amortization, ~~($83.2 million after tax),~~ $13.0 million of premium and write-off of deferred financing fees related to the prepayment of debt ~~($7.9 million after tax)~~ and a $15.0 million net loss on the sale of certain businesses and other non-recurring ~~transactions ($15.7 million after tax).~~
21
~~(2)~~ Results include $89.9 million of goodwill amortization ($82.9 million after tax) and the effect of a $3.2 million net gain on the sale of our sealants and foam rubber business, the sale of certain foreign businesses and other non-recurring transactions ($1.9 million loss after tax).transactions.

(3) ~~(3)~~ Except per share data, weighted average shares outstanding, ratio of earnings to fixed charges, employees as of year end ~~North American~~and content per vehicle ~~European content per vehicle and Western European content per vehicle.~~information.

(4) ~~(4)~~ Includes state and local non-income related taxes, foreign exchange gains and losses, ~~minority interests in consolidated subsidiaries, equity in net income of affiliates,~~ gains and losses on the sales of fixed assets and other miscellaneous income and expense.

(5) ~~(5)~~ The cumulative effect of a change in accounting principle results from goodwill impairment charges recorded in conjunction with the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

(6) ~~(6)~~ On December 15, 2004, ~~the Company~~we adopted the provisions of Emerging Issues Task Force (“EITF”) 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” Accordingly, diluted net income per share and weighted average shares outstanding — diluted have been restated to reflect the 4,813,056 shares issuable upon conversion of ~~the Company’s~~our outstanding ~~zero- coupon~~zero-coupon convertible senior notes since the issuance date of February 14, 2002.
25
(7) ~~(7)~~ “Fixed charges” consist of interest on debt, amortization of deferred financing fees and that portion of rental expenses representative of interest. “Earnings” consist of income (loss) before provision for income taxes, minority interests in consolidated subsidiaries, equity in the undistributed net ~~income~~(income) loss of affiliates, fixed charges and cumulative effect of a change in accounting principle. Earnings in 2005 were insufficient to cover fixed charges by $1,123.3 million. Accordingly, such ratio is not presented.

(8) ~~(8)~~ “North American content per vehicle” is our net sales in North America divided by estimated total North American vehicle production. Content per vehicle data excludes business conducted through non-consolidated joint ventures. Content per vehicle data for ~~2003~~2004 has been updated to reflect actual production levels.

(9) ~~(9)~~ “North American vehicle production” includes car and light truck production in the United States, Canada and Mexico as provided by ~~J.D. Power and Associates.~~Ward’s Automotive. Production data for ~~2003~~2004 has been updated to reflect actual production levels.
(10) “European content per vehicle” is our net sales in Europe divided by estimated total European vehicle production. Content per vehicle data excludes business conducted through non-consolidated joint ventures. Content per vehicle data for ~~2003~~2004 has been updated to reflect actual production levels.

(11) “European vehicle production” includes car and light truck production in Austria, Belgium, Bosnia, Czech Republic, Finland, France, Germany, Hungary, Italy, Kazakhstan, ~~the~~ Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Turkey, ~~the~~ Ukraine and ~~the~~ United Kingdom as provided by J.D. Power and Associates. Production data for ~~2003~~2004 has been updated to reflect actual production levels.
~~(12)~~ “Western European content per vehicle” is our net sales in Western Europe divided by estimated total Western European vehicle production. Content per vehicle data excludes business conducted through non-consolidated joint ventures. Content per vehicle data for 2003 has been updated to reflect actual production levels.
~~(13)~~ “Western European vehicle production” includes car and light truck production in Austria, Belgium, France, Germany, Italy, the Netherlands, Portugal, Spain, Sweden and the United Kingdom as provided by J.D. Power and Associates. Production data for 2003 has been updated to reflect actual production levels.

26
22
ITEM 7 —    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview

We were incorporated in Delaware in 1987 and are one of the world’s largest automotive interior systems suppliers based on net sales. Our net sales have grown from ~~$12.4~~$14.1 billion for the year ended December 31, ~~1999,~~2000, to ~~$17.0~~$17.1 billion for the year ended December 31, ~~2004. The major source of our internal growth has been new program awards.~~2005. We supply every major automotive manufacturer in the world, including General Motors, Ford, DaimlerChrysler, BMW, PSA, Volkswagen, Fiat, ~~Volkswagen,~~ Renault-Nissan, Hyundai, Mazda, ~~Toyota,~~ Subaru and ~~Hyundai.~~Toyota.

We ~~have capabilities in all five principal segments of the~~supply automotive manufacturers with complete automotive seat systems, electrical distribution systems and various electronic products. We also supply automotive interior ~~market: seat systems;~~components and systems, including instrument panels and cockpit ~~systems;~~systems, headliners and overhead ~~systems;~~systems, door ~~panels;~~panels and flooring and acoustic systems.
In light of recent customer and market trends, we have been evaluating strategic alternatives with respect to our interior segment. On October 17, 2005, we entered into a framework agreement relating to a proposed joint venture relationship with WL Ross & Co. LLC and Franklin Mutual Advisers, LLC. We ~~are also one~~would hold a non-controlling interest in the new joint venture that would explore acquisition opportunities in the automotive interior components sector, including a possible acquisition of all or a portion of Collins & Aikman Corporation. The proposed joint venture would involve all or a portion of our interior segment, but not our seating or electronic and electrical segments. Establishment of the ~~leading global suppliers~~proposed joint venture is subject to the negotiation and execution of ~~automotive electrical distribution systems. As a result of these capabilities,~~definitive agreements and other conditions. In the event that we fail to achieve resolution on various matters in such negotiations, we will continue to explore other strategic alternatives with respect to this segment. No assurances can ~~offer our customers fully integrated automotive interiors, including electronic products and electrical distribution systems. We were awarded~~be given that the ~~first-ever total interior integrator program by General Motors for the 2006 Cadillac DTS and Buick Lucerne models. As a total interior integrator, we work closely with the customer~~proposed joint venture will be completed on the ~~design and have lead~~terms contemplated or ~~sole responsibility for the engineering, component/module sourcing, manufacturing and delivery of the automotive interiors for these two passenger cars.~~at all.

Demand for our products is directly related to automotive vehicle production. Automotive sales and production can be affected by general economic or industry conditions, labor relations issues, regulatory requirements, trade agreements and other factors. Our operating results are also significantly impacted by what is referred to in this section as “vehicle platform mix”; that is, the overall commercial success of the vehicle platforms for which we supply particular products, as well as our relative profitability on these platforms. In addition, our two largest customers, General Motors and Ford, accounted for approximately 43% of our net sales in 2004, excluding net sales to Opel, Saab, Volvo, Jaguar and Land Rover, which are affiliates of General Motors or Ford. A significant loss of business with respect to any vehicle model for which we are a significant supplier, or a decrease in the production levels of any such models, could ~~materially~~have a material adverse impact on our future operating results. In addition, our two largest customers, General Motors and ~~negatively affect~~Ford, accounted for approximately 44% of our net sales in 2005, excluding net sales to Saab, Volvo, Jaguar and Land Rover, which are affiliates of General Motors or Ford. The automotive operations of both General Motors and Ford experienced significant operating losses in 2005 and recently announced restructuring actions, which could have a material impact on our future operating results.

Automotive industry conditions in North America and Europe continue to be challenging. In North America, the industry is characterized by significant overcapacity, fierce competition and significant pension and healthcare liabilities for the domestic automakers. In ~~addition, the domestic automakers have recently announced production cuts which significantly impact several of our key platforms. In~~ Europe, the market structure is ~~relatively~~more fragmented with significant ~~overcapacity, and~~overcapacity. We expect these challenging industry conditions to continue in the foreseeable future. During 2005, the domestic automakers lowered production levels on several of our key platforms, ~~experienced significant production declines in 2004.~~particularly within the traditional sport utility vehicle market segment. In ~~both~~addition, many of our ~~major markets,~~key platforms in North America and Europe underwent model changeovers or refreshenings in 2005. As a result, our vehicle platform mix had a material adverse impact on our operating results in 2005, and we experienced a significant increase in launch costs. Launch costs are expected to moderate in 2006.
In 2005, the market share of certain of our key ~~platforms are undergoing model changeovers or refreshenings that will have a larger than normal adverse impact on~~customers in both North America and Europe declined. There remains considerable uncertainty regarding our ~~vehicle platform mix~~customers’ production schedules in ~~2005.~~2006. Historically, the majority of our sales have been derived from theU.S.-based automotive manufacturers in North America ~~as well as~~and, to a lesser extent, automotive manufacturers in Western Europe. As discussed below, our ability to increase sales in the future will depend, in part, on our ability to increase our penetration of Asian automotive manufacturers worldwide and leverage our existing North American and European customer base across all product lines. See Item 1A, “Risk Factors.”

27
Our customers require us to reduce costs and, at the same time, assume ~~greater~~significant responsibility for the design, development and engineering of our products. Our profitability is largely dependent on our ability to achieve product cost reductions through manufacturing efficiencies, product design enhancement and ~~integration of interior products.~~supply chain management. We also seek to enhance our profitability by investing in technology, design capabilities and new product initiatives that respond to the needs of our customers and consumers. ~~Our profitability is also dependent on our ability to achieve product cost reductions, including cost reductions from our suppliers. Finally, we~~We continually evaluate alternatives to align our business with the changing needs of our customers and to lower the operating costs of our ~~company. This includes~~Company.
In the ~~realignment~~second quarter of 2005, we began to implement consolidation and census actions in order to address unfavorable industry conditions. These actions continued in the third and fourth quarters of 2005 and are part of a comprehensive restructuring strategy intended to (i) better align our manufacturing capacity with the changing needs of our ~~existing manufacturing~~customers, (ii) eliminate excess capacity ~~facility closures or similar actions.~~and lower our operating costs and (iii) streamline our organizational structure and reposition our business for improved long-term profitability. In connection with the restructuring actions, we expect to incur pretax costs of approximately $250 million, although all aspects of the restructuring actions have not been finalized. The restructuring actions recently announced by General Motors and Ford may require certain restructuring actions on our part that could increase the overall cost of our restructuring.
Our material cost as a percentage of net sales increased to 68.3% in 2005 from 65.5% in 2004. A substantial portion of this increase was the result of less favorable vehicle platform mix and increases in certain raw material, energy and commodity costs, as well as net selling price reductions. Increases in certain raw material, energy and commodity costs ~~such as~~(principally steel, resins and ~~diesel fuel,~~other oil-based commodities) had a ~~significant~~material adverse impact on our operating results in ~~2004~~2005. These conditions worsened as a result of the Gulf Coast storms in the third quarter of 2005. Unfavorable industry conditions have also resulted in financial distress within our supply base and ~~will continue to negatively affect our profitability~~an increase in ~~2005.~~commercial disputes and the risk of supply disruption. We have developed and implemented strategies to mitigate or partially offset the impact of higher raw material, energy and commodity costs, which include aggressive cost reduction actions, the utilization of our cost technology optimization process, the selective in-sourcing of components where we have available capacity, the continued consolidation of our supply base and the acceleration of low-cost country sourcing and
23
engineering. ~~In addition, the sharing of increased raw material costs has been, and will continue~~However, due to be, the subject of negotiations with our customers. While we believe that our mitigation efforts will offset a substantial portion of the financial impact of these increased costs, no assurances can be given that the magnitude and duration of the increased raw material, energy and commodity costs, these ~~increased~~strategies, together with commercial negotiations with our customers and suppliers, offset only a portion of the adverse impact. We expect that high raw material, energy and commodity costs will ~~not~~continue to have a material adverse impact on our ~~future~~ operating ~~results.~~results in the foreseeable future. See ~~“— Forward-Looking Statements” and “— Risk~~Item 1A, “Risk Factors — High raw material costs may continue to have a significant adverse impact on our profitability.”

In evaluating our financial condition and operating performance, we focus primarily on profitable sales growth and cash flows, as well as return on ~~invested capital~~investment on a consolidated basis. In addition to maintaining and expanding our business with our existing customers in our more established markets, we have increased our emphasis on expanding our business in ~~Eastern European and~~the Asian ~~markets~~market (including sourcing activity in Asia) and with Asian automotive manufacturers worldwide. The ~~Eastern European and~~ Asian ~~markets present~~market presents growth opportunities, as automotive manufacturers expand production in ~~these markets~~this market to meet increasing demand. ~~We have opened new facilities to support growth in the Czech Republic and Slovakia, and we are expanding our low-cost operations in Poland and Romania.~~ We currently have twelve joint ventures in China and several other joint ventures dedicated to serving Asian automotive manufacturers. We will continue to seek ways to expand our business in ~~Eastern European and~~the Asian ~~markets~~market and with Asian automotive manufacturers worldwide. In addition, we have improved our low-cost country manufacturing capabilities through expansion in Asia, Eastern Europe and Central America.

Our success in generating cash flow will depend, in part, on our ability to efficiently manage working capital. Working capital can be significantly impacted by the timing of cash flows from sales and purchases. In this regard, changes in certain customer payment terms ~~are expected to have~~had a ~~negative~~one-time material adverse impact on our reported cash flows ~~through~~in 2005, but these changes are not expected to impact reported cash flows for full year 2006. Historically, we have ~~a significant impact on~~been generally successful in aligning our ~~average daily cash flows.~~vendor payment terms with our customer payment terms. However, our ability to continue to do so may be adversely impacted by the recent decline in our financial results and adverse industry conditions. In addition, our cash flow is also dependent on our ability to efficiently manage our capital spending. Capital spending, as well as expenditures for recoverable customer engineering and tooling, increased in 2005 as compared to prior years, primarily as a result of spending to support new program awards and investments in common seat architecture. Capital spending is expected to moderate in 2006.

28
We utilize return on ~~invested capital~~investment as a measure of the efficiency with which assets are deployed to increase earnings. Improvements in our return on ~~invested capital~~investment will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency. The level of profitability and the return on investment of our interior segment is below that of our seating and electronic and electrical segments. Our interior segment continues to experience unfavorable operating results, primarily as a result of higher raw material costs, lower production volumes on key platforms, industry overcapacity, insufficient customer pricing and changes in certain customers’ sourcing strategies. In 2005, we evaluated the carrying value of goodwill within our interior segment for potential impairment and recorded goodwill impairment charges of approximately $1.0 billion. We also concluded that certain fixed assets within our interior segment were materially impaired and recorded fixed asset impairment charges of $82 million.

In 2005, we incurred costs of $104 million related to the restructuring actions described above, including $89 million of restructuring charges and $15 million of manufacturing inefficiencies. In addition, we recognized aggregate charges of $47 million related to the divestiture of an equity investment in a non-core business and the capital restructuring of two previously unconsolidated affiliates. In 2004, we incurred estimated costs of $48 million related to facility closures and other similar actions. For further information regarding to these items, see “— Restructuring” and Note 3, “Restructuring,” and Note 5, “Investments in Affiliates and Other Related Party Transactions,” to the consolidated financial statements included in this Report.
During 2005, operating losses generated in the United States resulted in an increase in the carrying value of our deferred tax assets. In light of our recent operating performance in the United States and current industry conditions, we assessed, based upon all available evidence, whether it was more likely than not that we would realize our U.S. deferred tax assets. We concluded that it was no longer more likely than not that we would realize our U.S. deferred tax assets. As a result, in the fourth quarter of 2005, we recorded a tax charge of $300 million comprised of (i) a full valuation allowance of $255 million and (ii) an increase in related tax reserves of $45 million. Although the tax charge did not result in current cash expenditures, it did negatively impact net income, assets and stockholders’ equity as of and for the year ended December 31, 2005. In the first quarter of 2005, we recorded a tax benefit of $18 million resulting from a tax law change in Poland. For further information related to income taxes, see Note 8, “Income Taxes,” to the consolidated financial statements included in this Report.
This section includes forward-looking statements that are subject to risks and uncertainties. For further information related to other factors that have had, or may in the future have, a significant impact on our business, consolidated financial position or results of operations, see Item 1A, “Risk Factors,” and “— Forward-Looking ~~Statements” and “— Risk Factors.~~Statements.”
Results of Operations

A summary of our operating results in millions of dollars and as a percentage of net sales is shown below:

For the Year Ended December 31,

2004 2003 2002

Net sales
Seating $ 11,314.7 66.7 % $ 10,743.9 68.2 % $ 9,853.5 68.3 %
Interior 2,965.0 17.5 2,817.2 17.9 2,550.4 17.7
Electronic and electrical 2,680.3 15.8 2,185.6 13.9 2,020.7 14.0

Net sales 16,960.0 100.0 15,746.7 100.0 14,424.6 100.0
Gross profit 1,402.1 8.3 1,346.4 8.6 1,260.3 8.7
Selling, general and administrative expenses 633.7 3.7 573.6 3.6 517.2 3.6
Interest expense 165.5 1.0 186.6 1.2 210.5 1.5
Other expense, net 38.6 0.2 51.8 0.3 52.1 0.4
Net income 422.2 2.5 380.5 2.4 13.0 0.1

For the Year Ended December 31,
2005 2004 2003

Net sales
Seating $ 11,035.0 64.6 % $ 11,314.6 66.7 % $ 10,743.8 68.2 %
Interior 3,097.6 18.1 2,965.0 17.5 2,817.1 17.9
Electronic and electrical 2,956.6 17.3 2,680.4 15.8 2,185.8 13.9

Net sales 17,089.2 100.0 16,960.0 100.0 15,746.7 100.0
Gross profit 736.0 4.3 1,402.1 8.3 1,346.4 8.6
Selling, general and administrative expenses 630.6 3.7 633.7 3.7 573.6 3.6
Goodwill impairment charges 1,012.8 5.9 — — — —
Interest expense 183.2 1.1 165.5 1.0 186.6 1.2
Other expense, net 38.0 0.2 38.6 0.2 51.8 0.3
Provision for income taxes 194.3 1.1 128.0 0.8 153.7 1.0
Equity in net (income) loss of affiliates 51.4 0.3 (2.6 ) — (8.6 ) (0.1 )
Net income (loss) (1,381.5 ) (8.1 ) 422.2 2.5 380.5 2.4

29
Year Ended December 31, 2005, Compared With Year Ended December 31, 2004
Net sales for the year ended December 31, 2005, were $17.1 billion as compared to $17.0 billion for the year ended December 31, 2004, an increase of 0.8%. The impact of new business, net foreign exchange rate fluctuations and the acquisition of Grote & Hartmann favorably impacted net sales by $1.6 billion, $151 million and $120 million, respectively. These increases were largely offset by less favorable vehicle platform mix, particularly in North America, which reduced net sales by $1.8 billion.
Gross profit and gross margin were $736 million and 4.3% in 2005, as compared to $1.4 billion and 8.3% in 2004. The declines in gross profit and gross margin were largely due to less favorable vehicle platform mix and net selling price reductions, which collectively reduced gross profit by $578 million. Gross profit also declined by $134 million as a result of fixed asset impairment charges and costs related to restructuring actions. The benefit from new business and our productivity initiatives and other efficiencies was largely offset by the net impact of higher raw material and commodity costs and inefficiencies associated with increased program launch activity.
Selling, general and administrative expenses, including research and development, were $631 million for the year ended December 31, 2005, as compared to $634 million for the year ended December 31, 2004. As a percentage of net sales, selling, general and administrative expenses were 3.7% in 2005 and 2004. The decrease in selling, general and administrative expenses during the period was primarily due to a decline in compensation-related expenses and our overall cost control initiatives, as well as a decrease in research and development expenses. These decreases were largely offset by increases in litigation-related charges.
Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $174 million in 2005 and $198 million in 2004. In certain situations, the reimbursement of pre-production engineering, research and design costs is contractually guaranteed by, and fully recoverable from, our customers and is therefore capitalized. For the years ended December 31, 2005 and 2004, we capitalized $227 million and $245 million, respectively, of such costs.
Interest expense was $183 million in 2005 as compared to $166 million in 2004, primarily due to an increase in short-term interest rates and the interest component of litigation-related charges, partially offset by the refinancing of our primary credit facility and a portion of our senior notes at lower interest rates and a decrease in interest expense related to our use of factoring and asset-backed securitization facilities.
Other expense, which includes state and local non-income related taxes, foreign exchange gains and losses, gains and losses on the sales of fixed assets and other miscellaneous income and expense, was $38 million in 2005 as compared to $39 million in 2004.
Equity in net loss of affiliates was $51 million for the year ended December 31, 2005, as compared to equity in net income of affiliates of $3 million for the year ended December 31, 2004. In 2005, we divested an equity investment in a non-core business, recognizing a charge of $17 million. In December 2005, we also recognized a loss of $30 million related to two previously unconsolidated affiliates as a result of capital restructurings, changes in the investors and amendments to the related operating agreements.
The provision for income taxes was $194 million, representing an effective tax rate of negative 16.4%, for the year ended December 31, 2005, as compared to $128 million, representing an effective tax rate of 23.3%, for the year ended December 31, 2004. The decrease in the effective tax rate is primarily the result of the impact of the goodwill impairment charges for which no tax benefit was provided as this goodwill is nondeductible for tax purposes, as well as the tax charge related to our decision to provide a full valuation allowance with respect to our net U.S. deferred tax assets in the fourth quarter of 2005. No tax benefit was provided on the portion of the restructuring and litigation-related charges that were incurred in certain countries for which no tax benefit is likely to be realized due to a history of operating losses in those countries. These items were partially offset by a one-time benefit of $18 million in the first quarter of 2005 resulting from a tax law change in Poland.
Net loss in 2005 was $1.4 billion, or $20.57 per diluted share, as compared to net income of $422 million, or $5.77 per diluted share, in 2004, reflecting the goodwill impairment charges of $1.0 billion and the other factors

30
described above. For further information related to our goodwill impairment charges, see Note 2, “Summary of Significant Account Policies,” to the consolidated financial statements included in this Report.
Reportable Operating Segments
The financial information presented below is for our three reportable operating segments for the periods presented. These segments are: seating, which includes seat systems and the components thereof; interior, which includes instrument panels and cockpit systems, headliners and overhead systems, door panels, flooring and acoustic systems and other interior products; and electronic and electrical, which includes electronic products and electrical distribution systems, primarily wire harnesses and junction boxes; interior control and entertainment systems; and wireless systems. Financial measures regarding each segment’s income (loss) before goodwill impairment charges, interest, other expense, provision for income taxes, minority interests in consolidated subsidiaries and equity in net (income) loss of affiliates (“segment earnings”) and segment earnings divided by net sales (“margin”) are not measures of performance under accounting principles generally accepted in the United States (“GAAP”). Such measures are presented because we evaluate the performance of our reportable operating segments, in part, based on income (loss) before goodwill impairment charges, interest, other expense and income taxes and the related margin. Segment earnings should not be considered in isolation or as a substitute for net income (loss), net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, segment earnings, as we determine it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated income before goodwill impairment charges, interest, other expense, provision for income taxes, minority interests in consolidated subsidiaries and equity in net (income) loss of affiliates to income (loss) before provision for income taxes, minority interests in consolidated subsidiaries and equity in net (income) loss of affiliates, see Note 11, “Segment Reporting,” to the consolidated financial statements included in this Report.
Seating —
A summary of the financial measures for our seating segment is shown below (dollar amounts in millions):

For the Year Ended December 31,
2005 2004

Net sales $ 11,035.0 $ 11,314.6
Segment earnings(1) 323.3 682.1
Margin 2.9 % 6.0 %
(1) ~~Year Ended December 31, 2004, Compared With Year Ended December 31, 2003~~ See definition above.

Seating net sales were $11.0 billion for the year ended December 31, 2005, as compared to $11.3 billion for the year ended December 31, 2004, a decrease of $280 million or 2.5%. Less favorable vehicle platform mix and changes in production volumes, particularly in North America, reduced net sales by $1.4 billion. This decrease was partially offset by the impact of new business and net foreign exchange rate fluctuations, which improved net sales by $927 million and $145 million, respectively. Segment earnings and the related margin on net sales were $323 million and 2.9% in 2005 as compared to $682 million and 6.0% in 2004. The declines in segment earnings and the related margin were largely due to less favorable vehicle platform mix and changes in production volumes, which, collectively with the favorable impact of new business, negatively impacted segment earnings by $246 million. Segment earnings and the related margin were also negatively affected by the gross impact of higher raw material and commodity costs. The benefit from our productivity initiatives and other efficiencies was partially offset by the effect of net selling price reductions, inefficiencies associated with increased program launch activity and increases in litigation-related charges. In 2005, we also incurred costs related to our restructuring actions of $33 million. In 2004, we incurred estimated costs related to facility closures and other similar actions in the seating segment of $32 million.

31
Interior —
A summary of the financial measures for our interior segment is shown below (dollar amounts in millions):

For the Year Ended December 31,
2005 2004

Net sales $ 3,097.6 $ 2,965.0
Segment earnings(1) (191.1 ) 85.1
Margin (6.2 )% 2.9 %
(1) See definition above.
Interior net sales were $3.1 billion for the year ended December 31, 2005, as compared to $3.0 billion for the year ended December 31, 2004, an increase of $133 million or 4.5%. The impact of new business improved net sales by $448 million. This increase was partially offset by less favorable vehicle platform mix and changes in production volumes, particularly in North America, which reduced net sales by $292 million. Segment earnings and the related margin on net sales were ($191) million and (6.2)% in 2005 as compared to $85 million and 2.9% in 2004. The declines in segment earnings and the related margin were largely due to the gross impact of higher raw material and commodity costs of approximately $110 million, which was partially offset by the benefit of productivity and cost reduction initiatives. Less favorable vehicle platform mix and changes in production volumes, collectively with the favorable impact of new business, reduced segment earnings by $107 million. Segment earnings and the related margin were also negatively affected by inefficiencies associated with program launch activity. In 2005, we also incurred fixed asset impairment charges and costs related to our restructuring actions of $114 million. In 2004, we incurred estimated costs related to facility closures and other similar actions in the interior segment of $4 million.
Electronic and Electrical —
A summary of the financial measures for our electronic and electrical segment is shown below (dollar amounts in millions):

For the Year Ended December 31,
2005 2004

Net sales $ 2,956.6 $ 2,680.4
Segment earnings(1) 180.0 210.9
Margin 6.1 % 7.9 %
(1) See definition above.
Electronic and electrical net sales were $3.0 billion for the year ended December 31, 2005, as compared to $2.7 billion for the year ended December 31, 2004, an increase of $276 million or 10.3%. The impact of new business, net of selling price reductions, and the acquisition of Grote & Hartmann improved net sales by $139 million and $120 million, respectively. Segment earnings and the related margin on net sales were $180 million and 6.1% in 2005 as compared to $211 million and 7.9% in 2004. In 2005, we incurred costs related to our restructuring actions of $39 million. In 2004, we incurred estimated costs related to facility closures and other similar actions in the electronic and electrical segment of $12 million. The effect of net selling price reductions and inefficiencies associated with increased program launch activity was largely offset by the benefit from our productivity initiatives and other efficiencies. The acquisition of Grote & Hartmann favorably impacted segment earnings by $8 million.
Year Ended December 31, 2004, Compared With Year Ended December 31, 2003
Net sales for the year ended December 31, 2004, were $17.0 billion as compared to $15.7 billion for the year ended December 31, 2003, an increase of 7.7%. New business, net of selling price reductions, and net foreign exchange rate fluctuations increased net sales by $1,010 million and $748 million, respectively. Net sales also benefited from the net impact of our acquisitions and divestitures, which contributed $173 million to
24
the increase. These increases were partially offset by changes in vehicle production volume and platform mix, which negatively impacted net sales by $718 million.

32
Gross profit and gross margin were $1,402 million and 8.3% in 2004, as compared to $1,346 million and 8.6% in 2003. The benefit from our productivity initiatives and other efficiencies and the impact of new business contributed $421 million and $90 million, respectively, to the increase in gross profit. Gross profit also benefited from the impact of net foreign exchange rate fluctuations and our ~~recent terminals and connectors acquisition.~~acquisition of Grote & Hartmann. Gross profit was negatively affected by the net impact of customer and supplier commercial settlements, including selling price reductions, which, collectively with the impact of vehicle platform mix, reduced gross profit by $444 million. Gross profit was also negatively impacted by higher raw material and commodity costs, including increased steel and resin prices.

Selling, general and administrative expenses, including research and development, were $634 million for the year ended December 31, 2004, as compared to $574 million for the year ended December 31, 2003. As a percentage of net sales, selling, general and administrative expenses were 3.7% in 2004 and 3.6% in 2003. Our incremental investment in Asian infrastructure and new programs, net foreign exchange rate fluctuations and the impact of our ~~terminals and connectors~~ acquisition of Grote & Hartmann contributed $24 million, $22 million and $20 million, respectively, to the increase in selling, general and administrative expenses.

Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $198 million in 2004 and $171 million in 2003. In certain situations, the reimbursement of pre-production engineering, research and design costs is contractually guaranteed by, and fully recoverable from, our customers and is therefore capitalized. For the years ended December 31, 2004 and 2003, we capitalized $245 million and $181 million, respectively, of such costs.

Interest expense was $166 million in 2004 as compared to $187 million in 2003. Lower interest rates, after giving effect to our hedging activities, favorably impacted interest expense by $22 million.

Other expense, which includes state and local non-income related taxes, foreign exchange gains and losses, gains and losses on the sales of fixed assets and other miscellaneous income and expense, was $39 million in 2004 as compared to $52 million in 2003. The primary reasons for the decrease were a reduction in losses on the sales of fixed assets and other miscellaneous expenses, which were partially offset by an increase in state and local non-income related taxes.

The provision for income taxes was $128 million, representing an effective tax rate of 23.3%, for the year ended December 31, 2004, as compared to $154 million, representing an effective tax rate of 28.8%, for the year ended December 31, 2003. Our overall tax planning strategy, as well as the mix of our earnings by country, has contributed to the decrease in the effective tax rate. The effective tax rates for 2004 and 2003 approximated the United States federal statutory income tax rate of 35%, adjusted for income taxes on foreign earnings, losses and remittances, valuation adjustments, research and development credits and other items, including the benefit from the settlement of prior years’ tax matters. For further information related to income taxes, see Note 8, “Income Taxes,” to the consolidated financial statements included in this Report.

Net income increased to $422 million, or $5.77 per diluted share, for the year ended December 31, 2004, as compared to $381 million, or $5.31 per diluted share, for the year ended December 31, 2003, for the reasons described above.
~~Reportable Operating Segments~~
Reportable Operating Segments

The financial information presented below is for our three reportable operating segments for the periods presented. These segments are: seating, which includes seat systems and the components thereof; interior, which includes instrument panels and cockpit systems, headliners and overhead systems, door panels, flooring and acoustic systems and other interior products; and electronic and electrical, which includes electronic products and electrical distribution systems, primarily wire harnesses and junction boxes; interior control and entertainment systems; and wireless systems. Financial measures regarding each segment’s income before interest, other expense, provision for income taxes, minority interests in consolidated subsidiaries and equity in net ~~income~~(income) loss of
25
affiliates ~~and cumulative effect of a change in accounting principle (for purposes of the reportable operating~~ (“segment ~~disclosure below, referred to as “income before interest, other expense and income taxes”~~earnings”) and ~~income before interest, other expense and income taxes~~segment earnings divided by net sales (“margin”) are not measures of performance under accounting principles generally accepted in the United States (“GAAP”). Such measures

33
are presented because we evaluate the performance of our reportable operating segments, in part, based on income before interest, other expense and income ~~taxes. These measures~~taxes and the related margin. Segment earnings should not be considered in isolation or as a substitute for net income, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, ~~these measures,~~segment earnings, as we determine ~~them,~~it, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated income before interest, other expense, provision for income taxes, minority interests in consolidated subsidiaries and equity in net ~~income~~(income) loss of affiliates ~~and cumulative effect of a change in accounting principle~~ to income before provision for income taxes, minority interests in consolidated subsidiaries and equity in net ~~income~~(income) loss of affiliates, ~~and cumulative effect of a change in accounting principle,~~ see Note 11, “Segment Reporting,” to the consolidated financial statements included in this Report.
~~Seating —~~
Seating —

A summary of the financial measures for our seating segment is shown below (dollar amounts in millions):

For the Year Ended
December 31,

2004 2003

Net sales $ 11,314.7 $ 10,743.9
Income before interest, other expense and income taxes 684.9 698.1
Margin 6.1 % 6.5 %

For the Year Ended December 31,
2004 2003

Net sales $ 11,314.6 $ 10,743.8
Segment earnings(1) 682.1 696.7
Margin 6.0 % 6.5 %
(1) See definition above.
Net sales were $11.3 billion for the year ended December 31, 2004, as compared to $10.7 billion for the year ended December 31, 2003, an increase of $571 million or 5.3%. New business, net of selling price reductions, net foreign exchange rate fluctuations and the impact of a seating acquisition in Korea favorably impacted net sales by $504 million, $528 million and $66 million, respectively. These increases were partially offset by the impact of vehicle production volume and platform mix, which reduced net sales by $527 million. ~~Income before interest, other expense and income taxes~~Segment earnings and the related margin on net sales were ~~$685~~$682 million and ~~6.1%~~6.0% in 2004 as compared to ~~$698~~$697 million and 6.5% in 2003. ~~Income before interest, other expense and income taxes~~Segment earnings and the related margin benefited from the impact of our productivity initiatives and other efficiencies, net of higher raw material and commodity costs, which contributed $161 million. This increase was more than offset by the impact of selling price reductions and changes in vehicle production volume and platform mix.
~~Interior —~~
Interior —

A summary of the financial measures for our interior segment is shown below (dollar amounts in millions):

For the Year Ended
December 31,

2004 2003

Net sales $ 2,965.0 $ 2,817.2
Income before interest, other expense and income taxes 85.1 104.0
Margin 2.9 % 3.7 %

For the Year Ended December 31,
2004 2003

Net sales $ 2,965.0 $ 2,817.1
Segment earnings(1) 85.1 104.0
Margin 2.9 % 3.7 %
(1) See definition above.
Net sales were $3.0 billion for the year ended December 31, 2004, as compared to $2.8 billion for the year ended December 31, 2003, an increase of $148 million or ~~5.2%~~5.3%. New business, net of selling price reductions, and net foreign exchange rate fluctuations favorably impacted net sales by $206 million and $93 million, respectively. These increases were partially offset by the impact of vehicle production volume and platform mix, as well as our divestitures, which decreased net sales by $108 million and $42 million, respectively. ~~Income before interest, other expense and income taxes~~Segment earnings and the related margin on net sales were $85 million
26
and 2.9% in 2004 as compared to $104 million and 3.7% in 2003. ~~Income before interest, other expense and income taxes~~Segment earnings and the related margin benefited from our productivity initiatives and other efficiencies, net of higher raw material and commodity costs, which contributed $106 million. This increase was more than offset by the impact of selling price reductions and changes in vehicle production volume and platform mix.

34
Electronic and Electrical —
~~Electronic and Electrical —~~

A summary of the financial measures for our electronic and electrical segment is shown below (dollar amounts in millions):

For the Year Ended
December 31,

2004 2003

Net sales $ 2,680.3 $ 2,185.6
Income before interest, other expense and income taxes 207.5 197.8
Margin 7.7 % 9.1 %

For the Year Ended December 31,
2004 2003

Net sales $ 2,680.4 $ 2,185.8
Segment earnings(1) 210.9 200.2
Margin 7.9 % 9.2 %
(1) See definition above.
Net sales were $2.7 billion for the year ended December 31, 2004, as compared to $2.2 billion for the year ended December 31, 2003, an increase of $495 million or 22.6%. New business, net of selling price reductions, the impact of our ~~recent terminals and connectors~~ acquisition of Grote & Hartmann and net foreign exchange rate fluctuations favorably impacted net sales by $300 million, $130 million and $134 million, respectively. These increases were partially offset by the impact of vehicle production volume and platform mix, which decreased net sales by $88 million. ~~Income before interest, other expense and income taxes~~Segment earnings and the related margin on net sales were ~~$208~~$211 million and ~~7.7%~~7.9% in 2004 as compared to ~~$198~~$200 million and ~~9.1%~~9.2% in 2003. ~~Income before interest, other expense and income taxes~~Segment earnings benefited from our productivity initiatives and other efficiencies, which contributed $21 million. The increase was largely offset by the impact of selling price reductions, net of the impact of new business. The decline in the related margin on net sales was primarily due to the impact of selling price reductions and the integration of our ~~recent terminals and connectors~~ acquisition of Grote & Hartmann, partially offset by the benefit of our productivity initiatives and other efficiencies.
~~Year Ended December 31, 2003, Compared With Year Ended December 31, 2002~~
Restructuring
      Net sales for the year ended December 31, 2003, were $15.7 billion as compared to $14.4 billion for the year ended December 31, 2002, an increase of $1.3 billion or 9.2%. New business, net of selling price reductions, and net foreign exchange rate fluctuations each increased net sales by $1.0 billion. These increases were partially offset by unfavorable changes in vehicle platform mix in Europe, which negatively impacted net sales by $424 million, and the impact of lower vehicle production volumes in North America, which negatively impacted net sales by $285 million.
~~Gross profit~~
2005
In order to address unfavorable industry conditions, we began to implement consolidation and gross margin were $1,346 million and 8.6% in 2003, as compared to $1,260 million and 8.7% in 2002. The benefit from our productivity initiatives and other efficiencies, net foreign exchange rate fluctuations and the positive impact of new business contributed $109 million, $61 million and $48 million, respectively, to the increase in gross profit. These increases were partially offset by the negative impact of lower vehicle production volumes in North America, unfavorable changes in vehicle platform mix in both North America and Europe and selling price reductions, which collectively reduced gross profit by $104 million. Facility consolidation costs also negatively impacted gross profit by $37 million.
      Selling, general and administrative expenses, including research and development, were $574 million for the year ended December 31, 2003, as compared to $517 million for the year ended December 31, 2002. As a percentage of net sales, selling, general and administrative expenses were 3.6% in both 2003 and 2002. Net foreign exchange rate fluctuations and increased marketing efforts related to Asian automotive manufacturers contributed $32 million and $7 million, respectively, to the increase in selling, general and administrative expenses.
      Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $171 million in 2003 and $176 million in 2002. In
27
certain situations, the reimbursement of pre-production engineering, research and design costs is contractually guaranteed by, and fully recoverable from, our customers and is therefore capitalized. For the years ended December 31, 2003 and 2002, we capitalized $181 million and $136 million, respectively, of such costs.
      Interest expense was $187 million in 2003 as compared to $211 million in 2002. Our reduced debt balances and lower interest rates, after giving effect to our hedging activities, favorably impacted interest expense by $14 million and $13 million, respectively, and were partially offset by the impact of net foreign exchange rate fluctuations.
      The provision for income taxes was $154 million, representing an effective tax rate of 28.8%, for the year ended December 31, 2003, as compared to $157 million, representing an effective tax rate of 33.5%, for the year ended December 31, 2002. The decreasecensus actions in the ~~effective tax rate is primarily the result~~second quarter of our overall tax planning strategy, as well as the mix of our earnings by country. The effective tax rates for 2003 and 2002 approximated the United States federal statutory income tax rate of 35%, adjusted for income taxes on foreign earnings, losses and remittances, valuation adjustments, research and development credits and other items. For further information related to income taxes, see Note 8, “Income Taxes,” to the consolidated financial statements included in this Report.
      Net income was $381 million, or $5.31 per diluted share, for the year ended December 31, 2003, as compared to $13 million, or $0.29 per diluted share, for the year ended December 31, 2002. On January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” under which goodwill is no longer amortized but is subject to annual impairment analysis. As a result of our initial impairment analysis, we recorded a cumulative effect2005. These actions are part of a ~~change in accounting principle related~~comprehensive restructuring strategy intended to impairment charges of $311 million ($299 million after tax) as of January 1, 2002. Income before cumulative effect of a change in accounting principle was $312 million, or $4.47 per diluted share, in 2002.
~~Reportable Operating Segments~~
~~Seating —~~
      ~~A summary of the financial measures for our seating segment is shown below (dollar amounts in millions):~~

For the Year Ended
December 31,

2003 2002

Net sales $ 10,743.9 $ 9,853.5
Income before interest, other expense and income taxes 698.1 545.9
Margin 6.5 % 5.5 %
      Net sales were $10.7 billion for the year ended December 31, 2003, as compared to $9.9 billion for the year ended December 31, 2002, an increase of $890 million or 9.0%. Net foreign exchange rate fluctuations, new business, net of selling price reductions, and the impact of a Korean seating acquisition positively impacted net sales by $758 million, $555 million and $13 million, respectively. These increases were partially offset by the impact of lower vehicle production volumes which, combined with changes in vehicle platform mix, reduced net sales by $437 million. Income before interest, other expense and income taxes and the related margin on net sales were $698 million and 6.5% in 2003 as compared to $546 million and 5.5% in 2002. Income before interest, other expense and income taxes benefited from favorable changes in platform mix which, offset by the impact of lower vehicle production volumes and selling price reductions, contributed $77 million to the increase. Income before interest, other expense and income taxes also benefited from our productivity initiatives and other efficiencies, net foreign exchange rate fluctuations and the positive impact of new business, which contributed $67 million, $31 million and $25 million, respectively, to the increase. These increases were partially offset by facility consolidation costs, which reduced income before interest, other expense and income taxes by $28 million. The improvement in the margin on net sales was primarily due to favorable changes in platform mix, partially offset by the impact of selling price reductions.
28
~~Interior —~~
      ~~A summary of the financial measures for our interior segment is shown below (dollar amounts in millions):~~

For the Year Ended
December 31,

2003 2002

Net sales $ 2,817.2 $ 2,550.4
Income before interest, other expense and income taxes 104.0 141.2
Margin 3.7 % 5.5 %
      Net sales were $2.8 billion for the year ended December 31, 2003, as compared to $2.6 billion for the year ended December 31, 2002, an increase of $267 million or 10.5%. New business, net of selling price reductions, and net foreign exchange rate fluctuations positively impacted net sales by $235 million and $103 million, respectively. These increases were partially offset by the impact of lower vehicle production volumes which, combined with changes in vehicle platform mix, reduced net sales by $62 million. Income before interest, other expense and income taxes and the related margin on net sales were $104 million and 3.7% in 2003 as compared to $141 million and 5.5% in 2002. The impact of lower vehicle production volumes, changes in vehicle platform mix and selling price reductions collectively reduced income before interest, other expense and income taxes by $87 million. Net foreign exchange rate fluctuations and facility consolidation costs also negatively impacted income before interest, other expense and income taxes by $10 million and $5 million, respectively. These decreases were partially offset by the benefit from our productivity initiatives and other efficiencies and the positive impact of new business, which contributed $52 million and $8 million, respectively, to income before interest, other expense and income taxes. The decline in the margin on net sales was primarily due to the impact of selling price reductions and net foreign exchange rate fluctuations, partially offset by the benefit from our productivity initiatives and other efficiencies.
~~Electronic and Electrical —~~
      ~~A summary of the financial measures for our electronic and electrical segment is shown below (dollar amounts in millions):~~

For the Year Ended
December 31,

2003 2002

Net sales $ 2,185.6 $ 2,020.7
Income before interest, other expense and income taxes 197.8 231.5
Margin 9.1 % 11.5 %
      Net sales were $2.2 billion for the year ended December 31, 2003, as compared to $2.0 billion for the year ended December 31, 2002, an increase of $165 million or 8.2%. New business, net of selling price reductions, and net foreign exchange rate fluctuations positively impacted net sales by $211 million and $157 million, respectively. These increases were partially offset by the impact of lower vehicle production volumes which, combined with changes in vehicle platform mix, reduced net sales by $203 million. Income before interest, other expense and income taxes and the related margin on net sales were $198 million and 9.1% in 2003 as compared to $232 million and 11.5% in 2002. The impact of lower vehicle production volumes, changes in vehicle platform mix and selling price reductions collectively reduced income before interest, other expense and income taxes by $78 million. Facility consolidation costs also negatively impacted income before interest, other expense and income taxes by $3 million. These decreases were partially offset by the benefit from our productivity initiatives and other efficiencies, net foreign exchange rate fluctuations and the positive impact of new business, which contributed $23 million, $13 million and $13 million, respectively, to income before interest, other expense and income taxes. The decline in the margin on net sales was primarily due to the impact of selling price reductions, partially offset by the benefit from our productivity initiatives and other efficiencies.
29
~~Sales Backlog~~
      As of December 31, 2004, we had a sales backlog of $1,550 million for orders to be executed in 2005. Our sales backlog reflects anticipated net sales from awarded new programs, less net sales from phased-out and canceled programs. The calculation of backlog does not reflect customer price reductions on existing or newly awarded programs. The sales backlog may be impacted by various assumptions embedded in the calculation, including vehicle production levels on new and replacement programs, foreign exchange rates and the timing of program launches. In addition, we typically enter into agreements with our customers at the beginning of a vehicle’s life for the fulfillment of our customers’ purchasing requirements for the entire production life of the vehicle. Although instances of early termination have historically been rare, these agreements generally may be terminated by our customers at any time. Therefore, our backlog information does not reflect firm orders or firm commitments.
~~Facility Consolidations~~
      ~~We continually evaluate alternatives to~~(i) better align our ~~business~~manufacturing capacity with the changing needs of our customers, (ii) eliminate excess capacity and lower our operating costs and (iii) streamline our organizational structure and reposition our business for improved long-term profitability.
In connection with the restructuring actions, we expect to ~~lower~~incur pre-tax costs of approximately $250 million, although all aspects of the restructuring actions have not been finalized. Such costs will include employee termination benefits, asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. These incremental restructuring costs will principally include equipment and personnel relocation costs. We also expect to incur incremental manufacturing inefficiency costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs will be recognized in our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Generally, charges will be recorded as elements of the restructuring strategy are finalized. Actual costs recorded in our consolidated financial statements may vary from current estimates.
In connection with our restructuring actions, we recorded restructuring and related manufacturing inefficiency charges of $104 million in 2005, including $100 million recorded as cost of sales and $6 million recorded as selling, general and administrative expenses. The remaining amounts include a gain on the sale of a facility, which is recorded as other expense, net. These charges resulted in cash expenditures of $67 million in 2005. The 2005 charges consist of employee termination benefits of $57 million for 643 salaried and 3,720 hourly employees, asset impairment charges of $15 million and contract termination costs of ~~our company. This includes~~$13 million, as well as other costs of $4 million. We also estimate that we incurred approximately $15 million in manufacturing inefficiency costs during this period as a result of the ~~realignment~~restructuring. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements and completed negotiations. Asset impairment charges relate to the disposal of ~~our existing manufacturing capacity, facility closures or similar actions~~buildings, leasehold improvements and machinery and equipment with carrying values of $15 million in excess of related estimated fair values. Contract termination costs include lease cancellation costs of $3 million, which are

35
expected to be paid through 2006, the ~~normal course~~repayment of ~~business.~~ various government-sponsored grants of $5 million, the termination of joint venture, subcontractor and other relationships of $3 million and pension and other postretirement benefit plan curtailments of $2 million.
2004 and 2003
In ~~addition to these,~~December 2003, we initiated ~~significant~~ actions affecting two of our U.S. seating ~~facilities in December 2003.~~facilities. As a result of ~~phased-out programs~~these actions, we recorded charges of $26 million and ~~uncompetitive cost structures, it was not economical~~$8 million in 2003 and 2004, respectively, for ~~us to continue to operate these facilities as they existed.~~employee termination benefits and asset impairments. These actions were completed in the second quarter of 2004. In ~~accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,”~~2004, we ~~recorded charges of $5 million and $20~~also incurred $40 million in ~~2004 and 2003, respectively,~~estimated costs related to ~~these actions for employee termination benefits required under related labor agreements. In addition, we recorded asset impairment charges of $3 million~~additional facility consolidations and ~~$5 million in 2004~~closures and 2003, respectively, related to these actions to write down the value of machinery and equipment that has been abandoned. These charges are included in cost of sales in our consolidated statement of income for the years ended December 31, 2004 and 2003.census reductions.
Acquisition

On July 5, 2004, we completed the acquisition of the parent of GHW Grote & Hartmann GmbH (“Grote & Hartmann”) for consideration of $160 million, including assumed debt of $86 ~~million.~~million, subject to adjustment. This amount excludes the cost of integration, as well as other internal costs related to the transaction which were expensed as incurred. Grote & Hartmann iswas based in Wuppertal, Germany, and ~~manufactures~~manufactured terminals and connectors, as well as junction boxes, primarily for the automotive industry. ~~Grote & Hartmann had full year 2003 sales of approximately $275 million.~~

The Grote & Hartmann acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are included in the consolidated balance ~~sheet~~sheets as of December 31, 2005 and 2004. The operating results of Grote & Hartmann are included in the consolidated financial statements since the date of acquisition.
Liquidity and Financial Condition

Our primary liquidity needs are to fund capital expenditures, service indebtedness and support working capital requirements. In addition, approximately 90% of the costs associated with our current restructuring strategy are expected to require cash expenditures. Our principal sources of liquidity are cash flows from operating activities and ~~borrowing availability~~borrowings under ~~our primary~~available credit ~~facility.~~facilities. A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, distributions orand advances from our subsidiaries to provide the funds necessary to meet our obligations. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear. For further information regarding potential dividends from ournon-U.S. subsidiaries, see Note 8, “Income Taxes,” to the consolidated financial statements included in this Report.
30
~~Cash Flows~~

Cash Flows
Net cash provided by operating activities was $561 million in 2005 as compared to $676 million in ~~2004 as compared to $586~~2004. Net income (loss), excluding impairment charges, deferred tax provision (benefit) and equity in net (income) loss of affiliates, declined by $607 million ~~in 2003. The~~between years. This decrease was largely offset by the net change in sold accounts receivable, which resulted in a ~~$228~~$482 million ~~improvement~~increase in operating cash flows between ~~periods, and a $42 million increase in net income were partially offset by~~ the ~~net change in working capital and the net change in recoverable customer engineering and tooling, which collectively resulted in a $177 million decrease in operating cash flows between~~ periods. Increases in accounts receivable and accounts payable were a use of ~~$148~~$250 million and a source of ~~$190~~$298 million of cash, respectively, in ~~2004,~~2005, reflecting the timing of payments received from our customers and made to our suppliers. ~~Other current assets~~
Net cash used in investing activities was $531 million in 2005 as compared to $473 million in 2004. Capital spending was $568 million in 2005 as compared to $429 million in 2004. This increase was primarily a result of spending to support new program awards and ~~accrued liabilities~~investments in common seat architecture. The increase in net cash used in investing activities was partially offset by cash paid related to the acquisition of Grote & Hartmann in 2004. In 2006, capital spending is forecasted to be approximately $400 million.
Our financing activities were a use of ~~$63~~$347 million of cash in 2005 as compared to a source of $166 million of cash in 2004, primarily as a result of the ~~timing~~repayment of ~~commercial settlements, domestic and foreign tax payments and payroll-related payments.~~
      Net cash used in investing activities was $473 million in 2004 as compared to $347 million in 2003. This increase was primarily due to cash paid related to the acquisition of Grote & Hartmann, as well as a $53 million increase in capital expenditures between periods. Capital spending was $429 million in 2004 as compared to $376 million in 2003. This increase was primarily to support new program awards, to execute plant and operating efficiency actions and to fund our common product architecture strategy. In 2005, capital spending is estimated to be in the range of $425 million to $475 million.
      ~~Our financing activities were a source of $166 million of cash in 2004 as compared to a use of $159 million of cash in 2003, primarily as a result of our August 2004 issuance of $400~~$600 million aggregate principal amount of ~~5.75% senior notes due 2014. We expect to use the net proceeds of this offering for general corporate purposes, including, without limitation, the repayment or repurchase of a portion of our~~ 7.96% senior notes ~~due May~~in 2005. Net repayments of our short-term and long-term debt were $79 million in 2004 as compared to $167 million in 2003. The lower debt reduction was primarily the result of stock repurchases and dividend payments in an aggregate amount of $166 million in 2004, partially offset by increased net cash provided by operating activities in the current year.

36
Capitalization
~~Capitalization~~
In addition to cash provided by operating activities, we utilize a combination of our amended and restated primary credit facility and long-term notes to fund our capital expenditures and working capital requirements. For the years ended December 31, ~~2004~~2005 and ~~2003,~~2004, our average outstanding long-term debt balance, as of the end of each fiscal quarter, was ~~$2.2~~$2.3 billion and ~~$2.1~~$2.2 billion, respectively. The weighted average long-term interest rate, including rates under our ~~primary~~committed credit facility and the effect of hedging activities, was ~~6.3%~~6.5% and ~~6.6%~~6.3% for the respective periods.

We utilize uncommitted lines of credit as needed for our short-term working capital fluctuations. For the years ended December 31, ~~2004~~2005 and ~~2003,~~2004, our average outstanding unsecured short-term debt balance, as of the end of each fiscal quarter, was ~~$19~~$38 million and ~~$37~~$19 million, respectively. The weighted average interest rate ~~including the effect of hedging activities,~~ was ~~2.8%~~3.7% and ~~3.7%~~2.8% for the respective periods. The availability of uncommitted lines of credit may be affected by our financial performance, credit ratings and other factors. Uncommitted lines of credit available from banks decreased by approximately $105 million from December 31, 2004, to December 31, 2005. See also “— Off-Balance Sheet Arrangements” and “— Accounts Receivable Factoring.”
~~Primary Credit Facility~~
Amended and Restated Primary Credit Facility
~~Our~~
On March 23, 2005, we entered into a $1.7 billion credit and guarantee agreement (the “primary credit facility”), which provides for maximum revolving borrowing commitments of $1.7 billion and matures on March 23, 2010. The primary credit facility ~~consists of a~~replaced our existing $1.7 billion amended and restated credit facility, which ~~matures~~was due to mature on March 26, 2006. AsOn August 3, 2005, the primary credit facility was amended to (i) revise the leverage ratio covenant for the third quarter of ~~December 31, 2004, we had no borrowings outstanding~~2005 through the first quarter of 2006, (ii) obtain the consent of the lenders to permit us to enter into a new18-month term loan facility (the “term loan facility”) with a principal amount of up to $400 million and (iii) provide for the pledge of the capital stock of certain of our material subsidiaries to secure our obligations under ~~our~~the primary credit facility and ~~$52~~the term loan facility. On August 11, 2005, we entered into an amended and restated credit and guarantee agreement (the “amended and restated primary credit facility”). The amended and restated primary credit facility effectively combined our existing primary credit facility, as amended, with the new $400 million ~~committed under outstanding letters~~term loan facility with a maturity date of ~~credit, resulting in more than $1.6 billion of unused availability. Our~~February 11, 2007. The amended and restated primary credit facility provides for multicurrency revolving borrowings in a maximum aggregate amount of ~~$500~~$750 million, ~~and~~ Canadian revolving borrowings in a maximum aggregate amount of ~~$100~~$200 million and swing-line revolving borrowings in a maximum aggregate amount of $300 million, the commitments for which are part of the aggregate revolving credit facility commitment. As of December 31, 2005, we had $400 million in borrowings outstanding under the amended and restated primary credit facility, ~~commitment. We are currently seeking to extend~~all of which were outstanding under our term loan facility, as well as $97 million committed under outstanding letters of credit.
Revolving borrowings under the ~~maturity of our existing~~amended and restated primary credit facility ~~through~~bear interest, payable no less frequently than quarterly, at (a) (1) applicable interbank rates, on Eurodollar and Eurocurrency loans, (2) the greater of the U.S. prime rate and the federal funds rate plus 0.50%, on base rate loans, (3) the greater of the rate publicly announced by the Canadian administrative agent and the federal funds rate plus 0.50%, on U.S. dollar denominated Canadian loans, (4) the greater of the prime rate announced by the Canadian administrative agent and the average Canadian interbank bid rate (CDOR) plus 1.0%, on Canadian dollar denominated Canadian loans, and (5) various published or quoted rates, on swing line and other loans, plus (b) a ~~replacement~~percentage spread ranging from 0% to 1.0%, depending on the type of loanand/or currency and our credit rating or leverage ratio. Borrowings under the term loan facility ~~with~~bear interest at a ~~syndicate of lenders.~~
~~Subsidiary Guarantees —~~
      ~~The~~percentage spread ranging from 0.50% to 0.75% for alternate base rate loans and 1.50% to 1.75% for Eurodollar loans depending on our credit rating or leverage ratio. Under the amended and restated primary credit facility, iswe agree to pay a facility fee, payable quarterly, at rates ranging from 0.10% to 0.35%, depending on our credit rating or leverage ratio, and when applicable, a utilization fee.
Subsidiary Guarantees —
Our obligations under the amended and restated primary credit facility are guaranteed, on a joint and several basis, by certain of our subsidiaries, which are primarily domestic subsidiaries and isall of which are directly or

37
indirectly 100% owned by us. In addition, our obligations under the amended and restated primary credit facility are secured by the pledge of all or a portion of the capital stock of certain of our significant subsidiaries. ~~Pursuant to the terms of the primary~~
31
~~credit facility, the guarantees~~
Covenants —
The amended and stock pledges may be released, at our option, when and if certain conditions are satisfied, including credit ratings at or above BBB- from Standard & Poor’s Ratings Services and at or above Baa3 from Moody’s Investors Service and certain other conditions. These conditions were satisfied in May 2004, when Moody’s Investors Service raised its credit rating of our senior unsecured debt to Baa3. As of the date of the Report, we have not sought to release the guarantees and stock pledges.
~~Covenants —~~
      ~~Our~~restated primary credit facility contains operating and financial covenants that, among other things, could limit our ability to obtain additional sources of capital. ~~As of January 1, 2005, the~~The principal financial covenants ~~required~~require that we maintain a leverage ratio of not more than 3.75 to 1 as of December 31, 2005, 3.50 to 1 as of April 1, 2006 and 3.25 to 1 as of the end of each quarter thereafter and an interest coverage ratio of not less than ~~3.50~~3.5 to 1 ~~(in~~as of the end of each ~~case, as such~~quarter. These ratios are ~~defined in the agreement governing our primary credit facility). As of December 31, 2004, our~~calculated on a trailing four quarter basis. The leverage and interest coverage ratios, ~~were 1.7~~as well as the related components of their computation, are defined in the amended and ~~7.4, respectively. The~~restated primary credit ~~facility does not require accelerated repayment~~facility. The leverage ratio is calculated as the ratio of consolidated indebtedness (which is net of cash and excludes transactions related to our asset-backed securitization and factoring facilities) to consolidated operating profit (which excludes, among other things, certain impairments and certain restructurings, as discussed more fully in the ~~event~~amended and restated primary credit facility). The interest coverage ratio is calculated as the ratio of ~~a decrease in our credit ratings (see “— Credit Ratings”).~~consolidated operating profit to consolidated interest expense. As of December 31, ~~2004,~~2005, we were in compliance with all covenants and other requirements set forth in our amended and restated primary credit facility. Our leverage and interest coverage ratios were 2.7 to 1 and 4.2 to 1, respectively. The amended and restated primary credit facility does not require accelerated repayment in the event of a decline in our credit ratings (see “— Credit Ratings”).

For further information related to our amended and restated primary credit facility described above, including the operating and financial covenants to which we are subject and related definitions, see Note 7, “Long-Term Debt,” to the consolidated financial statements included in this Report and the agreement governing our amended and restated primary credit facility, which has been incorporated by reference as an exhibit to this Report.
~~Senior Notes~~
Senior Notes

As of December 31, ~~2004,~~2005, we had ~~$2.4~~$1.8 billion of senior notes outstanding, consisting primarily of ~~$400~~$399 million aggregate principal amount of senior notes due 2014, ~~$286~~$300 million accreted value of zero-coupon convertible senior notes due 2022, Euro 250 million (approximately ~~$339~~$296 million based on the exchange rate in effect as of December 31, ~~2004)~~2005) aggregate principal amount of senior notes due 2008 ~~$600 million aggregate principal amount of senior notes due 2005~~ and $800 million aggregate principal amount of senior notes due 2009. We ~~intend to repay~~repaid the $600 million senior notes due May 2005 at maturity with excess cash and borrowings under ~~our~~the primary credit facility.

In August 2004, we issued $400 million aggregate principal amount of unsecured 5.75% senior notes, which mature in 2014, yielding gross proceeds of $399 million. ~~We expect to use the net proceeds of this offering for general corporate purposes, including, without limitation, the repayment or repurchase of a portion of our senior notes due 2005.~~ The notes are unsecured and rank equally with our other unsecured senior indebtedness, including our other senior notes. The ~~offering~~proceeds from these notes were ultimately utilized to refinance a portion of the $600 million senior notes ~~was not~~due May 2005. In April 2005, we completed an exchange offer of the 2014 Notes for substantially identical notes registered under the Securities Act of 1933, as amended (the “Securities Act”). Under the terms of a registration rights agreement entered into in connection with the issuance of the notes, we are required to complete an exchange offer of the notes for substantially identical notes registered under the Securities Act. We will be required to pay additional interest on the notes in the event the exchange offer is not completed by a specified date and under certain other circumstances.amended.
~~Zero-Coupon Convertible Senior Notes —~~
Zero-Coupon Convertible Senior Notes —

In February 2002, we issued $640 million aggregate principal amount at maturity of zero-coupon convertible senior notes due 2022, yielding gross proceeds of $250 million. The notes are unsecured and rank equally with our other unsecured senior indebtedness, including our other senior notes. Each note of $1,000 principal amount at maturity was issued at a price of $391.06, representing a yield to maturity of 4.75%. Holders of the notes may convert their notes at any time on or before the maturity date at a conversion rate, subject to adjustment, of 7.5204 shares of our common stock per note, provided that the average per share price of our common stock for the 20 trading days immediately prior to the conversion date is at least a specified percentage, beginning at 120% upon issuance and declining ~~1/2%~~1/2% each year thereafter to 110% at maturity, of the accreted value of the note, divided by the conversion rate (the “Contingent Conversion Trigger”). The average per share price of our common stock for the 20 trading days immediately prior to December 31, ~~2004,~~2005, was ~~$58.95.~~$28.01. As of December 31, ~~2004,~~2005, the Contingent Conversion Trigger was ~~$70.79.~~
32
$73.87. The notes are also convertible (1) if the long-term credit rating assigned to the notes by either Moody’s Investors Service or Standard & Poor’s Ratings Services is reduced below Ba3 or ~~BB-~~BB−,

38
respectively, or either ratings agency withdraws its long-term credit rating assigned to the notes, (2) if we call the notes for redemption or (3) upon the occurrence of specified other events.

We have an option to redeem all or a portion of the notes for cash at their accreted value at any time on or after February 20, 2007. Should we exercise this option, holders of the notes could exercise their option to convert the notes into our common stock at the conversion rate, subject to adjustment, of 7.5204 shares per note. Holders may require us to purchase their notes on each of February 20, 2007, 2012 and 2017, as well as upon the occurrence of a fundamental change (as defined in the indenture governing the notes), at their accreted value on such dates. On August 26, 2004, we amended our outstanding zero-coupon convertible senior notes to require the settlement of any repurchase obligation with respect to the ~~zero-coupon convertible senior~~ notes for ~~cash.~~cash only.
~~Subsidiary Guarantees —~~
Subsidiary Guarantees —

Our obligations under the senior notes are guaranteed by the same subsidiaries that guarantee our obligations under the amended and restated primary credit facility. In the event that any such subsidiary ceases to be a guarantor under the amended and restated primary credit facility, such subsidiary will be released as a guarantor of the senior notes. Our obligations under the senior notes are not secured by the pledge of the capital stock of any of our subsidiaries.
~~Covenants —~~
Covenants —

Our senior notes contain covenants ~~restricting~~limiting our ability to incur liens and to enter into sale and leaseback transactions and ~~restricting~~limiting our ability to consolidate with, to merge with or into or to sell or otherwise dispose of all or substantially all of our assets to any person. As of December 31, 2005, we were in compliance with all covenants and other requirements set forth in our senior notes.

For further information related to our senior notes described above, see Note 7, “Long-Term Debt,” to the consolidated financial statements included in this Report and the indentures governing our senior notes, which have been incorporated by reference as exhibits to this Report.
~~Contractual Obligations~~
Contractual Obligations

Our scheduled maturities of long-term debt, including capital lease obligations, our scheduled interest payments on our ~~public~~outstanding debt and our lease commitments under non-cancelable operating leases as of December 31, ~~2004,~~2005, are shown below (in millions):

2005 2006 2007 2008 2009 Thereafter Total

Long-term debt maturities $ 632.8 $ 6.8 $ 9.2 $ 342.3 $ 805.4 $ 703.2 $ 2,499.7
Interest payments on our public debt 138.8 115.1 115.1 101.5 55.4 115.0 640.9
Lease commitments 88.4 97.5 59.2 51.6 39.9 113.0 449.6

Total $ 860.0 $ 219.4 $ 183.5 $ 495.4 $ 900.7 $ 931.2 $ 3,590.2

2006 2007 2008 2009 2010 Thereafter Total

Long-term debt maturities $ 9.4 $ 722.0 (1) $ 300.4 $ 799.8 $ 2.8 $ 418.1 $ 2,252.5
Interest payments on our outstanding debt 111.9 111.9 99.9 55.4 23.0 92.0 494.1
Lease commitments 113.5 68.7 58.4 51.0 43.4 49.7 384.7

Total $ 234.8 $ 902.6 $ 458.7 $ 906.2 $ 69.2 $ 559.8 $ 3,131.3

(1) Our zero-coupon convertible senior notes are reflected in the contractual obligations table above at their book value of $300 million as of December 31, 2005. Their accreted value as of February 20, 2007 (the first date at which holders may require us to purchase their notes) will be $317 million.
Borrowings under our amended and restated primary credit facility bear interest at variable ~~rates.~~rates, and we utilize interest rate swap agreements to convert certain fixed rate obligations to variable rate. Therefore, an increase in interest rates would reduce our profitability. See “— Market Risk Sensitivity.”

In addition to the obligations set forth above, we have capital requirements with respect to new programs. We enter into agreements with our customers to produce products at the beginning of a vehicle’s life. Although such agreements do not provide for minimum quantities, once we enter into such agreements, ~~fulfillment of~~we are generally required to fulfill our customers’ purchasing requirements ~~is our obligation~~ for the entire production life of the vehicle. Prior to being formally awarded a program, we typically work closely with our customers in the early stages of designing and engineering a

39
vehicle’s interior systems. Failure to complete the design and engineering work related to a vehicle’s interior systems, or to fulfill a customer’s contract, could adversely affect our business.
33

We also enter into agreements with suppliers to assist us in meeting our customers’ production needs. These agreements vary as to duration and quantity commitments. Historically, most have been short-term agreements not providing for minimum ~~purchases.~~purchases or are requirements-based contracts.

We also have minimum funding requirements with respect to our pension ~~obligation.~~obligations. We expect to contribute approximately ~~$53 million to $58~~$65 million to our domestic and foreign pension plans in 2006 as compared to $49 million in 2005. Our minimum funding requirements after ~~2005~~2006 will depend on several factors, including the investment performance of our retirement plans and prevailing interest rates. Our funding obligations may also be affected by changes in applicable legal requirements. We also have payments due with respect to our postretirement benefit ~~obligation.~~obligations. We do not fund our postretirement benefit ~~obligation.~~obligations. Rather, payments are made as costs are incurred by covered retirees. We expect benefit payments to be approximately $9 million in 2006 as compared to $8 million in 2005. For further information related to our pension and other postretirement benefit plans, see “— Other Matters — Pension and Other Postretirement Benefit Plans” and Note 9, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in this Report.
~~Off-Balance Sheet Arrangements~~
Off-Balance Sheet Arrangements
~~Asset-Backed Securitization Facility —~~

Asset-Backed Securitization Facility — We have in place an asset-backed securitization facility (the “ABS facility”), which provides for maximum purchases of adjusted accounts receivable of ~~$200 million.~~$150 million as of December 31, 2005. As of December 31, 2005, accounts receivable in an aggregate amount of $150 million were sold under this facility. Although we utilized the ABS facility throughout 2004, as of December 31, 2004, there were no accounts receivable sold under this facility. The level of funding utilized under this facility is based on the credit ratings of our major customers, the level of aggregate accounts receivable in a specific month and our funding requirements. Should our major customers experience further reductions in their credit ratings, we may be unable to utilize the ABS facility in the future. Should this occur, we would intend to utilize our amended and restated primary credit facility to replace the funding currently provided by the ABS facility. In October ~~2004,~~2005, the ABS facility was amended to extend the termination date from November ~~2004~~2005 to ~~November 2005. In January 2005,~~October 2006. No assurances can be given that the ABS facility ~~was further amended to reduce the level of maximum purchases to $150 million.~~will be extended upon its maturity. For further information related to the ABS facility, see Note 12, “Financial Instruments,” to the consolidated financial statements included in this Report.
Guarantees and Commitments —
We guarantee the residual value of certain of our leased assets. As of December 31, ~~2004,~~2005, these guarantees totaled $27 million. In addition, we guarantee 39% of certain of the debt of Total Interior Systems — America, LLC, 40% of certain of the debt of Beijing Lear Dymos Automotive Seating and Interior Co., Ltd. and 60% of certain of the debt of Honduras Electrical Distribution Systems S. de R.L. de C.V. The percentages of debt guaranteed of these entities are based on our ownership percentages. As of December 31, ~~2004,~~2005, the aggregate amount of debt guaranteed was approximately $8$29 million.
~~Accounts Receivable Factoring~~
Accounts Receivable Factoring

Certain of our European and Asian subsidiaries periodically factor their accounts receivable with financial institutions. Such receivables are factored without recourse to us and are excluded from accounts receivable in our consolidated balance sheets. As of December 31, 2005, the amount of factored receivables was $256 million. As of December 31, 2004, there were no factored accounts receivable. ~~As of December 31, 2003, the amount of factored receivables was $71 million.~~ We cannot provide any assurances that these factoring facilities will be available or utilized in the future.
~~Credit Ratings~~
Credit Ratings

The credit ratings below are not recommendations to buy, sell or hold our securities and are subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

40
34
The credit ratings of our senior unsecured debt as of ~~December 31, 2004,~~the date of this Report are shown below. ~~All such~~The ratings of Standard & Poor’s Rating Services and Fitch Ratings are ~~“investment~~one level below investment grade.” The rating of Moody’s Investors Service is two levels below investment grade.

Standard & Poor’s
Moody’s
Fitch
Ratings Services Investors Service Ratings

Credit rating of senior unsecured debt ~~BBB-~~BB+ ~~Baa3~~Ba2 ~~BBB-~~BB+
Ratings outlook ~~Stable~~Negative ~~Stable~~Negative ~~Stable~~
~~Dividends~~Negative
      ~~A summary of 2004 and 2003 dividend declarations is shown below:~~
~~Dividend Amount~~ ~~Declaration Date~~ ~~Record Date~~ ~~Payment Date~~
~~$0.20~~ ~~November 13, 2003~~ ~~December 15, 2003~~ ~~January 9, 2004~~
~~$0.20~~ ~~February 3, 2004~~ ~~February 18, 2004~~ ~~March 8, 2004~~
~~$0.20~~ ~~May 13, 2004~~ ~~May 28, 2004~~ ~~June 14, 2004~~
~~$0.20~~ ~~August 12, 2004~~ ~~August 27, 2004~~ ~~September 13, 2004~~
~~$0.20~~ ~~November 11, 2004~~ ~~November 26, 2004~~ ~~December 13, 2004~~
On January 13, 2005, our Board of Directors declared a cash dividend of $0.25 per share of common stock, payable on March 14, 2005, to shareholders of record at the close of business February 25, 2005. We expect to pay quarterly cash dividends in the future, although such payment is dependent upon our financial condition, results of operations, capital requirements, alternative uses of capital and other factors. Also, we are subject to the restrictions on the payment of dividends contained in our primary credit facility and in certain other contractual obligations.
Dividends
See Item 5, “Market for the Company’s Common ~~Stock,~~Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
~~Common Stock Repurchase Program~~
Common Stock Repurchase Program

In May 2002, our Board of Directors approved a common stock repurchase program which permitted the discretionary repurchase of up to 3.3 million shares of our outstanding common stock over an initial period of 24 months, as disclosed in our Annual Report onForm 10-K for the year ended December 31, 2003. In May 2004, the program was extended until May 2006, as disclosed in our Quarterly Report onForm 10-Q for the quarter ended April 3, 2004. In 2004, we repurchased 1,834,300 shares of our outstanding common stock at an average purchase price of $53.26 per share, excluding commissions of $0.03 to $0.04 per share, under this program. In 2003, we repurchased 31,800 shares of our outstanding common stock at an average purchase price of $34.03 per share, excluding commissions of $0.04 per share, under this program.

In November 2004, our Board of Directors approved a new common stock repurchase program which permits the discretionary repurchase of up to 5,000,000 shares of our common stock through November 15, 2006, as disclosed in our Current Report onForm 8-K dated November 11, 2004. This stock repurchase program ~~replaces~~replaced the program described above. In 2005, we repurchased 490,900 shares of our outstanding common stock at an average purchase price of $51.72 per share, excluding commissions of $0.03 per share, under this program. In 2004, there were no shares of our common stock repurchased under this program. As of December 31, 2005, 4,509,100 shares of common stock were available for repurchase under the common stock repurchase program. The extent to which we will repurchase our common stock and the timing of such repurchases will depend upon prevailing market conditions, alternative uses of capital and other factors. See “— Forward-Looking Statements.” ~~Also, we are subject to the restrictions on common stock repurchases contained in our primary credit facility and in certain other contractual obligations.~~
~~Adequacy of Liquidity Sources~~
Adequacy of Liquidity Sources

We believe that cash flows from operations and ~~availability under our primary~~available credit ~~facility~~facilities will be sufficient to meet our ~~long-term debt maturities, projected~~liquidity needs, including capital expenditures and anticipated working capital requirements, for the foreseeable future. ~~However,~~Certain of our debt will mature in the first quarter of 2007, and we are currently exploring refinancing alternatives. Our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. ~~Please see~~See Item 1A, “Risk Factors,” “— Executive ~~Overview,”~~Overview” and “— Forward-Looking ~~Statements” and “—~~Statements.”
Market Risk ~~Factors.”~~Sensitivity
35
~~Market Risk Sensitivity~~

In the normal course of business, we are exposed to market risk associated with fluctuations in foreign exchange rates and interest rates. We manage these risks through the use of derivative financial instruments in accordance with management’s guidelines. We enter into all hedging transactions for periods consistent with the underlying exposures. We do not enter into derivative instruments for trading purposes.
~~Foreign Exchange~~
Foreign Exchange

Operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies (“transactional exposure”). We mitigate this risk by entering into forward foreign exchange, futures and option contracts. The foreign exchange contracts are executed with banks that we believe are creditworthy. Gains and losses related to foreign exchange contracts are deferred and included in the

41
measurement of the foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign exchange contracts are generally offset by the direct effects of currency movements on the underlying transactions.

Our most significant foreign currency transactional exposures relate to the Mexican peso, the Canadian dollar and the Euro. We have performed a quantitative analysis of our overall currency rate exposure as of December 31, ~~2004.~~2005. The potential earnings benefit related to net transactional exposures from a hypothetical 10% strengthening of the U.S. dollar relative to all other currencies for ~~2005~~2006 is approximately $2$16 million. The potential earnings benefit related to net transactional exposures from a similar strengthening of the Euro relative to all other currencies for ~~2005~~2006 is approximately $1$2 million.

As of December 31, ~~2004,~~2005, foreign exchange contracts representing ~~$1.5~~$2.0 billion of notional amount were outstanding with maturities of less than twelve months. As of December 31, ~~2004,~~2005, the fair market value of these contracts was approximately ~~$14~~$0 million. A 10% change in the value of the U.S. dollar relative to all other currencies would result in a $3$34 million change in the aggregate fair market value of these contracts. A 10% change in the value of the Euro relative to all other currencies would result in a ~~$15~~$44 million change in the aggregate fair market value of these contracts.

There are certain shortcomings inherent in the sensitivity analysis presented. The analysis assumes that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings impact to increase or decrease depending on the currency and the direction of the rate movement.

In addition to the transactional exposure described above, our operating results are impacted by the translation of our foreign operating income into U.S. dollars (“translation exposure”). In 2005, net sales outside of the United States accounted for 63% of our consolidated net sales. We do not enter into foreign exchange contracts to mitigate this exposure.
~~Interest Rates~~
Interest Rates

We use a combination of fixed and variable rate debt and interest rate swap contracts to manage our exposure to interest rate movements. Our exposure to variable interest rates on outstanding ~~floating~~variable rate debt instruments indexed to United States or European Monetary Union short-term money market rates is partially managed by the use of interest rate swap contracts to convert certain variable rate debt obligations to fixed rate, matching effective and maturity dates to specific debt instruments. We also utilize interest rate swap contracts to convert certain fixed rate debt obligations to variable rate, matching effective and maturity ~~date~~dates to specific debt instruments. All of our interest rate swap contracts are executed with banks that we believe are creditworthy and are denominated in currencies that match the underlying debt instrument. Net interest payments or receipts from interest rate swap contracts are ~~recorded~~included as adjustments to interest expense in our consolidated statements of ~~income~~operations on an accrual basis. ~~As of December 31, 2004, there were no contracts outstanding which convert variable rate debt obligations to fixed rate, only contracts which convert fixed rate debt obligations to variable rate.~~

We have performed a quantitative analysis of our overall interest rate exposure as of December 31, ~~2004.~~2005. This analysis assumes an instantaneous 100 basis point parallel shift in interest rates at all points of the yield
36
curve. The potential adverse earnings impact from this hypothetical increase for ~~2005~~2006 is approximately $6$12 million.

As of December 31, ~~2004,~~2005, interest rate swap contracts representing $600 million of notional amount were outstanding with maturity dates of ~~May 2005~~September 2007 through May 2009. ~~All of~~Of these outstanding contracts, $300 million are designated as fair value hedges and modify the fixed rate characteristics of our outstanding ~~long-term~~8.11% senior notes due May 2009. The remaining $300 million are designated as cash flow hedges and modify the variable rate characteristics of our variable rate debt instruments. The fair market value of all outstanding interest rate swap contracts is subject to changes in value due to changes in interest rates. As of December 31, ~~2004,~~2005, the fair market value of these contracts was approximately negative $10 million. A 100 basis point parallel shift in interest rates would result in a ~~$14~~$6 million change in the aggregate fair market value of these contracts.
~~Commodity Prices~~
Commodity Prices

We have commodity price risk with respect to purchases of certain raw materials, including steel, leather, resins, chemicals and diesel fuel. In limited circumstances, we have used financial instruments to mitigate this risk.

42
Increases in certain raw material, orenergy and commodity costs ~~principally~~(principally steel, resins and other oil-based ~~commodities, have~~commodities) had a ~~significant~~material adverse impact on our operating results in ~~2004~~2005. These conditions worsened as a result of the Gulf Coast storms in the third quarter of 2005. Unfavorable industry conditions have also resulted in financial distress within our supply base and ~~will continue to negatively affect our profitability~~an increase in ~~2005.~~commercial disputes and the risk of supply disruption. We have developed and implemented strategies to mitigate or partially offset the impact of higher raw material, energy and commodity costs, which include aggressive cost reduction actions, the utilization of our cost technology optimization process, the selective in-sourcing of components where we have available capacity, the continued consolidation of our supply base and the acceleration of low-cost country sourcing and engineering. ~~In addition, the sharing of increased raw material costs has been, and will continue~~However, due to be, the subject of negotiations with our customers. While we believe that our mitigation efforts will offset a substantial portion of the financial impact of these increased costs, no assurances can be given that the magnitude and duration of the increased raw material, energy and commodity costs, these ~~increased~~strategies, together with commercial negotiations with our customers and suppliers, offset only a portion of the adverse impact. We expect that high raw material, energy and commodity costs will ~~not~~continue to have a material adverse impact on our ~~future~~ operating ~~results.~~results in the foreseeable future. See ~~“— Forward-Looking Statements” and “— Risk~~Item 1A, “Risk Factors — High raw material costs may continue to have a significant adverse impact on our ~~profitability.~~profitability,” and “— Forward-Looking Statements.”

For further information related to the financial instruments described above, see Note 7, “Long-Term Debt,” and Note 12, “Financial Instruments,” to the consolidated financial statements included in this Report.
Other Matters
~~Pension and Other Postretirement Benefit Plans~~
Legal and Environmental Matters
      Approximately 20% of our active workforce is covered by defined benefit pension plans. Approximately 10% of our active workforce is covered by other postretirement benefit plans. Pension plans provide benefits based on plan-specific benefit formulas as defined by the applicable plan documents. Postretirement benefit plans generally provide for the continuation of medical benefits for all eligible employees. We also have contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, our policy is to fund our pension benefit obligation based on legal requirements, tax considerations and local practices. We do not fund our postretirement benefit obligation.
As of December 31, 2004 (based on a September 30, 2004 measurement date), our projected benefit obligations related to our pension and other postretirement benefit plans were $631 million and $222 million, respectively. These obligations were valued using a weighted average discount rate of 6% for domestic plans, 6% for foreign pension plans and 6.50% for foreign other postretirement benefit plans. Discount rates are determined based on a review of the rates of return for high quality long-term bonds, such as Moody’s Long-Term AA Bond Index for domestic plans. As of December 31, 2004 and 2003, our unfunded pension benefit obligation was $236 million and $182 million, respectively.
      For each of the years ended December 31, 2004 and 2003, pension net periodic benefit cost was $54 million and was determined using a variety of actuarial assumptions. Pension net periodic benefit cost was calculated using an expected return on plan assets of 7.75% for domestic plans and 7% for foreign plans in both 2004 and 2003. The expected return on plan assets is determined based on several factors, including adjusted historical returns, historical risk premiums for various asset classes and target asset allocations within the portfolio. Adjustments made to the historical returns are based on recent return experience in the equity and
37
~~fixed income markets and the belief that deviations from historical returns are likely over the relevant investment horizon.~~
      Pension net periodic benefit cost is estimated to be approximately $56 million in 2005. This estimate is based on a weighted average discount rate of 6% and an expected return on plan assets of 7.75% for domestic plans and 7% for foreign plans. Actual cost is also dependent on various other factors related to the employees covered by these plans. We believe that these actuarial assumptions are reasonable. Adjustments to our actuarial assumptions could have a material adverse effect on our operating results. Decreasing the discount rate by 1% would have increased the pension benefit obligation and the pension net periodic benefit cost by approximately $101 million and approximately $13 million, respectively, as of and for the year ended December 31, 2004. Decreasing the expected return on plan assets by 1% would have increased the pension net periodic benefit cost by approximately $3 million for the year ended December 31, 2004.
      We expect to contribute approximately $53 million to $58 million to our domestic and foreign pension plans in 2005. Contributions to our pension plans are consistent with minimum funding requirements of the relevant governmental authorities. We may make contributions in excess of these minimums when we believe it is financially advantageous to do so and based on our other capital requirements.
      In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) was enacted. The Medicare Act introduced a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of certain other postretirement benefit plans that provide prescription drug benefits at least actuarially equivalent to Medicare Part D. In May 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” which provides the applicable accounting guidance related to the federal subsidy. In accordance with the transition provisions of FSP 106-2, the effects of the Medicare Act are reflected in the measurement of the postretirement benefit obligation and postretirement net periodic benefit cost as of and for the year ended December 31, 2004. The effects of adoption were not significant.
      For further information related to our pension and other postretirement benefit plans, see Note 9, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in this Report.
~~Legal and Environmental Matters~~
We are involved from time to time in ~~certain~~ legal proceedings and claims, including, without limitation, commercial or contractual ~~disputes.~~disputes with our suppliers and competitors. Largely as a result of generally unfavorable industry conditions and financial distress within the automotive supply base, we experienced an increase in commercial and contractual disputes, particularly with our suppliers. These disputes vary in nature and are usually resolved by negotiations between the parties.

On January 29, 2002, Seton Company (“Seton”), one of our leather suppliers, filed a suit alleging that we had breached a purported agreement to purchase leather from Seton for seats for the life of the General Motors GMT 800 program. ~~This suit presently is pending~~Seton filed the lawsuit in the U.S. District Court for the Eastern District of ~~Michigan. Seton seeks~~Michigan seeking compensatory and exemplary damages totaling approximately $97 million, plus interest, on breach of contract and promissory estoppel claims. In May 2005, this case proceeded to trial, and the jury returned a $30 million verdict against us. On September 27, 2005, the Court denied our post-trial motions challenging the judgment and granted Seton’s motion to award prejudgment interest in the amount of approximately $5 million. We are appealing the judgment and the interest award.
On January 26, 2004, we filed a patent infringement lawsuit against Johnson Controls Inc. and Johnson Controls Interiors LLC (together, “JCI”) in the U.S. District Court for the Eastern District of Michigan alleging that JCI’s garage door opener products infringed certain of our radio frequency transmitter patents. JCI counterclaimed seeking a declaratory judgment that the subject patents are invalid and unenforceable, and that JCI is not infringing these patents. JCI also has filed motions for summary judgment asserting that its garage door opener products do not infringe our patents. We are vigorously pursuing our claims against JCI and ~~has submitted a revised report now alleging up to $97 million~~discovery is on-going. A trial in ~~damages;~~the case is currently scheduled for the second quarter of 2006.
After we ~~will challenge several~~filed our patent infringement action against JCI, affiliates of JCI sued one of our vendors and certain of the ~~assumptions~~vendor’s employees in Ottawa Circuit Court, Michigan, on July 8, 2004, alleging misappropriation of trade secrets. The suit alleges that the defendants misappropriated and ~~bases for~~shared with us trade secrets involving JCI’s universal garage door opener product. JCI seeks to enjoin the defendants from selling or attempting to sell a competing product. We are not a defendant in this ~~revised report.~~lawsuit; however, the agreements between us and the defendants contain customary indemnification provisions. We ~~continue to~~do not believe that our garage door opener product benefited from any allegedly misappropriated trade secrets or technology. However, JCI has sought discovery of certain information which we believe is confidential and proprietary, and we have ~~meritorious defenses~~intervened in the case for the limited purpose of protecting our rights with respect to ~~Seton’s liability~~JCI’s discovery efforts. Discovery has been extended to July 2006. A trial date has not yet been scheduled.

43
On June 13, 2005, The Chamberlain Group (“Chamberlain”) filed a lawsuit against us and ~~damages~~Ford Motor Company (“Ford”) in the Northern District of Illinois alleging patent infringement. Two counts were asserted against us and Ford based upon Chamberlain’s rolling code security system patent and a related product which operates transmitters to actuate garage door openers. Two additional counts were asserted against Ford only (not us) based upon different Chamberlain patents. The Chamberlain lawsuit was filed in connection with the marketing of our universal garage door opener system, which competes with a product offered by JCI. JCI obtained technology from Chamberlain to operate its product. In October 2005, JCI joined the lawsuit as a plaintiff along with Chamberlain, and Chamberlain dismissed its infringement claims against Ford based upon its rolling security system patent. JCI and ~~intend to~~Chamberlain have filed a motion for a preliminary injunction, which we are contesting. We are vigorously ~~defend~~defending the claims asserted in this lawsuit. ~~The~~A trial ~~is expected to begin in the March/ April 2005 timeframe.~~date has not yet been scheduled.

We are subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for ~~the~~clean-up costs ~~of cleaning up certain damages~~ resulting from past spills, disposals or other releases of hazardous wastes and environmental compliance. Our policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance. However, we currently are, have been and in the future may become the subject of formal or informal enforcement actions or procedures.

We have been named as a potentially responsible party at several third-party landfill sites and are engaged in the cleanup of hazardous waste at certain sites owned, leased or operated by us, including several properties acquired in our 1999 acquisition of UT Automotive, Inc. (“UT Automotive”). Certain present and former
38
properties of UT Automotive are subject to environmental liabilities which may be significant. We obtained agreements and indemnities with respect to certain environmental liabilities from United Technologies Corporation (“UTC”) in connection with our acquisition of UT Automotive. UTC manages and directly funds these environmental liabilities pursuant to its agreements and indemnities with us.

While we do not believe that the environmental liabilities associated with our current and former properties will have a material adverse effect on our business, consolidated financial position or results of operations, no assurances can be given in this regard.

One of our subsidiaries and certain predecessor companies were named as defendants in an action filed by three plaintiffs in August 2001 in the Circuit Court of Lowndes County, Mississippi, asserting claims stemming from alleged environmental contamination caused by an automobile parts manufacturing plant located in Columbus, Mississippi. The plant was acquired by us as part of our acquisition of UT Automotive in May 1999 and sold almost immediately thereafter, in June 1999, to Johnson Electric Holdings Limited (“Johnson Electric”). In December 2002, 61 additional cases were filed by approximately 1,000 plaintiffs in the same court against us and other defendants relating to similar claims. In September 2003, we were dismissed as a party to these cases. In the first half of 2004, we were named again as a defendant in these same 61 additional cases and were also named in five new actions filed by approximately 150 individual plaintiffs related to alleged environmental contamination from the same facility. The plaintiffs in these actions are persons who allegedly were either residentsand/or owned property near the facility or worked at the facility. In November 2004, two additional lawsuits were filed by 28 plaintiffs (individuals and organizations), alleging property damage as a result of the alleged contamination. Each of these complaints seeks compensatory and punitive damages.
All of the plaintiffs have dismissed their claims for health effects and personal injury damages without prejudice. There is the potential that these plaintiffs could seek separate counsel to re-file their personal injury claims. Currently, there are approximately 270 plaintiffs remaining in the lawsuits who are proceeding with property damage claims only. In March 2005, the venue for these lawsuits was transferred from Lowndes County, Mississippi, to Lafayette County, Mississippi. In April 2005, certain plaintiffs filed an amended complaint alleging negligence, nuisance, intentional tort and conspiracy claims and seeking compensatory and punitive damages. In April 2005, the court scheduled the first trial date for the first group of plaintiffs to commence March 2006. The March 2006 trial date has since been continued until a date to be set by the court, and discovery has extended into the first quarter of 2006.
UTC, the former owner of UT Automotive, and Johnson Electric have each sought indemnification for losses associated with the Mississippi claims from us under the respective acquisition agreements, and we have claimed

44
indemnification from them under the same agreements. To date, no company admits to, or has been found to have, an obligation to fully defend and indemnify any other. We intend to vigorously defend against these claims and believe that we will eventually be indemnified by either UTC or Johnson Electric for a substantial portion of the resulting losses, if any. However, the ultimate outcome of these matters is unknown.
In January 2004, the Securities and Exchange Commission (the “SEC”) commenced an informal inquiry into our September 2002 amendment of our 2001Form 10-K. The amendment was filed to report our employment of relatives of certain of our directors and officers and certain related party transactions. The SEC’s inquiry does not relate to our consolidated financial statements. In February 2005, the staff of the SEC informed us that it proposed to recommend to the SEC that it issue an administrative “cease and desist” order as a result of our failure to disclose the related party transactions in question prior to the amendment of our 2001Form 10-K. We expect to consent to the entry of the order as part of a settlement of this matter.

In February 2006, we received a subpoena from the SEC in connection with an ongoing investigation of General Motors Corporation by the SEC. This investigation has been previously reported by General Motors as involving, among other things, General Motors’ accounting for payments and credits by suppliers. The SEC subpoena seeks the production of documents relating to payments or credits by us to General Motors from 2001 to the present. We are cooperating with the SEC in connection with this matter.
Although we record reserves for legal, product warranty and environmental matters in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” the outcomes of these matters are inherently uncertain. Actual results may differ significantly from current estimates. See Item 1A, “Risk Factors.” For further information regarding legal and environmental matters, see ~~“Item~~Item 3, ~~– Legal~~“Legal Proceedings.”
~~Certain Tax Matters~~
Certain Tax Matters
~~UT Automotive~~

UT Automotive
Prior to our acquisition of UT Automotive from UTC in May 1999, ~~a subsidiary~~one of ~~Lear~~our subsidiaries purchased the stock of a UT Automotive subsidiary. In connection with the acquisition, we agreed to indemnify UTC for certain tax consequences if the Internal Revenue Service (the “IRS”) overturned UTC’s tax treatment of the transaction. The IRS ~~recently issued a notice of~~ proposed an adjustment to ~~UTC related to~~UTC’s tax treatment of the ~~acquisition~~transaction seeking an increase in tax of approximately ~~$87~~$88 million, excluding interest. In April 2005, a protest objecting to the proposed adjustment was filed with the IRS. The case was then referred to the Appeals Office of the IRS for an independent review. There have been several meetings and discussions with the IRS Appeals personnel in an attempt to resolve the case. Although we believe that valid support exists for UTC’s tax positions, we and UTC are currently in settlement negotiations with the IRS. An indemnity payment by us to UTC for the ultimate amount due to the IRS would constitute an adjustment to the purchase price and resulting goodwill of the UT Automotive acquisition, if and when made, and would not be expected to have a material effect on our reported earnings. ~~We believe that valid support exists for UTC’s tax positions and intend to vigorously contest the IRS’s proposed adjustment. However, the ultimate outcome~~
American Jobs Creation Act of ~~this matter is not certain.~~2004
~~American Jobs Creation Act of 2004~~
In October 2004, the American Jobs Creation Act of 2004 (“the Act”) was signed into law. The Act ~~creates~~created a temporary incentive for U.S. corporations to repatriate earnings from foreign subsidiaries by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations to the extent the dividends exceed a base amount and are invested in the United States pursuant to a domestic reinvestment plan. The temporary incentive iswas available to us inuntil December 31, 2005. The amount of our dividends potentially eligible for the deduction iswas limited to $500 million.
~~The deduction is subject~~
After completing our evaluation, we decided not to a number of limitations and uncertainty remains as to the interpretation of numerous provisions in the Act. The U.S.Treasury Department is in the process of providing clarifying guidance on key elements ofpursue dividends under the repatriation provision ~~and Congress may reintroduce legislation that provides for certain technical corrections to the Act. We have not completed our evaluation~~ of the ~~repatriation provision~~Act due to ~~the uncertainty associated with the interpretation of the provision, as well as~~ numerous tax ~~legal,~~and treasury considerations. This decision had no effect on our provision for income taxes for the year ended December 31, 2005.
Significant Accounting Policies and ~~business considerations. We expect to complete our evaluation of the potential dividends we may pursue, if any, and the related tax ramifications after additional guidance is issued.~~Critical Accounting Estimates
~~Significant Accounting Policies and Critical Accounting Estimates~~
Our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in this Report. Certain of our accounting policies require

45
management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of
39
revenues and expenses during the reporting period. ~~These estimates and assumptions are subject to an inherent degree of uncertainty.~~ These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. ~~Actual~~However, they are subject to an inherent degree of uncertainty. As a result, actual results in these areas ~~could~~may differ significantly from our estimates.

We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations.
~~Pre-Production Costs Related to Long-Term Supply Arrangements~~
Pre-Production Costs Related to Long-Term Supply Arrangements

We incur pre-production engineering, research and development (“ER&D”) and tooling costs related to the products produced for our customers under long-term supply agreements. We expense all pre-production ER&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, we expense all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the customer has not provided a non-cancelable right to use the tooling. During ~~2004~~2005 and ~~2003,~~2004, we capitalized ~~$245~~$227 million and ~~$181~~$245 million, respectively, of pre-production ER&D costs for which reimbursement is contractually guaranteed by the customer. During ~~2004~~2005 and ~~2003,~~2004, we also capitalized ~~$396~~$639 million and ~~$381~~$396 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. During ~~2004~~2005 and ~~2003,~~2004, we collected ~~$646~~$716 million and ~~$540~~$646 million, respectively, of cash related to ER&D and tooling costs.

Gains and losses related to ER&D and tooling projects are reviewed on an aggregate program basis. Net gains on projects are deferred and recognized over the life of the related long-term supply agreement. Net losses on projects are recognized as costs are incurred.

A change in the commercial arrangements affecting any of our significant programs that would require us to expense ER&D or tooling costs that we currently capitalize could have a material adverse ~~effect~~impact on our operating results.
~~Goodwill~~
Goodwill
~~On January 1, 2002,~~
As of December 31, 2005 and 2004, we ~~adopted SFAS No. 142, “Goodwill~~had recorded goodwill of approximately $1.9 billion and ~~Other Intangible Assets.” Under this statement, goodwill~~$3.0 billion, respectively. Goodwill is ~~no longer~~not amortized but is ~~subject to~~tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment, ~~analysis. Our~~or decline in value, may have occurred. In conducting our impairment ~~analysis compares~~testing, we compare the fair ~~values~~value of each of our reporting units ~~based on a discounted cash flow model,~~ to the related net book value. If the fair value of a reporting unit exceeds its net book value, goodwill is considered not to be impaired. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. We conduct our annual impairment testing on the first day of the fourth quarter each year.
We utilize an income approach to estimate the fair value of each of our reporting units. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical downturns that occur in the industry. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally-developed forecasts, as well as commercial, wage and benefit, inflation and discount rate assumptions. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income approach provides a reasonable estimate of the fair value of our reporting units.

46
During the third quarter of 2005, events occurred which indicated a significant decline in the fair value of our interior segment, as well as an impairment of the related goodwill. These events included unfavorable operating results, primarily as a result of higher raw material costs, lower production volumes on key platforms, industry overcapacity, insufficient customer pricing and changes in certain customers’ sourcing strategies, as well as our decision to evaluate strategic alternatives with respect to this segment. As of the end of the third quarter of 2005, we evaluated the net book value of goodwill within our interior segment by comparing the fair value of the reporting unit to the related net book value. As a result, we recorded an estimated goodwill impairment charge of $670 million in the third quarter of 2005.
During the fourth quarter of 2005, additional events occurred which indicated a further decline in the fair value of our interior segment. These events included a further deterioration of the commercial outlook for this segment, as well as an updated assessment of our ability to recover the increase in the costs associated with resin-based raw materials in North America. We updated the fair value estimate for this segment and finalized the implied fair value of goodwill pursuant to asset valuation and allocation procedures. As a result, we recorded an additional goodwill impairment charge of $343 million in the fourth quarter of 2005.
The annual impairment testing for our remaining segments was completed as of October 2, 2005, and there was no additional impairment.
Long-Lived Assets
We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If impairment indicators exist, we perform the required analysis and record impairment charges in accordance with SFAS No. 144. In conducting our analysis, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be impaired. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates. Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of ~~goodwill.~~long-lived assets.
During the third and fourth quarters of 2005, we evaluated the net book value of the fixed assets of certain operating locations within our interior segment. As a result, ~~of the adoption of SFAS No. 142,~~ we recorded impairment charges of ~~$311 million ($299 million after tax) as of January 1, 2002. These~~$82 million. Consistent with the goodwill impairment charges, the fixed asset impairment charges are ~~reflected~~due to the unfavorable operating results of our interior segment, as ~~a cumulative effect~~well as the deterioration of ~~a change~~the commercial outlook for this segment. Also in accounting principle, net of tax, in our consolidated statement of income for the year ended December 31, 2002. Our annual SFAS No. 142 impairment analysis was completed as of October 3, 2004, and there was no additional impairment. As of December 31, 2004,2005, we ~~had $3.0 billion of goodwill recorded. An impairment charge related to this amount would not impact our cash flows but could materially and negatively affect our operating results.~~
~~Long-Lived Assets~~
      On January 1, 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, we monitor our long-lived assets for impairment indicators. If impairment indicators exist, we perform the required analysis and record impairment charges in accordance with SFAS No. 144. In 2004 and 2003, we recorded fixed asset impairment charges of $3$15 million and $5 million, respectively, related to certain facility consolidations. In 2003, we also recorded impairment charges of $6 million related to other facility closures, an early program termination and ongoing losses at certain ofin conjunction with our ~~facilities. The~~
40
estimated fair values were based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of long-lived assets.restructuring actions. We have certain other facilities that have generated operating losses in recent years. The results of the related impairment analyses indicated that impairment of the fixed assets was not required. WeHowever, we will continue to monitor the operating plans of these facilities for potential impairment.
~~Legal and Other Contingencies~~
In 2004, we recorded impairment charges of $3 million related to certain facility consolidations. In 2003, we recorded impairment charges of $5 million related to certain facility consolidations and impairment charges of $6 million related to other facility closures, an early program termination and ongoing losses at certain of our facilities.

These fixed asset impairment charges are recorded in cost of sales in the consolidated statements of operations for the years ended December 31, 2005, 2004 and 2003.
Restructuring
Accruals have been recorded in conjunction with our restructuring actions, as well as the integration of acquired businesses. These accruals include estimates primarily related to facility consolidations and closures, census reductions and contract termination costs. Actual costs may vary from these estimates. Restructuring-related

47
accruals are reviewed on a quarterly basis, and changes to the restructuring actions are appropriately recognized when identified.
Legal and Other Contingencies
We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions and other claims that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. We have accrued for estimated losses in accordance with accounting principles generally accepted in the United States for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable. The determination of the amount of such reserves is based on knowledge and experience with regard to past and current matters and consultation with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. The reserves may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
~~Revenue Recognition and Sales Commitments~~
Pension and Other Postretirement Benefit Plans

Approximately 20% of our active workforce is covered by defined benefit pension plans. Approximately 10% of our active workforce is covered by other postretirement benefit plans. Pension plans provide benefits based on plan-specific benefit formulas as defined by the applicable plan documents. Postretirement benefit plans generally provide for the continuation of medical benefits for all eligible employees. We also have contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, our policy is to fund our pension benefit obligation based on legal requirements, tax considerations and local practices. We do not fund our postretirement benefit obligation.
As of December 31, 2005 (based on a September 30, 2005 measurement date), our projected benefit obligations related to our pension and other postretirement benefit plans were $788 million and $266 million, respectively, and our unfunded pension and other postretirement benefit obligations were $314 million and $266 million, respectively. These benefit obligations were valued using a weighted average discount rate of 5.75% and 5.70% for domestic pension and other postretirement benefit plans, respectively, and 5.00% and 5.30% for foreign pension and other postretirement benefit plans, respectively. The determination of the discount rate is based on the construction of a hypothetical bond portfolio consisting of high-quality fixed income securities with durations that match the timing of expected benefit payments. Changes in the selected discount rate could have a material impact on our projected benefit obligations and the underfunded status of our pension and other postretirment benefit plans. Decreasing the discount rate by 1% would have increased the projected benefit obligations and underfunded status of our pension and other postretirement benefit plans by approximately $155 million and $50 million, respectively.
For the year ended December 31, 2005, pension and other postretirement net periodic benefit cost was $58 million and $29 million, respectively, and was determined using a variety of actuarial assumptions. Pension net periodic benefit cost in 2005 was calculated using a weighted average discount rate of 6.00% for both domestic and foreign plans and an expected return on plan assets of 7.75% and 7.00% for domestic and foreign plans, respectively. The expected return on plan assets is determined based on several factors, including adjusted historical returns, historical risk premiums for various asset classes and target asset allocations within the portfolio. Adjustments made to the historical returns are based on recent return experience in the equity and fixed income markets and the belief that deviations from historical returns are likely over the relevant investment horizon. Other postretirement net periodic benefit cost was calculated in 2005 using a discount rate of 6.00% and 6.50% for domestic and foreign plans, respectively. Adjustments to our actuarial assumptions could have a material adverse impact on our operating results. Decreasing the discount rate by 1% would have increased pension and other postretirement periodic net benefit cost by approximately $14 million and approximately $5 million, respectively, for the year ended December 31, 2005. Decreasing the expected return on plan assets by 1% would have increased pension net periodic benefit cost by approximately $4 million for the year ended December 31, 2005.

48
Aggregate pension and other postretirement net periodic benefit cost is forecasted to be approximately $97 million in 2006. This estimate is based on a weighted average discount rate of 5.75% and 5.00% for domestic and foreign pension plans, respectively, and 5.70% and 5.30% for domestic and foreign other postretirement benefit plans, respectively. Actual cost is also dependent on various other factors related to the employees covered by these plans.
We expect to contribute approximately $65 million to our domestic and foreign pension plans in 2006. Contributions to our pension plans are consistent with minimum funding requirements of the relevant governmental authorities. We may make contributions in excess of these minimums when we believe it is financially advantageous to do so and based on our other capital requirements.
For further information related to our pension and other postretirement benefit plans, see Note 9, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in this Report.
Revenue Recognition and Sales Commitments
We enter into agreements with our customers to produce products at the beginning of a vehicle’s life. Although such agreements do not provide for minimum quantities, once we enter into such agreements, ~~fulfillment of~~we are generally required to fulfill our customers’ purchasing requirements ~~is our obligation~~ for the entire production life of the vehicle. These agreements generally may be terminated by our customer at any time. Historically, terminations of these agreements have been minimal. In certain limited instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses as they are incurred.

We receive blanket purchase orders from our customers on an annual basis. Generally, each purchase order provides the annual terms, including pricing, related to a particular vehicle model. Purchase orders do not specify quantities. We recognize revenue based on the pricing terms included in our annual purchase orders as our products are shipped to our customers. We are asked to provide our customers with annual cost reductions as part of certain agreements. We accrue for such amounts as a reduction of revenue as our products are shipped to our customers. In addition, we have ongoing adjustments to our pricing arrangements with our customers based on the related content, ~~and~~the cost of our ~~products.~~products and other commercial factors. Such pricing accruals are adjusted as they are settled with our customers.

Amounts billed to customers related to shipping and handling are included in net sales in our consolidated statements of ~~income.~~operations. Shipping and handling costs are included in cost of sales in our consolidated statements of ~~income.~~operations.
In 2000 and in prior years, we recorded loss contract accruals in purchase accounting in conjunction with certain acquisitions. These loss contract accruals were not recorded in the historical operating results of the acquired businesses. The losses included in the accrual have not been, and will not be, included in our operating results since the respective acquisition dates. Further, our future operating results will benefit from
41
~~accruing these contract losses in the related purchase price allocations. A summary of the loss contract accrual activity related to these acquisitions is shown below (in millions):~~Income Taxes

Accrual as of
Original Adjustments/ Dec. 31,
Accrual Utilized 2004

Lear-Donnelly $ 8.7 $ (8.7 ) $ —
UT Automotive 19.7 (19.3 ) 0.4
Peregrine 18.4 (18.4 ) —
Delphi 53.3 (53.3 ) —
~~We utilized $13 million, $7 million and $8 million of the loss contract accruals to offset losses in 2004, 2003 and 2002, respectively.~~
~~Income Taxes~~
In determining the provision for income taxes for financial statement purposes, we ~~must~~ make certain estimates and ~~judgments. These estimates and~~ judgments, which affect our evaluation of the carrying value of our deferred tax assets, as well as our calculation of certain tax ~~liabilities and~~liabilities. In accordance with SFAS No. 109, “Accounting for Income Taxes,” we evaluate the ~~determination~~carrying value of ~~the recoverability of certain~~our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available evidence. Such evidence includes historical results, expectations for future pretax operating income, the time period over which ~~arise from~~our temporary differences ~~between~~will reverse and the implementation of feasible and prudent tax planning strategies.
During 2005, operating losses generated in the United States resulted in an increase in the carrying value of our deferred tax assets. In light of our recent operating performance in the United States and ~~financial statement recognition of revenue and expense. Deferred tax assets are also reduced by a valuation allowance if,~~current industry conditions, we assessed, based ~~on the weight of~~upon all available evidence, whether it iswas more likely than not that ~~all or a portion of the recorded~~we would realize our U.S. deferred tax assets. We concluded that it was no longer more likely than not that we would realize our U.S. deferred tax assets. As a result, in the fourth quarter of 2005, we recorded a tax charge of $300 million comprised of (i) a full valuation allowance of $255 million and (ii) an increase in related tax reserves of $45 million. Although the tax charge did not result in current cash expenditures, it did negatively impact net income, assets ~~will not be realized in future periods.~~and stockholders’ equity as of and for the year ended December 31, 2005. As of December 31, ~~2004,~~2005, we ~~have~~ recorded a U.S. valuation ~~allowances~~allowance of ~~$278~~$255 million and a valuation allowance for certain foreign tax ~~jurisdictions.~~jurisdictions of

49
$223 million. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Our future income tax expense will be reduced to the extent of decreases in our valuation allowances.
In addition, the calculation of our tax benefits and liabilities includes uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax benefits and liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these liabilities based on changing facts and circumstances; however, due to the complexity of some of these uncertainties and the impact of any tax audits, the ultimate resolutions may be materially different from our estimated liabilities. For further information related to income taxes, see Note 8, “Income Taxes,” to the consolidated financial statements included in this Report.
~~Use of Estimates~~
Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. During ~~2004,~~2005, there were no material changes in the methods or policies used to establish estimates and assumptions. Generally, matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, unsettled pricing discussions with customers and suppliers, ~~warranty,~~restructuring accruals, deferred tax asset valuation allowances and income taxes, pension and other postretirement benefit plan assumptions, ~~facility consolidation and reorganization reserves, self-insurance accruals, asset valuation reserves and~~ accruals related to litigation, warranty and environmental remediation costs and ~~income taxes.~~self-insurance accruals. Actual results may differ from estimates provided.
~~Recently Issued Accounting Pronouncements~~
Recently Issued Accounting Pronouncements
~~Pensions and Other Postretirement Benefits~~

Inventory Costs
The FASB issued a revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement retains the original pension and other postretirement benefits disclosure requirements of SFAS No. 132 and requires additional disclosures for both annual and interim periods. All disclosures required by this statement have been reflected in Note 9, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in the Report.
42
~~Variable Interest Entities~~
      ~~The FASB issued Interpretation~~Financial Accounting Standards Board (“~~FIN”~~FASB”) No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” the provisions of which apply immediately to any variable interest entity created after January 31, 2003, apply no later than the first period ending after December 15, 2003, to special purpose corporations, and apply in the first interim period ending after March  15, 2004, to any variable interest entity created prior to February 1, 2003. This interpretation requires the consolidation of a variable interest entity by its primary beneficiary and may require the consolidation of a portion of a variable interest entity’s assets or liabilities under certain circumstances. We adopted the requirements of FIN No. 46 as of April 3, 2004. The effects of adoption were not significant.
~~Contingently Convertible Debt~~
      The FASB ratified the final consensus of the Emerging Issues Task Force on EITF 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which states that the impact of contingently convertible instruments that are convertible into common stock upon the achievement of a specified market price of the issuer’s shares, such as our outstanding zero-coupon convertible senior notes, should be included in diluted net income per share computations regardless of whether the market price trigger has been met. Accordingly, we have restated diluted net income per share for 2003 and 2002 to include the dilutive impact of our zero-coupon convertible senior notes since the issuance date of February 14, 2002.
~~Inventory Costs~~
      ~~The FASB~~ issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” This statement clarifies the requirement that abnormal inventory-related costs be recognized as current-period charges and requires that the allocation of fixed production overheads to inventory conversion costs be based on the normal capacity of the production facilities. The provisions of this statement are to be applied prospectively to inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the effects of adoption to be significant.
~~Nonmonetary Assets~~
Nonmonetary Assets

The FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29.” APB Opinion No. 29, in general, requires the use of fair value as the measurement basis for exchanges of nonmonetary assets. This statement eliminates the exception to the fair value measurement principle for nonmonetary exchanges of similar productive assets and replaces it with a general exception for nonmonetary asset exchanges that lack commercial substance. The provisions of this statement are to be applied prospectively to nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the effects of adoption to be significant.
~~Stock-Based Compensation~~
Stock-Based Compensation

The FASB issued a revised SFAS No. 123, “Share-Based Payment.” This statement requires that all share-based payments to employees be recognized in the financial statements based on their grant-date fair value. Under previous guidance, companies had the option of recognizing the fair value of stock-based compensation in the consolidated financial statements or disclosing the proforma impact of stock-based compensation on the

50
consolidated statement of ~~income~~operations in the notes to the consolidated financial statements. As described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in this Report, we adopted the fair value recognition provisions of SFAS No. 123 for all employee awards issued after January 1, 2003. The revised statement is effective at the beginning of the first annual ~~or interim~~ period beginning after ~~December~~June 15, 2005, and provides two methods of adoption, the modified-prospective method and the modified-retrospective method. We anticipate adopting the revised statement using the modified-prospective method. We are currently evaluating the provisions of the revised statement but do not expect the impact of adoption to be significant.
43
Conditional Asset Retirement Obligations
The FASB issued Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47 requires the accrual of costs related to legal obligations to perform certain activities in connection with the retirement, disposal or abandonment of assets. The effects of adoption were not significant.
Financial Instruments
The FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” This statement resolves issues related to the application of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to beneficial interests in securitized assets. The provisions of this statement are to be applied prospectively to all financial instruments acquired or issued during fiscal years beginning after September 15, 2006. We are currently evaluating the provisions of this statement but do not expect the effects of adoption to be significant.
Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. The words “will,” “may,” “designed to,” “outlook,” “believes,” “should,” “anticipates,” “plans,” “expects,” “intends,” “estimates” and similar expressions identify these forward-looking statements. All statements contained or incorporated in this Report which address operating performance, events or developments that we expect or anticipate may occur in the future, including statements related to business opportunities, awarded sales contracts, sales backlog and net income per share growth or statements expressing views about future operating results, are forward-looking statements. Important factors, risks and uncertainties that may cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to:
• general economic conditions in the markets in which we ~~operate;~~operate, including changes in interest rates;

• fluctuations in the production of vehicles for which we are a supplier;

• labor disputes involving us or our significant customers or suppliers or that otherwise affect us;

• our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;

• the outcome of customer productivity negotiations;

• the impact and timing of program launch costs;

• the costs and timing of facility closures, business realignment or similar actions;

• increases in our warranty or product liability costs;

• risks associated with conducting business in foreign countries;

• competitive conditions impacting our key ~~customers;~~customers and suppliers;

51
• raw material ~~cost~~costs and availability;

• our ability to mitigate the significant impact of recent increases in raw material, ~~prices;~~energy and commodity costs;

• the outcome of legal or regulatory proceedings to which we are or may become a party;

• unanticipated changes in cash flow;
• the finalization of our restructuring strategy;
• the outcome of various strategic alternatives being evaluated with respect to our interior segment; and

• other risks, described ~~below~~ in ~~“— Risk Factors”~~Item 1A, “Risk Factors,” and from time to time in our other SEC filings.
We
Finally, the proposed joint venture between us and WL Ross & Co. LLC with respect to our interior segment is subject to the negotiation and execution of definitive agreements and other conditions. No assurances can be given that the proposed joint venture will be completed on the terms contemplated or at all.
The forward-looking statements in this Report are made as of the date hereof, and we do not assume any obligation to update, ~~any of these forward-looking statements.~~amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.

52
~~Risk Factors~~
• ~~A decline in automotive sales could reduce our sales and harm our profitability.~~
ITEM 8 — Demand for our products is directly related to automotive vehicle production. Automotive sales and production can be affected by general economic or industry conditions, labor relations issues, regulatory requirements, trade agreements and other factors. Automotive production in North America and Europe, our largest markets where most of our operations are located, has declined between 1999 and 2004. Numerous factors beyond our control could lead to a further decline in automotive production in these markets. Automotive industry conditions in North America and Europe continue to be challenging. In North America, the industry is characterized by significant overcapacity, fierce competition and significant pension and healthcare liabilities for the domestic automakers. North American automakers have recently announced production cuts which significantly impact several of our key platforms. In Europe, the market structure is relatively fragmented with significant overcapacity, and several of our key platforms have experienced production declines. Any decline in automotive production levels, particularly with respect to models for which we are a significant supplier, could reduce our sales and harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.
44
• ~~The loss of business from a major customer could reduce our sales and harm our profitability.~~CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
General Motors and Ford, two of the largest automotive manufacturers in the world, together accounted for approximately 43% of our net sales in 2004, excluding net sales to Opel, Saab, Volvo, Jaguar and Land Rover, which are affiliates of General Motors or Ford. Inclusive of their respective affiliates, General Motors and Ford accounted for approximately 31% and 24%, respectively, of our net sales in 2004. In recent years, General Motors and Ford have experienced declining market shares in North America. A loss of significant business from General Motors or Ford, including a loss of business resulting from a decline in the market share of either of these customers, would be harmful to our business and our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock. In addition, no assurances can be given that we will be successful in expanding our business with Asian automotive manufacturers.
• The discontinuation of, the loss of business with respect to or a lack of commercial success of a particular vehicle model for which we are a significant supplier could reduce our sales and harm our profitability.
Although we have purchase orders from many of our customers, these purchase orders generally provide for the supply of a customer’s annual requirements for a particular model and assembly plant, renewable on a year-to-year basis, rather than for the purchase of a specific quantity of products. Therefore, the discontinuation of, the loss of business with respect to or a lack of commercial success of a particular vehicle model for which we are a significant supplier could reduce our sales and harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.
• ~~Our substantial international operations make us vulnerable to risks associated with doing business in foreign countries.~~
As a result of our global presence, a significant portion of our revenues and expenses are denominated in currencies other than U.S. dollars. In addition, we have manufacturing and distribution facilities in many foreign countries, including countries in Asia, Eastern and Western Europe and Central and South America. International operations are subject to certain risks inherent in doing business abroad, including:
• ~~exposure to local economic conditions;~~
• ~~expropriation and nationalization;~~
• ~~foreign exchange rate fluctuations and currency controls;~~
• ~~withholding and other taxes on remittances and other payments by subsidiaries;~~
• ~~investment restrictions or requirements;~~
• ~~export and import restrictions; and~~
• ~~increases in working capital requirements related to long supply chains.~~
Expanding our business in Asian markets and our business relationships with Asian automotive manufacturers are important elements of our strategy. In addition, our strategy includes expanding our manufacturing operations in lower-cost regions. As a result, our exposure to the risks described above may be greater in the future. The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. However, any such occurrences could be harmful to our business and our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.
• ~~High raw material costs may continue to have a significant adverse impact on our profitability.~~
Higher costs for certain raw materials, principally steel, resins and diesel fuel, had a significant adverse impact on our operating results in 2004 and will continue to negatively impact our profitability in 2005.
45
While we have developed strategies to mitigate or partially offset the impact of higher raw material costs, we cannot assure you that such measures will be successful. In addition, no assurances can be given that the magnitude and duration of these cost increases or any future cost increases will not have a larger adverse impact on our profitability and consolidated financial position than currently anticipated.
• ~~A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could reduce our sales and harm our profitability.~~
Most of our employees and a substantial number of the employees of our largest customers and suppliers are members of industrial trade unions and are employed under the terms of collective bargaining agreements. Virtually all of our unionized facilities in the United States and Canada have a separate agreement with the union that represents the workers at such facilities, with each such agreement having an expiration date that is independent of other collective bargaining agreements. Collective bargaining agreements covering approximately 60% of our unionized workforce of approximately 82,000 employees, including 23% of our unionized workforce in the United States and Canada, are scheduled to expire during 2005. A labor dispute involving us or any of our customers or suppliers or that could otherwise affect our operations, or the inability by us or any of our customers or suppliers to negotiate an extension of a collective bargaining agreement covering a large number of employees upon its expiration, could reduce our sales and harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock. Significant increases in labor costs as a result of the renegotiation of collective bargaining agreements could also be harmful to our business and our profitability.
• ~~Adverse developments affecting one or more of our major suppliers could harm our profitability.~~
We obtain components and other products and services from numerous tier II automotive suppliers and other vendors throughout the world. In certain instances, it would be difficult and expensive for us to change suppliers of products and services that are critical to our business. Certain of our suppliers are financially distressed or may become financially distressed. Any significant disruption in our supplier relationships, including certain relationships with sole-source suppliers, could harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.
• ~~A significant product liability lawsuit, warranty claim or product recall involving us or one of our major customers could harm our profitability.~~
In the event that our products fail to perform as expected and such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability lawsuits and other claims. In addition, we are a party to warranty-sharing and other agreements with our customers related to our products. These customers may seek contribution or indemnification from us for all or a portion of the costs associated with product liability and warranty claims, recalls or other corrective actions involving our products. These types of claims could significantly harm our profitability, thereby making it more difficult for us to make payments under our indebtedness or resulting in a decline in the value of our common stock.
• ~~We are involved from time to time in legal proceedings and commercial or contractual disputes, which could have an adverse impact on our profitability and consolidated financial position.~~
We are involved in legal proceedings and commercial or contractual disputes that, from time to time, are significant. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes, including disputes with our suppliers, intellectual property matters, personal injury claims and employment matters. No assurances can be given that such proceedings and claims will not have a material adverse effect on our profitability and consolidated financial position.
46
• We depend upon cash from our subsidiaries. Therefore, if we do not receive dividends or other distributions from our subsidiaries, it could be more difficult for us to make payments under our indebtedness.
A substantial portion of our revenue and operating income is generated by our wholly-owned subsidiaries. Accordingly, we are dependent on the earnings and cash flows of, and dividends and distributions or advances from, our subsidiaries to provide the funds necessary to meet our debt service obligations. We utilize certain cash flows of our foreign subsidiaries to satisfy obligations locally. Our obligations under our primary credit facility and senior notes are currently guaranteed by certain of our subsidiaries, but such guarantees may be released under certain circumstances.
• ~~Risks related to Arthur Andersen LLP.~~
Our consolidated financial statements for the years ended December 31, 2001 and 2000, were audited by Arthur Andersen LLP, independent public accountants. On June 15, 2002, Arthur Andersen LLP was convicted of federal obstruction of justice charges. On August 31, 2002, Arthur Andersen LLP ceased practicing before the SEC. Holders of our securities may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in any of our financial statements audited by Arthur Andersen LLP.
Arthur Andersen LLP did not participate in the preparation of this Report and did not reissue its audit report with respect to the financial information included in this Report. As a result, holders of our securities may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in the financial information audited by Arthur Andersen LLP. In addition, even if such holders were able to assert such a claim, as a result of its conviction on federal obstruction of justice charges and other lawsuits, Arthur Andersen LLP may fail or otherwise have insufficient assets to satisfy claims made by investors that might arise under federal securities laws or otherwise with respect to the financial information it has audited.
47
~~ITEM 8 — CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
4954
Consolidated Balance Sheets as of December 31, 2005 and 2004
56
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
5157
~~Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002~~
52
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004 ~~2003~~ and ~~2002~~2003
5358
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 ~~2003~~ and ~~2002~~2003
5459
Notes to Consolidated Financial Statements
5560
Schedule II — Valuation and Qualifying Accounts
95105

53
48

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Lear Corporation

We have audited the accompanying consolidated balance sheets of Lear Corporation and Subsidiaries (the Company) as of December 31, ~~2004~~2005 and ~~2003,~~2004, and the related consolidated statements of ~~income,~~operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, ~~2004.~~2005. Our audits also included the financial statement schedule for the three years in the period ended December 31, ~~2004,~~2005, included in Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, ~~2004~~2005 and ~~2003,~~2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2004,~~2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the three years in the period ended December 31, ~~2004,~~2005, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of calculating diluted net income per share in accordance with Emerging Issues Task Force IssueNo. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” effective December 15, 2004, changed its method of accounting for stock-based compensation effective January 1, 2003, and adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.2004.

We have also audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2004,~~2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated ~~February 9, 2005,~~March 6, 2006, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Troy, Michigan
~~February 9, 2005~~March 6, 2006

54
49

Report of Independent Registered Public Accounting Firm on
Internal Controls over Financial Reporting

To the Board of Directors and Shareholders of

Lear Corporation

We have audited management’s assessment, included in Management’s Annual Report on Internal Control Over Financial Reporting included in Item 9A(b), that Lear Corporation and Subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, ~~2004,~~2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, ~~2004,~~2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2004,~~2005, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, ~~2004~~2005 and ~~2003,~~2004, and the related consolidated statements of ~~income,~~operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, ~~2004,~~2005, and the related financial statement schedule for the three years in the period ended December 31, ~~2004,~~2005, and our report dated ~~February 9, 2005,~~March 6, 2006, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Troy, Michigan

~~February 9, 2005~~

March 6, 2006

LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

2004 2003

(In millions, except
share data)
ASSETS
Current Assets:

Cash and cash equivalents $ 584.9 $ 169.3
Accounts receivable 2,584.9 2,200.3
Inventories 621.2 550.2
Recoverable customer engineering and tooling 205.8 169.0
Other 375.2 286.6

Total current assets 4,372.0 3,375.4

Long-Term Assets:

Property, plant and equipment, net 2,019.8 1,817.8
Goodwill, net 3,039.4 2,940.1
Other 513.2 437.7

Total long-term assets 5,572.4 5,195.6

$ 9,944.4 $ 8,571.0

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:

Short-term borrowings $ 35.4 $ 17.1
Accounts payable and drafts 2,777.6 2,444.1
Accrued salaries and wages 205.4 185.2
Accrued employee benefits 244.3 208.2
Other accrued liabilities 752.4 723.5
Current portion of long-term debt 632.8 4.0

Total current liabilities 4,647.9 3,582.1

Long-Term Liabilities:

Long-term debt 1,866.9 2,057.2
Other 699.5 674.2

Total long-term liabilities 2,566.4 2,731.4

Stockholders’ Equity:

Common stock, par value $0.01 per share, 150,000,000 shares authorized, 73,147,178 shares and 72,453,683 shares issued as of December 31, 2004 and 2003, respectively 0.7 0.7
Additional paid-in capital 1,064.4 1,027.7
Common stock held in treasury, 5,730,476 shares and 4,291,302 shares as of December 31, 2004 and 2003, respectively, at cost (204.1 ) (110.8 )
Retained earnings 1,810.5 1,441.8
Accumulated other comprehensive income (loss) 58.6 (101.9 )

Total stockholders’ equity 2,730.1 2,257.5

$ 9,944.4 $ 8,571.0

December 31,
2005 2004
(In millions, except

share data)

ASSETS
Current Assets:

Cash and cash equivalents $ 207.6 $ 584.9
Accounts receivable 2,337.6 2,584.9
Inventories 688.2 621.2
Recoverable customer engineering and tooling 317.7 205.8
Other 295.3 375.2

Total current assets 3,846.4 4,372.0

Long-Term Assets:

Property, plant and equipment, net 2,019.3 2,019.8
Goodwill, net 1,939.8 3,039.4
Other 482.9 513.2

Total long-term assets 4,442.0 5,572.4

$ 8,288.4 $ 9,944.4

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:

Short-term borrowings $ 23.4 $ 35.4
Accounts payable and drafts 2,993.5 2,777.6
Accrued employee benefits 168.5 244.3
Other accrued liabilities 911.9 957.8
Current portion of long-term debt 9.4 632.8

Total current liabilities 4,106.7 4,647.9

Long-Term Liabilities:

Long-term debt 2,243.1 1,866.9
Other 827.6 699.5

Total long-term liabilities 3,070.7 2,566.4

Stockholders’ Equity:

Common stock, par value $0.01 per share, 150,000,000 shares authorized, 73,281,653 shares and 73,147,178 shares issued as of December 31, 2005 and 2004, respectively 0.7 0.7
Additional paid-in capital 1,108.6 1,064.4
Common stock held in treasury, 6,094,847 shares and 5,730,476 shares as of December 31, 2005 and 2004, respectively, at cost (225.5 ) (204.1 )
Retained earnings 361.8 1,810.5
Accumulated other comprehensive income (loss) (134.6 ) 58.6

Total stockholders’ equity 1,111.0 2,730.1

$ 8,288.4 $ 9,944.4

The accompanying notes are an integral part of these consolidated ~~balance sheets.~~financial statements.

56
51

LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

For the Year Ended December 31,

2004 2003 2002

(In millions, except per share data)
Net sales $ 16,960.0 $ 15,746.7 $ 14,424.6
Cost of sales 15,557.9 14,400.3 13,164.3
Selling, general and administrative expenses 633.7 573.6 517.2
Interest expense 165.5 186.6 210.5
Other expense, net 38.6 51.8 52.1

Income before provision for income taxes, minority interests in consolidated subsidiaries, equity in net income of affiliates and cumulative effect of a change in accounting principle 564.3 534.4 480.5
Provision for income taxes 128.0 153.7 157.0
Minority interests in consolidated subsidiaries 16.7 8.8 13.3
Equity in net income of affiliates (2.6 ) (8.6 ) (1.3 )

Income before cumulative effect of a change in accounting principle 422.2 380.5 311.5
Cumulative effect of a change in accounting principle, net of tax — — 298.5

Net income $ 422.2 $ 380.5 $ 13.0

Basic net income per share
Income before cumulative effect of a change in accounting principle $ 6.18 $ 5.71 $ 4.77
Cumulative effect of a change in accounting principle — — 4.57

Basic net income per share $ 6.18 $ 5.71 $ 0.20

Diluted net income per share
Income before cumulative effect of a change in accounting principle $ 5.77 $ 5.31 $ 4.47
Cumulative effect of a change in accounting principle — — 4.18

Diluted net income per share $ 5.77 $ 5.31 $ 0.29

For the Year Ended December 31,
2005 2004 2003
(In millions, except per share data)

Net sales $ 17,089.2 $ 16,960.0 $ 15,746.7
Cost of sales 16,353.2 15,557.9 14,400.3
Selling, general and administrative expenses 630.6 633.7 573.6
Goodwill impairment charges 1,012.8 — —
Interest expense 183.2 165.5 186.6
Other expense, net 38.0 38.6 51.8

Income (loss) before provision for income taxes, minority interests in consolidated subsidiaries and equity in net (income) loss of affiliates (1,128.6 ) 564.3 534.4
Provision for income taxes 194.3 128.0 153.7
Minority interests in consolidated subsidiaries 7.2 16.7 8.8
Equity in net (income) loss of affiliates 51.4 (2.6 ) (8.6 )

Net income (loss) $ (1,381.5 ) $ 422.2 $ 380.5

Basic net income (loss) per share $ (20.57 ) $ 6.18 $ 5.71

Diluted net income (loss) per share $ (20.57 ) $ 5.77 $ 5.31

The accompanying notes are an integral part of these consolidated financial statements.

57
52

LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

December 31,

2004 2003 2002

(In millions, except share data)
Common Stock

Balance at beginning and end of period $ 0.7 $ 0.7 $ 0.7

Additional Paid-in Capital

Balance at beginning of period $ 1,027.7 $ 943.6 $ 888.3
Stock options exercised 24.4 66.4 47.4
Tax benefit of stock options exercised 10.3 17.5 7.9
Settlement of stock-based compensation 2.0 0.2 —

Balance at end of period $ 1,064.4 $ 1,027.7 $ 943.6

Notes Receivable from Sale of Common Stock

Balance at beginning of period $ — $ — $ (0.1 )
Notes receivable payment received — — 0.1

Balance at end of period $ — $ — $ —

Treasury Stock

Balance at beginning of period $ (110.8 ) $ (111.4 ) $ (111.4 )
Purchases of 1,834,300 shares at an average price of $53.29 per share (97.7 ) — —
Issuances of 395,126 shares at an average price of $11.12 per share in settlement of stock-based compensation 4.4 — —
Purchases of 31,800 shares at an average price of $34.07 per share — (1.1 ) —
Issuances of 102,828 shares at an average price of $17.08 per share in settlement of stock-based compensation — 1.7 —

Balance at end of period $ (204.1 ) $ (110.8 ) $ (111.4 )

Retained Earnings

Balance at beginning of period $ 1,441.8 $ 1,075.8 $ 1,062.8
Net income 422.2 380.5 13.0
Dividends declared of $0.80 per share in 2004 and $0.20 per share in 2003 (53.5 ) (14.5 ) —

Balance at end of period $ 1,810.5 $ 1,441.8 $ 1,075.8

Accumulated Other Comprehensive Income (Loss)

Minimum Pension Liability
Balance at beginning of period $ (62.2 ) $ (48.9 ) $ (20.6 )
Minimum pension liability adjustments (10.4 ) (13.3 ) (28.3 )

Balance at end of period $ (72.6 ) $ (62.2 ) $ (48.9 )

Derivative Instruments and Hedging Activities
Balance at beginning of period $ (13.7 ) $ (26.5 ) $ (13.1 )
Derivative instruments and hedging activities adjustments 31.1 12.8 (13.4 )

Balance at end of period $ 17.4 $ (13.7 ) $ (26.5 )

Cumulative Translation Adjustments
Balance at beginning of period $ (61.5 ) $ (187.5 ) $ (255.1 )
Cumulative translation adjustments 127.1 126.0 67.6

Balance at end of period $ 65.6 $ (61.5 ) $ (187.5 )

Deferred Income Tax Asset
Balance at beginning of period $ 35.5 $ 16.5 $ 7.6
Deferred income tax asset adjustments 12.7 19.0 8.9

Balance at end of period $ 48.2 $ 35.5 $ 16.5

Accumulated other comprehensive income (loss) $ 58.6 $ (101.9 ) $ (246.4 )

Total Stockholders’ Equity
$ 2,730.1 $ 2,257.5 $ 1,662.3

Comprehensive Income

Net income $ 422.2 $ 380.5 $ 13.0
Minimum pension liability adjustments (10.4 ) (13.3 ) (28.3 )
Derivative instruments and hedging activities adjustments 31.1 12.8 (13.4 )
Cumulative translation adjustments 127.1 126.0 67.6
Deferred income tax asset adjustments 12.7 19.0 8.9

Comprehensive Income
$ 582.7 $ 525.0 $ 47.8

December 31,
2005 2004 2003
(In millions, except share data)

Common Stock

Balance at beginning and end of period $ 0.7 $ 0.7 $ 0.7

Additional Paid-in Capital

Balance at beginning of period $ 1,064.4 $ 1,027.7 $ 943.6
Stock-based compensation 43.8 26.4 66.6
Tax benefit of stock options exercised 0.4 10.3 17.5

Balance at end of period $ 1,108.6 $ 1,064.4 $ 1,027.7

Treasury Stock

Balance at beginning of period $ (204.1 ) $ (110.8 ) $ (111.4 )
Purchases of 490,900 shares at an average price of $51.75 (25.4 ) — —
Issuances of 126,529 shares at an average price of $31.99 4.0
Purchases of 1,834,300 shares at an average price of $53.29 per share — (97.7 ) —
Issuances of 395,126 shares at an average price of $11.12 per share in settlement ofstock-based compensation
— 4.4 —
Purchases of 31,800 shares at an average price of $34.07 per share — — (1.1 )
Issuances of 102,828 shares at an average price of $17.08 per share in settlement ofstock-based compensation
— — 1.7

Balance at end of period $ (225.5 ) $ (204.1 ) $ (110.8 )

Retained Earnings

Balance at beginning of period $ 1,810.5 $ 1,441.8 $ 1,075.8
Net income (loss) (1,381.5 ) 422.2 380.5
Dividends declared of $1.00 per share in 2005, $0.80 per share in 2004 and $0.20 per share in 2003 (67.2 ) (53.5 ) (14.5 )

Balance at end of period $ 361.8 $ 1,810.5 $ 1,441.8

Accumulated Other Comprehensive Income (Loss)

Minimum Pension Liability
Balance at beginning of period $ (72.6 ) $ (62.2 ) $ (48.9 )
Minimum pension liability adjustments (42.4 ) (10.4 ) (13.3 )

Balance at end of period $ (115.0 ) $ (72.6 ) $ (62.2 )

Derivative Instruments and Hedging Activities
Balance at beginning of period $ 17.4 $ (13.7 ) $ (26.5 )
Derivative instruments and hedging activities adjustments (8.4 ) 31.1 12.8

Balance at end of period $ 9.0 $ 17.4 $ (13.7 )

Cumulative Translation Adjustments
Balance at beginning of period $ 65.6 $ (61.5 ) $ (187.5 )
Cumulative translation adjustments (152.4 ) 127.1 126.0

Balance at end of period $ (86.8 ) $ 65.6 $ (61.5 )

Deferred Income Tax Asset
Balance at beginning of period $ 48.2 $ 35.5 $ 16.5
Deferred income tax asset adjustments 10.0 12.7 19.0

Balance at end of period $ 58.2 $ 48.2 $ 35.5

Accumulated other comprehensive income (loss) $ (134.6 ) $ 58.6 $ (101.9 )

Total Stockholders’ Equity
$ 1,111.0 $ 2,730.1 $ 2,257.5

Comprehensive Income (Loss)

Net income (loss) $ (1,381.5 ) $ 422.2 $ 380.5
Minimum pension liability adjustments (42.4 ) (10.4 ) (13.3 )
Derivative instruments and hedging activities adjustments (8.4 ) 31.1 12.8
Cumulative translation adjustments (152.4 ) 127.1 126.0
Deferred income tax asset adjustments 10.0 12.7 19.0

Comprehensive Income (Loss)
$ (1,574.7 ) $ 582.7 $ 525.0

The accompanying notes are an integral part of these consolidated financial statements.

58
53

LEAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Year Ended
December 31,

2004 2003 2002

(In millions)
Cash Flows from Operating Activities:

Net income $ 422.2 $ 380.5 $ 13.0
Adjustments to reconcile net income to net cash provided by operating activities-
Cumulative effect of a change in accounting principle — — 298.5
Depreciation and amortization 355.1 321.8 301.0
Net change in recoverable customer engineering and tooling (32.5 ) (7.6 ) 46.5
Net change in working capital items (28.3 ) 124.2 (51.4 )
Other, net 29.8 65.5 59.7

Net cash provided by operating activities before net change in sold accounts receivable 746.3 884.4 667.3
Net change in sold accounts receivable (70.4 ) (298.1 ) (122.2 )

Net cash provided by operating activities 675.9 586.3 545.1

Cash Flows from Investing Activities:

Additions to property, plant and equipment (429.0 ) (375.6 ) (272.6 )
Cost of acquisitions, net of cash acquired (103.0 ) (13.7 ) (15.2 )
Net proceeds from disposition of businesses and other assets 56.3 33.7 22.5
Other, net 3.2 8.8 6.0

Net cash used in investing activities (472.5 ) (346.8 ) (259.3 )

Cash Flows from Financing Activities:

Issuance of senior notes 399.2 — 250.3
Long-term revolving credit repayments, net — (132.8 ) (583.4 )
Other long-term debt borrowings (repayments), net (49.4 ) (10.3 ) 1.4
Short-term debt repayments, net (29.8 ) (24.0 ) (31.4 )
Dividends paid (68.0 ) — —
Proceeds from exercise of stock options 24.4 66.4 47.4
Repurchase of common stock (97.7 ) (1.1 ) —
Increase (decrease) in drafts (12.6 ) (56.8 ) 19.8
Other, net — — 0.1

Net cash provided by (used in) financing activities 166.1 (158.6 ) (295.8 )

Effect of foreign currency translation 46.1 (3.3 ) 14.1

Net Change in Cash and Cash Equivalents
415.6 77.6 4.1
Cash and Cash Equivalents at Beginning of Year
169.3 91.7 87.6

Cash and Cash Equivalents at End of Year
$ 584.9 $ 169.3 $ 91.7

Changes in Working Capital:

Accounts receivable $ (147.7 ) $ (196.5 ) $ 118.0
Inventories (7.0 ) (27.4 ) (34.2 )
Accounts payable 189.8 318.0 (171.3 )
Accrued liabilities and other (63.4 ) 30.1 36.1

Net change in working capital items $ (28.3 ) $ 124.2 $ (51.4 )

Supplementary Disclosure:

Cash paid for interest $ 153.5 $ 177.3 $ 203.1

Cash paid for income taxes, net of refunds received of $52.7, $52.5 and $41.3 in 2004, 2003 and 2002, respectively $ 140.0 $ 203.7 $ 131.1

For the Year Ended December 31,
2005 2004 2003
(In millions)

Cash Flows from Operating Activities:

Net income (loss) $ (1,381.5 ) $ 422.2 $ 380.5
Adjustments to reconcile net income to net cash provided by operating activities — Goodwill impairment charges 1,012.8 — —
Fixed asset impairment charges 97.4 3.0 11.2
Deferred tax provision (benefit) 44.7 8.7 (33.1 )
Equity in net (income) loss of affiliates 51.4 (2.6 ) (8.6 )
Depreciation and amortization 393.4 355.1 321.8
Net change in recoverable customer engineering and tooling (112.5 ) (32.5 ) (7.6 )
Net change in working capital items 9.7 (62.4 ) 158.0
Other, net 34.3 54.8 62.2

Net cash provided by operating activities before net change in sold accounts receivable 149.7 746.3 884.4
Net change in sold accounts receivable 411.1 (70.4 ) (298.1 )

Net cash provided by operating activities 560.8 675.9 586.3

Cash Flows from Investing Activities:

Additions to property, plant and equipment (568.4 ) (429.0 ) (375.6 )
Cost of acquisitions, net of cash acquired (11.8 ) (103.0 ) (13.7 )
Net proceeds from disposition of businesses and other assets 43.6 56.3 33.7
Other, net 5.3 3.2 8.8

Net cash used in investing activities (531.3 ) (472.5 ) (346.8 )

Cash Flows from Financing Activities:

Issuance (repayment) of senior notes (600.0 ) 399.2 —
Primary credit facility borrowings (repayments), net 400.0 — (132.8 )
Other long-term debt borrowings (repayments), net (32.7 ) (49.4 ) (10.3 )
Short-term debt repayments, net (23.8 ) (29.8 ) (24.0 )
Dividends paid (67.2 ) (68.0 ) —
Proceeds from exercise of stock options 4.7 24.4 66.4
Repurchase of common stock (25.4 ) (97.7 ) (1.1 )
Decrease in drafts (3.3 ) (12.6 ) (56.8 )
Other, net 0.7 — —

Net cash provided by (used in) financing activities (347.0 ) 166.1 (158.6 )

Effect of foreign currency translation (59.8 ) 46.1 (3.3 )

Net Change in Cash and Cash Equivalents
(377.3 ) 415.6 77.6
Cash and Cash Equivalents at Beginning of Year
584.9 169.3 91.7

Cash and Cash Equivalents at End of Year
$ 207.6 $ 584.9 $ 169.3

Changes in Working Capital:

Accounts receivable $ (250.3 ) $ (147.7 ) $ (196.5 )
Inventories (76.9 ) (7.0 ) (27.4 )
Accounts payable 298.1 189.8 318.0
Accrued liabilities and other 38.8 (97.5 ) 63.9

Net change in working capital items $ 9.7 $ (62.4 ) $ 158.0

Supplementary Disclosure:

Cash paid for interest $ 172.6 $ 153.5 $ 177.3

Cash paid for income taxes, net of refunds received of $76.7 in 2005, $52.7 in 2004 and $52.5 in 2003 $ 112.7 $ 140.0 $ 203.7

The accompanying notes are an integral part of these consolidated financial statements.

59
54

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements


(1)	Basis of Presentation

The consolidated financial statements include the accounts of Lear Corporation (“Lear” or the “Parent”), a Delaware corporation and the wholly owned and less than wholly owned subsidiaries controlled by Lear (collectively, the “Company”). In addition, Lear consolidates variable interest entities in which it bears a majority of the risk of the entities’ potential losses or stands to gain from a majority of the entities’ expected returns. Investments in affiliates in which Lear does not have control, but does have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method (Note 5)5, “Investments in Affiliates and Other Related Party Transactions”).

The Company and its affiliates design and manufacture interior systems and components for automobiles and light trucks. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide (Note ~~11)~~11, “Segment Reporting”).


(2)	Summary of Significant Accounting Policies


	*~~Cash and Cash Equivalents~~*

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with original maturities of ninety days or less.


	*~~Accounts Receivable~~*

Accounts Receivable

The Company records accounts receivable as its products are shipped to its customers. The Company’s customers are the major automotive manufacturers in the world. The Company records accounts receivable reserves for known collectibility issues, as such issues relate to specific transactions or customer balances. As of December 31, ~~2004~~2005 and ~~2003,~~2004, accounts receivable are reflected net of reserves of ~~$26.7~~$23.3 million and ~~$30.6~~$26.7 million, respectively. The Company writes off accounts receivable when it becomes apparent based upon age or customer circumstances that such amounts will not be collected. Generally, the Company does not require collateral for its accounts receivable.


	*~~Inventories~~*

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using thefirst-in, first-out method. Finished goods andwork-in-process inventories include material, labor and manufacturing overhead costs. The Company records inventory reserves for inventory in excess of productionand/or forecasted requirements and for obsolete inventory in production and service inventories. As of December 31, ~~2004~~2005 and ~~2003,~~2004, inventories are reflected net of reserves of ~~$73.0~~$93.6 million and ~~$55.8~~$86.4 million, respectively. A summary of inventories is shown below (in millions):

December 31,

2004 2003

Raw materials $ 487.8 $ 399.1
Work-in-process 43.8 37.6
Finished goods 89.6 113.5

Inventories $ 621.2 $ 550.2

December 31,
2005 2004

Raw materials $ 511.3 $ 487.8
Work-in-process 47.8 43.8
Finished goods 129.1 89.6

Inventories $ 688.2 $ 621.2

~~Pre-Production Costs Related to Long-Term Supply Arrangements~~

Pre-Production Costs Related to Long-Term Supply Arrangements
The Company incurs pre-production engineering, research and development (“ER&D”) and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production ER&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools
55
~~Lear Corporation and Subsidiaries~~
~~Notes to Consolidated Financial Statements — (Continued)~~
for which reimbursement is not contractually guaranteed by the customer or for which the customer has not provided a non-cancelable right to

60

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

use the tooling. During ~~2004~~2005 and ~~2003,~~2004, the Company capitalized ~~$244.9~~$227.2 million and ~~$181.2~~$244.9 million, respectively, of pre-production ER&D costs for which reimbursement is contractually guaranteed by the customer. During ~~2004~~2005 and ~~2003,~~2004, the Company also capitalized ~~$396.3~~$638.6 million and ~~$380.5~~$396.3 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. These amounts are included in recoverable customer engineering and tooling and other long-term assets in the consolidated balance sheets. During ~~2004~~2005 and ~~2003,~~2004, the Company collected ~~$646.0~~$715.8 and ~~$539.6~~$646.0 million, respectively, of cash related to ER&D and tooling costs.

During ~~2004~~2005 and ~~2003,~~2004, the Company capitalized ~~$45.0~~$44.4 million and ~~$39.2~~$45.0 million, respectively, of Company-owned tooling. These amounts are included in property, plant and equipment, net, in the consolidated balance sheets.

The classification of capitalized pre-production ER&D and tooling costs related to long-term supply agreements is shown below (in millions):

December 31,

2004 2003

Current $ 205.8 $ 169.0
Long-term 245.1 233.5

Recoverable customer engineering and tooling $ 450.9 $ 402.5

December 31,
2005 2004

Current $ 317.7 $ 205.8
Long-term 223.2 245.1

Recoverable customer engineering and tooling $ 540.9 $ 450.9

Gains and losses related to ER&D and tooling projects are reviewed on an aggregate program basis. Net gains on projects are deferred and recognized over the life of the long-term supply agreement. Net losses on projects are recognized as costs are incurred.
~~Property, Plant and Equipment~~
Property, Plant and Equipment

Property, plant and equipment is stated at cost. Depreciable property is depreciated over the estimated useful lives of the assets, using principally the straight-line method as follows:

Buildings and improvements 20 to 2540 years
Machinery and equipment 5 to 15 years

A summary of property, plant and equipment is shown below (in millions):

December 31,

2004 2003

Land $ 138.6 $ 124.6
Buildings and improvements 759.2 673.7
Machinery and equipment 2,844.7 2,501.5
Construction in progress 52.8 61.3

Total property, plant and equipment 3,795.3 3,361.1
Less — accumulated depreciation (1,775.5 ) (1,543.3 )

Net property, plant and equipment $ 2,019.8 $ 1,817.8

December 31,
2005 2004

Land $ 140.3 $ 138.6
Buildings and improvements 701.1 759.2
Machinery and equipment 3,006.3 2,844.7
Construction in progress 70.5 52.8

Total property, plant and equipment 3,918.2 3,795.3
Less — accumulated depreciation (1,898.9 ) (1,775.5 )

Net property, plant and equipment $ 2,019.3 $ 2,019.8

Depreciation expense was $388.5 million, $350.6 million ~~$321.8 million~~ and ~~$301.0~~$321.8 million for the years ended December 31, 2005, 2004 and 2003, ~~and 2002,~~ respectively.
Goodwill
Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment, or decline in value, may have occurred. In conducting its impairment testing, the Company compares the fair value of each of its reporting
56
61

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)


	*~~Goodwill~~*

~~On January 1, 2002,~~units to the ~~Company adopted Statement~~related net book value. If the fair value of ~~Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Under this statement,~~a reporting unit exceeds its net book value, goodwill is ~~no longer amortized but~~considered not to be impaired. If the net book value of a reporting unit exceeds its fair value, an impairment loss is ~~subject to~~measured and recognized. The Company conducts its annual impairment ~~analysis.~~ testing on the first day of the fourth quarter each year.

The ~~Company’s impairment analysis compares~~Company utilizes an income approach to estimate the fair ~~values~~value of each of its reporting ~~units,~~units. The income approach is based on ~~a discounted~~projected debt-free cash flow ~~model,~~which is discounted to the present value using discount factors that consider the timing and risk of cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical downturns that occur in the industry. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally-developed forecasts, as well as commercial, wage and benefit, inflation and discount rate assumptions. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, the Company believes that the income approach provides a reasonable estimate of the fair value of its reporting units.

During the third quarter of 2005, events occurred which indicated a significant decline in the fair value of the Company’s interior segment, as well as an impairment of the related goodwill. These events included unfavorable operating results, primarily as a result of higher raw material costs, lower production volumes on key platforms, industry overcapacity, insufficient customer pricing and changes in certain customers’ sourcing strategies, as well as the Company’s decision to evaluate strategic alternatives with respect to this segment. As of the end of the third quarter of 2005, the Company evaluated the net book value of goodwill within its interior segment by comparing the fair value of the reporting unit to the related net book ~~values.~~value. As a result, ~~of the adoption of SFAS No. 142,~~ the Company recorded an estimated goodwill impairment ~~charges~~charge of ~~$310.8~~$670.0 million ~~($298.5 million after tax) as of January 1, 2002. These charges are reflected as a cumulative effect of a change in accounting principle, net of tax,~~ in the ~~consolidated statement~~third quarter of ~~income~~2005.

During the fourth quarter of 2005, additional events occurred which indicated a further decline in the fair value of the Company’s interior segment. These events included a further deterioration of the commercial outlook for this segment, as well as an updated assessment of the Company’s ability to recover the increase in the costs associated with resin-based raw materials in North America. The Company updated the fair value estimate for this segment and finalized the implied fair value of goodwill pursuant to asset valuation and allocation procedures. As a result, the Company recorded an additional goodwill impairment charge of $342.8 million in the fourth quarter of 2005.

The annual impairment testing for the ~~year ended December 31, 2002. The~~ Company’s ~~annual SFAS No. 142 impairment analysis~~remaining segments was completed as of October ~~3, 2004,~~2, 2005, and there was no additional impairment.

A summary of the changes in the carrying amount of goodwill, by reportable operating segment, for each of the two years in the period ended December 31, ~~2004,~~2005, is shown below (in millions):

Electronic and
Seating Interior Electrical Total

Balance as of December 31, 2002 $ 971.6 $ 1,023.2 $ 865.6 $ 2,860.4
Foreign currency translation and other 51.8 (0.3 ) 28.2 79.7

Balance as of December 31, 2003 $ 1,023.4 $ 1,022.9 $ 893.8 $ 2,940.1

Acquisition — — 35.0 35.0
Foreign currency translation and other 52.3 (5.1 ) 17.1 64.3

Balance as of December 31, 2004 $ 1,075.7 $ 1,017.8 $ 945.9 $ 3,039.4

Electronic and

Seating Interior Electrical Total

Balance as of January 1, 2004 $ 1,023.4 $ 1,022.9 $ 893.8 $ 2,940.1
Acquisition — — 35.0 35.0
Foreign currency translation and other 52.3 (5.1 ) 17.1 64.3

Balance as of December 31, 2004 $ 1,075.7 $ 1,017.8 $ 945.9 $ 3,039.4

Goodwill impairment charges — (1,012.8 ) — (1,012.8 )
Foreign currency translation and other (41.5 ) (5.0 ) (40.3 ) (86.8 )

Balance as of December 31, 2005 $ 1,034.2 $ — $ 905.6 $ 1,939.8

~~Intangible Assets~~

62

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Intangible Assets

The Company’s intangible assets acquired through business acquisitions are valued based on independent appraisals. A summary of intangible assets as of December 31, 2005 and 2004, is shown below (in millions):

Weighted Average
Gross Carrying Accumulated Net Carrying Useful Life
Value Amortization Value (Years)

Technology $ 2.2 $ (0.1 ) $ 2.1 10.0
Customer contracts 24.8 (3.2 ) 21.6 7.7
Customer relationships 28.2 (1.2 ) 27.0 20.0

Balance as of December 31, 2004 $ 55.2 $ (4.5 ) $ 50.7 14.4

Weighted Average

Gross Carrying
Accumulated
Net Carrying
Useful Life

Value Amortization Value (years)

Technology $ 2.8 $ (0.4 ) $ 2.4 10.0
Customer contracts 20.8 (4.9 ) 15.9 7.7
Customer relationships 27.2 (2.4 ) 24.8 18.8

Balance as of December 31, 2005 $ 50.8 $ (7.7 ) $ 43.1 14.2

Weighted Average

Gross Carrying
Accumulated
Net Carrying
Useful Life

Value Amortization Value (years)

Technology $ 2.2 $ (0.1 ) $ 2.1 10.0
Customer contracts 24.8 (3.2 ) 21.6 7.7
Customer relationships 28.2 (1.2 ) 27.0 20.0

Balance as of December 31, 2004 $ 55.2 $ (4.5 ) $ 50.7 14.4

Excluding the impact of any future acquisitions, the Company’s estimated annual amortization expense is approximately ~~$4.7~~$4.5 million in each of the five succeeding years.
~~Long-Lived Assets~~
Long-Lived Assets
~~On January 1, 2002, the~~
The Company ~~adopted SFAS~~monitors its long-lived assets for impairment indicators on an ongoing basis in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ~~Accordingly, the Company monitors its long-lived assets for impairment indicators.~~ If impairment indicators exist, the Company performs the required analysis and records impairment charges in accordance with SFAS No. 144. In ~~2004~~conducting its analysis, the Company compares the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be impaired. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and ~~2003,~~recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates. Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of long-lived assets.
During the third and fourth quarters of 2005, the Company evaluated the net book value of the fixed assets of certain operating locations within its interior segment. As a result, the Company recorded impairment charges of ~~$3.0 million and $5.3 million, respectively, related~~$82.3 million. Consistent with the goodwill impairment charges, the fixed asset impairment charges are due to ~~certain seating facility consolidations (Note 3). In 2003,~~the unfavorable operating results of the Company’s interior segment, as well as the deterioration of the commercial outlook for this segment. Also in 2005, the Company ~~also~~ recorded fixed asset impairment charges of ~~$5.9~~$15.1 million ~~related to other facility closures, an early program termination and ongoing operating losses at certain of~~in conjunction with its ~~facilities. These charges relate to seating ($2.3 million), interior ($0.8 million) and electronic and electrical ($2.8 million) facilities.~~restructuring actions (Note 3, “Restructuring”). The Company has
57
~~Lear Corporation and Subsidiaries~~
~~Notes to Consolidated Financial Statements — (Continued)~~
certain other facilities that have generated operating losses in recent years. The results of the related impairment analyses indicated that impairment of the fixed assets was not required. ~~The~~However, the Company will continue to monitor the operating plans of these facilities for potential impairment.
~~Revenue Recognition and Sales Commitments~~
In 2004, the Company recorded impairment charges of $3.0 million related to certain facility consolidations (Note 3, “Restructuring”). In 2003, the Company recorded impairment charges of $5.3 million related to certain

63

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

facility consolidations (Note 3, “Restructuring”) and impairment charges of $5.9 million related to other facility closures, an early program termination and ongoing losses at certain of our facilities.

These fixed asset impairment charges are recorded in cost of sales in the consolidated statements of operations for the years ended December 31, 2005, 2004 and 2003.

Revenue Recognition and Sales Commitments

The Company enters into agreements with its customers to produce products at the beginning of a vehicle’s life. Although such agreements do not provide for minimum quantities, once the Company enters into such agreements, ~~fulfillment of~~ the Company is generally required to fulfill its customers’ purchasing requirements ~~is the Company’s obligation~~ for the entire production life of the vehicle. These agreements generally may be terminated by the customer at any time. Historically, terminations of these agreements have been minimal. In certain limited instances, the Company may be committed under existing agreements to supply products to its customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, the Company recognizes losses as they are incurred.

The Company receives blanket purchase orders from its customers on an annual basis. Generally, each purchase order provides the annual terms, including pricing, related to a particular vehicle model. Purchase orders do not specify quantities. The Company recognizes revenue based on the pricing terms included in its annual purchase orders as its products are shipped to its customers. The Company is asked to provide its customers with annual cost reductions as part of certain agreements. The Company accrues for such amounts as a reduction of revenue as its products are shipped to its customers. In addition, the Company has ongoing adjustments to its pricing arrangements with its customers based on the related content, ~~and~~the cost of its ~~products. The Company accrues for such amounts as a reduction of revenue as its~~ products ~~are shipped to its customers.~~and other commercial factors. Such pricing accruals are adjusted as they are settled with the Company’s customers.

Amounts billed to customers related to shipping and handling costs are included in net sales in the consolidated statements of ~~income.~~operations. Shipping and handling costs are included in cost of sales in the consolidated statements of ~~income.~~operations.


	*~~Research and Development~~*

Research and Development

Costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the Company’s customers, are charged to selling, general and administrative expenses as incurred. These costs amounted to $174.0 million, $197.6 million ~~$171.1 million~~ and ~~$176.0~~$171.1 million for the years ended December 31, 2005, 2004 ~~2003~~ and ~~2002,~~2003, respectively.


	*~~Other Expense, Net~~*

Other Expense, Net

Other expense includes state and local non-income related taxes, foreign exchange gains and losses, gains and losses on the sales of fixed assets and other miscellaneous income and expense. A summary of other expense is shown below (in millions):

For the Year Ended
December 31,

2004 2003 2002

Other expense $ 38.6 $ 51.8 $ 52.1
Other income — — —

Other expense, net $ 38.6 $ 51.8 $ 52.1

For the Year Ended December 31,
2005 2004 2003

Other expense $ 41.8 $ 38.6 $ 51.8
Other income (3.8 ) — —

Other expense, net $ 38.0 $ 38.6 $ 51.8

~~Foreign Currency Translation~~

Foreign Currency Translation
With the exception of foreign subsidiaries operating in highly inflationary economies, which are measured in U.S. dollars, assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the foreign exchange rates

64

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

in effect at the end of the period. Revenues and expenses of foreign subsidiaries are translated

~~Lear Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements — (Continued)~~

using an average of the foreign exchange rates in effect during the period. Translation adjustments that arise from translating a foreign subsidiary’s financial statements from the functional currency to U.S. dollars are reflected in accumulated other comprehensive income (loss) in the consolidated balance sheets.

Transaction gains and losses that arise from foreign exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of a foreign currency investment position, are included in the statements of ~~income~~operations as incurred.


	*~~Net Income Per Share~~*

Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average common shares outstanding during the period. Diluted net income (loss) per share is computed using the average share price during the period when calculating the dilutive effect of common stock equivalents. On December 15, 2004, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which ~~states~~require that the impact of contingently convertible instruments that are convertible into common stock upon the achievement of a specified market price of the issuer’s shares, such as the Company’s outstanding zero-coupon convertible senior notes, ~~should~~ be included in net income per share computations regardless of whether the market price trigger has been met. The effect ofEITF 04-08 on the computation of diluted net income per share is, when dilutive, to adjust net income by adding back after-tax interest expense on convertible debt and to increase total shares outstanding by the number of shares that would be issuable upon conversion. There are 4,813,056 shares issuable upon conversion of the Company’s outstanding convertible zero-coupon senior notes. ~~The Company has restated diluted net income per share for 2003 and 2002 to include the dilutive impact of the zero-coupon convertible senior notes since the issuance date of February 14, 2002.~~ Tables summarizing net income (loss), for diluted net income (loss) per share (in millions) and shares outstanding are shown below:

For the Year Ended
December 31,

2004 2003 2002

Income before cumulative effect of a change in accounting principle $ 422.2 $ 380.5 $ 311.5
Add: After-tax interest expense on convertible debt 9.3 9.0 7.4

Income before cumulative effect of a change in accounting principle, for diluted net income per share 431.5 389.5 318.9
Cumulative effect of a change in accounting principle, net of tax — — (298.5 )

Net income, for diluted net income per share $ 431.5 $ 389.5 $ 20.4

For the Year Ended December 31,

2004 2003 2002

(Restated) (Restated)
Weighted average common shares outstanding 68,278,858 66,689,757 65,365,218
Dilutive effect of common stock equivalents 1,635,349 1,843,755 1,691,921
Shares issuable upon conversion of convertible debt 4,813,056 4,813,056 4,232,852

Diluted shares outstanding 74,727,263 73,346,568 71,289,991

For the Year Ended December 31,
2005 2004 2003

Net income (loss) $ (1,381.5 ) $ 422.2 $ 380.5
Add: After-tax interest expense on convertible debt — 9.3 9.0

Net income (loss), for diluted net income (loss) per share $ (1,381.5 ) $ 431.5 $ 389.5

For the Year Ended December 31,
2005 2004 2003
(Restated)

Weighted average common shares outstanding 67,166,668 68,278,858 66,689,757
Dilutive effect of common stock equivalents — 1,635,349 1,843,755
Shares issuable upon conversion of convertible debt — 4,813,056 4,813,056

Diluted shares outstanding 67,166,668 74,727,263 73,346,568

For further information related to the zero-coupon convertible senior notes, see Note 7, “Long-Term Debt.”
59
65

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

The shares issuable upon conversion of the Company’s outstanding zero-coupon convertible debt and the effect of common stock equivalents, including options, restricted stock units, performance units and stock appreciation rights were excluded from the computation of diluted shares outstanding for the year ended December 31, 2005, as inclusion would have resulted in antidilution. Certain options were ~~not included~~excluded in the computation of diluted shares outstanding for the years ended December 31, 2005 and 2003, as inclusion would have resulted in antidilution. A summary of these options and their exercise prices, as well as these restricted stock units, performance units and stock appreciation rights, is shown below:

For the Year Ended December 31,

2004 2003 2002

Antidilutive options — 505,200 554,750
Exercise prices — $54.22-$55.33 $54.22

For the Year Ended December 31,
2005 2004 2003

Options
Antidilutive options 2,983,405 — 505,200
Exercise prices $ 22.12 - $55.33 — $ 54.22 - $55.33
Restricted stock units 2,234,122 — —
Performance units 123,672 — —
Stock appreciation rights 1,215,046 — —
~~Stock-Based Compensation~~

Stock-Based Compensation
The Company has three plans under which it has issued stock options: the 1994 Stock Option Plan, the 1996 Stock Option Plan and the Long-Term Stock Incentive Plan. Options issued to date under these plans generally vest three years following the grant date and expire ten years from the ~~original plan~~issuance date.

A summary of option transactions during each of the three years in the period ended December 31, ~~2004,~~2005, is shown below:

Stock Options Price Range

Outstanding as of December 31, 2001 6,354,889 $ 5.00-$54.22
Granted 1,883,875 $ 39.83-$41.83
Expired or cancelled (404,024 ) $ 14.06-$54.22
Exercised (1,484,321 ) $ 5.00-$39.00

Outstanding as of December 31, 2002 6,350,419 $ 15.50-$54.22
Granted 16,000 $ 55.33
Expired or cancelled (10,099 ) $ 20.41-$54.22
Exercised (2,353,695 ) $ 15.50-$54.22

Outstanding as of December 31, 2003 4,002,625 $ 15.50-$55.33
Expired or cancelled (14,450 ) $ 15.50-$54.22
Exercised (693,495 ) $ 15.50-$54.22

Outstanding as of December 31, 2004 3,294,680 $ 22.12-$55.33

Stock

Options Price Range

Outstanding as of January 1, 2003 6,350,419 $ 15.50 - $54.22
Granted 16,000 $55.33
Expired or cancelled (10,099 ) $ 20.41 - $54.22
Exercised (2,353,695 ) $ 15.50 - $54.22

Outstanding as of December 31, 2003 4,002,625 $ 15.50 - $55.33
Expired or cancelled (14,450 ) $ 15.50 - $54.22
Exercised (693,495 ) $ 15.50 - $54.22

Outstanding as of December 31, 2004 3,294,680 $ 22.12 - $55.33
Expired or cancelled (176,800 ) $ 22.12 - $54.22
Exercised (134,475 ) $ 22.12 - $54.22

Outstanding as of December 31, 2005 2,983,405 $ 22.12 - $55.33

66

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

A summary of options outstanding as of December 31, ~~2004,~~2005, is shown below:

Range of exercise prices $ 22.12-27.25 $ 33.00-39.83 $ 41.83-42.32 $ 54.22-55.33

Options outstanding:
Number outstanding 254,050 953,880 1,648,550 438,200
Weighted average remaining contractual life (years) 5.17 5.48 7.42 3.53
Weighted average exercise price $ 22.60 $ 36.90 $ 41.83 $ 54.26
Options exercisable:
Number exercisable 254,050 933,880 — 422,200
Weighted average exercise price $ 22.60 $ 36.84 N/A $ 54.22

Range of Exercise Prices
$22.12 – 27.25 $33.00 – 39.83 $41.83 – 42.32 $54.22 – 55.33

Options outstanding:
Number outstanding 228,175 829,980 1,517,050 408,200
Weighted average remaining contractual life (years) 4.16 4.50 6.42 2.55
Weighted average exercise price $ 22.55 $ 36.91 $ 41.83 $ 54.26
Options exercisable:
Number exercisable 228,175 829,980 1,517,050 392,200
Weighted average exercise price $ 22.55 $ 36.91 $ 41.83 $ 54.22
The fair value of the 2003 stock option grant was estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: expected dividend yield of 1.45%; expected life of seven years; risk-free interest rate of 3.87%; and expected volatility of 41.24%. The fair value of the 2003 stock option grant was $23.23 per option.
The Long-Term Stock Incentive Plan also permits the grants of stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units (collectively, “Incentive Units”) to officers and other key employees of the Company. As of December 31, ~~2004,~~2005, the Company had outstanding ~~Incentive Units~~stock-settled stock appreciation rights of 1,215,046 at a weighted average exercise price of $27.65 per right and outstanding restricted stock and performance shares convertible into a maximum of ~~2,040,176~~2,357,794 shares of common stock of the Company. ~~Incentive Units~~Restricted stock and performance shares include
60
~~Lear Corporation and Subsidiaries~~
~~Notes to Consolidated Financial Statements — (Continued)~~
~~1,201,931~~ 1,406,719 restricted stock units at no cost to the employee, ~~629,218~~827,403 restricted stock units at a weighted average cost to the employee of ~~$37.11~~$40.33 per unit and ~~209,027~~123,672 performance shares at no cost to the employee. As of December 31, 2005, the Company also had outstanding cash-settled stock appreciation rights of 334,542 at a weighted average exercise price of $27.53 per right.

Stock appreciation rights vest on a graded basis over one to three years following the grant date and expire seven years from the grant date. Restricted stock units vest on a graded basis over two to five years following the grant date, and performance shares vest three years following the grant date.

67

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

A summary of Incentive Unit transactions during each of the three years in the period ended December 31, 2005, is shown below:

Stock Appreciation
Restricted Stock
Performance

Rights(1) Units Shares(2)

Outstanding as of January 1, 2003 — 663,496 207,642
Granted — 882,294 82,108
Expired or cancelled — (3 ) (1,282 )
Distributed — (151,071 ) (32,310 )(3)

Outstanding as of December 31, 2003 — 1,394,716 256,158
Granted — 954,637 53,193
Expired or cancelled — (39,332 ) (6,664 )
Distributed — (476,337 ) (93,660 )

Outstanding as of December 31, 2004 — 1,833,684 209,027
Granted 1,215,046 605,811 56,733
Expired or cancelled — (74,528 ) (67,452 )
Distributed — (130,845 ) (74,636 )

Outstanding as of December 31, 2005 1,215,046 2,234,122 123,672

(1) Does not include cash-settled stock appreciation rights.
(2) Performance shares reflected as “granted” are notional shares granted at the beginning of a three-year performance period whose eventual payout is subject to satisfaction of performance criteria. Performance shares reflected as “distributed” are those that are paid out in cash or shares of common stock upon satisfaction of the performance criteria at the end of the three-year performance period.
(3) The amount of performance shares reflected as “distributed” in 2003 includes distributions of cash and shares of common stock upon satisfaction of the applicable performance criteria. Of the 32,310 performance shares distributed in 2003, 21,688 shares were distributed in cash and 10,622 shares were distributed in shares of common stock. The amounts of performance shares reflected as “distributed” in 2004 and 2005 were distributed solely in shares of common stock.
The fair values of the 2005 stock-settled stock appreciation right grants, which have a seven-year term, were estimated as of the grant dates using the Black-Scholes option pricing model with the following weighted average assumptions: expected dividend yields of 1.91%; expected life of 41/2 years; risk-free interest rate of 4.40%; and expected volatility of 40.00%. The weighted average fair value of the 2005 stock-settled stock appreciation right grant was $9.30 per right.
Prior to 2003, the Company accounted for stock-based compensation under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense was not recognized related to stock options, as the exercise price of the stock option was equal to the fair market value of the stock as of the grant date. Compensation expense was recognized related to certain Incentive Units.

On January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” under which compensation cost for grants of Incentive Units and stock options is determined based on the fair value of the Incentive Units and stock options as of the grant date. SFAS No. 123 has been applied prospectively to all employee awards granted after January 1, 2003, as permitted under the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” A summary of the

68

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

effect on net income (loss) and net income (loss) per share, as if the fair value based method had been applied to all outstanding and unvested awards in each period, is shown below (in millions, except per share data):

For the Year Ended
December 31,

2004 2003 2002

Net income, as reported $ 422.2 $ 380.5 $ 13.0
Add: Stock-based employee compensation expense included in reported net income, net of tax 10.9 5.5 2.2
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (21.6 ) (23.3 ) (19.8 )

Net income (loss), pro forma $ 411.5 $ 362.7 $ (4.6 )

Net income (loss) per share:
Basic — as reported $ 6.18 $ 5.71 $ 0.20
Basic — pro forma $ 6.03 $ 5.44 $ (0.07 )
Diluted — as reported $ 5.77 $ 5.31 $ 0.29
Diluted — pro forma $ 5.63 $ 5.07 $ 0.04

~~The fair value~~

For the Year Ended December 31,
2005 2004 2003

Net income (loss), as reported $ (1,381.5 ) $ 422.2 $ 380.5
Add: Stock-based employee compensation expense included in reported net income (loss), net of tax 14.7 10.9 5.5
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (18.1 ) (21.6 ) (23.3 )

Net income (loss), pro forma $ (1,384.9 ) $ 411.5 $ 362.7

Net income (loss) per share:
Basic — as reported $ (20.57 ) $ 6.18 $ 5.71
Basic — pro forma $ (20.62 ) $ 6.03 $ 5.44
Diluted — as reported $ (20.57 ) $ 5.77 $ 5.31
Diluted — pro forma $ (20.62 ) $ 5.63 $ 5.07
Use of each stock option grant is estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: expected dividend yields of 1.45% in 2003 and 0.00% in 2002; expected lives of seven years in 2003 and 2002; risk-free interest rates of 3.87% in 2003 and 5.75% in 2002; and expected volatility of 41.24% in 2003 and 41.35% in 2002. The fair values of the stock option grants were $23.23 in 2003 and $21.23 and $22.30 in 2002.Estimates
~~Use of Estimates~~
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. During ~~2004,~~2005, there were no material changes in the methods or policies used to establish estimates and assumptions. Generally, matters subject to estimation and judgment include amounts related to accounts receivable realization, ~~(Note 2),~~ inventory obsolescence, ~~(Note 2),~~asset impairments and unsettled pricing discussions with customers and suppliers (Note ~~2), warranty~~2, “Summary of Significant Accounting Policies”); restructuring accruals (Note ~~10),~~3, “Restructuring”); deferred tax asset valuation allowances and income taxes (Note 8, “Income Taxes”); pension and other postretirement benefit plan assumptions (Note ~~9), facility consolidation~~9, “Pension and ~~reorganization reserves (Notes 3), self-insurance accruals, asset valuation reserves and~~Other Postretirement Benefit Plans”); accruals related to litigation, ~~(Note 10),~~warranty and environmental remediation costs (Note ~~10)~~10, “Commitments and ~~income taxes (Note 8).~~Contingencies”); and self-insurance accruals. Actual results may differ from estimates provided.
61
~~Lear Corporation and Subsidiaries~~Reclassifications
~~Notes to Consolidated Financial Statements — (Continued)~~
~~Reclassifications~~
Certain amounts in prior years’ financial statements have been reclassified to conform to the presentation used in the year ended December 31, ~~2004.~~2005.
(3) ~~Facility Actions~~Restructuring
~~The~~
2005
In order to address unfavorable industry conditions, the Company ~~continually evaluates alternatives~~began to implement consolidation and census actions in the second quarter of 2005. These actions are part of a comprehensive restructuring strategy intended to (i) better align ~~its business~~the Company’s manufacturing capacity with the changing needs of its customers, (ii) eliminate excess capacity and to lower the operating costs of the ~~Company. This includes~~Company and (iii) streamline the ~~realignment~~Company’s organizational structure and reposition its business for improved long-term profitability.
In connection with the restructuring actions, the Company expects to incur pre-tax costs of ~~its existing~~approximately $250 million, although all aspects of the restructuring actions have not been finalized. Such costs will include employee termination benefits, asset impairment charges and contract termination costs, as well as other incremental costs resulting from the restructuring actions. These incremental costs will principally include equipment and personnel relocation costs. The Company also expects to incur incremental manufacturing ~~capacity, facility closures or similar~~inefficiency costs at

69

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

the operating locations impacted by the restructuring actions during the related restructuring implementation period. Restructuring costs will be recognized in the ~~normal course~~Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States. Generally, charges will be recorded as elements of ~~business.~~ the restructuring strategy are finalized. Actual costs recorded in the Company’s consolidated financial statements may vary from current estimates.

In ~~addition to these,~~connection with the Company’s restructuring actions, the Company recorded charges of $88.9 million in 2005, including $84.6 million recorded as cost of sales and $6.2 million recorded as selling, general and administrative expenses. The remaining amounts include a gain on the sale of a facility, which is recorded as other expense, net. The 2005 charges consist of employee termination benefits of $56.5 million for 643 salaried and 3,720 hourly employees, asset impairment charges of $15.1 million and contract termination costs of $13.5 million, as well as other costs of $3.8 million. Employee termination benefits were recorded based on existing union and employee contracts, statutory requirements and completed negotiations. Asset impairment charges relate to the disposal of buildings, leasehold improvements and machinery and equipment with carrying values of $15.1 million in excess of related estimated fair values. Contract termination costs include lease cancellation costs of $3.4 million, which are expected to be paid through 2006, the repayment of various government-sponsored grants of $4.8 million, the termination of joint venture, subcontractor and other relationships of $3.2 million and pension and other postretirement benefit plan curtailments of $2.1 million.

A summary of the 2005 restructuring charges, excluding the $2.1 million pension and other postretirement benefit plan curtailments, is shown below (in millions):

Utilization Accrual as of

Charges Cash Non-Cash December 31, 2005

Employee termination benefits $ 56.5 $ (41.4 ) $ — $ 15.1
Asset impairments 15.1 — (15.1 ) —
Contract termination costs 11.4 (6.4 ) — 5.0
Other related costs 3.8 (3.8 ) — —

Total $ 86.8 $ (51.6 ) $ (15.1 ) $ 20.1

2004 and 2003
In December 2003, the Company initiated ~~significant~~ actions affecting two of its U.S. seating ~~facilities in December 2003.~~facilities. As a result of ~~phased-out programs and uncompetitive cost structures, it was not economical for~~these actions, the Company ~~to continue to operate these facilities as they existed.~~recorded charges of $25.5 million and $7.8 million in 2003 and 2004, respectively, for employee termination benefits and asset impairments. These actions were completed in the second quarter of 2004. In ~~accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,”~~2004, the Company ~~recorded charges of $4.8 million and $20.2~~also incurred $39.9 million in ~~2004 and 2003, respectively,~~estimated costs related to ~~these actions for employee termination benefits required under related labor agreements. In addition, the Company recorded asset impairment charges of $3.0 million~~additional facility consolidations and ~~$5.3 million in 2004~~closures and 2003, respectively, related to these actions to write down the value of machinery and equipment that has been abandoned. These charges are included in cost of sales in the consolidated statements of income for the years ended December 31, 2004 and 2003.census reductions.
(4) Acquisition

On July 5, 2004, the Company completed the acquisition of the parent of GHW Grote & Hartmann GmbH (“Grote & Hartmann”) for consideration of $160.2 million, including assumed debt of $86.3 ~~million.~~million, subject to adjustment. This amount excludes the cost of integration, as well as other internal costs related to the transaction which were expensed as incurred. Grote & Hartmann iswas based in Wuppertal, Germany, and ~~manufactures~~manufactured terminals and connectors, as well as junction boxes, primarily for the automotive industry.

The Grote & Hartmann acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are included in the consolidated balance ~~sheet~~sheets as of December 31, 2005 and 2004. The operating results of Grote & Hartmann are included in the consolidated financial statements since the date of acquisition. ~~The preliminary purchase price and related allocation are shown below (in millions):~~

Consideration paid to former owner $ 73.9
Debt assumed 86.3
Fees and expenses 3.2

Cost of acquisition $ 163.4

Property, plant and equipment $ 101.4
Net working capital 32.6
Restructuring accrual (18.8 )
Other assets purchased and liabilities assumed, net (25.1 )
Goodwill 35.0
Intangible assets 38.3

Total cost allocation $ 163.4

The purchase price and related allocation are preliminary and may be revised as a result of adjustments made to the purchase price, obtaining additional information regarding liabilities assumed, including
62
70

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

contingent liabilities, revisions of preliminary estimates of fair values made at the date of purchase and certain tax attributes. At the time of the acquisition, the Company began to formulate plans for the restructuring of certain acquired operations. The Company is continuing to finalize these restructuring plans, which include potential plant closings and the termination or relocation of employees. The Company has made indemnity claims against the sellers for breaches of certain representations and warranties, which are pending as of the date of this Report.

Intangible assets include amounts recognized for the fair value of customer contracts, customer relationships and technology acquired. These intangible assets have a weighted average useful life of approximately fifteen years.

The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented.


(5)	Investments in Affiliates and Other Related Party Transactions

The Company’s beneficial ownership in affiliates accounted for under the equity method is shown below:

December 31,

2004 2003 2002

Honduras Electrical Distribution Systems S. de R.L. de C.V. (Honduras) 60 % — % — %
Lear-Kyungshin Sales and Engineering LLC 60 — —
Shenyang Lear Automotive Seating and Interior Systems Co., Ltd. (China) 60 60 —
Shanghai Lear STEC Automotive Parts Co., Ltd. (China) 55 55 —
Lear Furukawa Corporation 51 51 51
Industrias Cousin Freres, S.L. (Spain) 50 50 50
Hanil Lear India Private Ltd. (India) 50 50 50
Lear Diamond Electro-Circuit Systems Co., Ltd. (Japan) 50 50 50
Lear-NHK Seating and Interior Co., Ltd. (Japan) 50 50 50
Nanjing Lear Xindi Automotive Interiors Systems Co., Ltd. (China) 50 50 50
Lear Dongfeng Automotive Seating Co., Ltd. (China) 50 50 —
Beijing Lear Dymos Automotive Seating and Interior Co., Ltd. (China) 50 — —
Dong Kwang Lear Yuhan Hoesa (Korea) 50 — —
Bing Assembly Systems, L.L.C 49 49 49
JL Automotive, LLC 49 49 49
Precision Fabrics Group, Inc. 43 41 40
Jiangxi Jiangling Lear Interior Systems Co., Ltd. (China) 41 41 41
Klingel Italiana S.R.L. (Italy) 40 — —
Total Interior Systems — America, LLC 39 39 39
UPM S.r.L. (Italy) 39 39 39
Markol Otomotiv Yan Sanayi VE Ticaret A.S. (Turkey) 35 35 35
RecepTec Holdings, L.L.C 21 21 —
Corporate Eagle Two, L.L.C — 50 50
Saturn Electronics Texas, L.L.C — 45 45
Nawon Ind. Co., Ltd. (Korea) — 40 —
Lear Motorola Integrated Solutions, L.L.C — — 50
Hanyil Co., Ltd. (Korea) — — 29
NTTF Industries, Ltd. (India) — — 23

~~Lear Corporation and Subsidiaries~~

December 31,
2005 2004 2003

Honduras Electrical Distribution Systems S. de R.L. de C.V. (Honduras) 60 % 60 % —
Lear-Kyungshin Sales and Engineering LLC 60 60 —
Shanghai Lear STEC Automotive Parts Co., Ltd. (China) 55 55 55
Lear Shurlok Electronics (Proprietary) Limited (South Africa) 51 — —
Industrias Cousin Freres, S.L. (Spain) 50 50 50
Hanil Lear India Private Limited (India) 50 50 50
Lear Diamond Electro-Circuit Systems Co., Ltd. (Japan) 50 50 50
Nanjing Lear Xindi Automotive Interiors Systems Co., Ltd. (China) 50 50 50
Lear Dongfeng Automotive Seating Co., Ltd. (China) 50 50 50
Dong Kwang Lear Yuhan Hoesa (Korea) 50 50 —
Jiangxi Jiangling Lear Interior Systems Co. Ltd. (China) 41 41 41
Beijing Lear Dymos Automotive Seating and Interior Co., Ltd. (China) 40 50 —
Total Interior Systems — America, LLC 39 39 39
UPM S.r.L. (Italy) 39 39 39
Markol Otomotiv Yan Sanayi VE Ticaret A.S. (Turkey) 35 35 35
RecepTec Holdings, L.L.C. 21 21 21
Shenyang Lear Automotive Seating and Interior Systems Co., Ltd. (China) — 60 60
Lear Furukawa Corporation — 51 51
Lear-NHK Seating and Interior Co., Ltd. (Japan) — 50 50
Bing Assembly Systems, L.L.C. — 49 49
JL Automotive, LLC — 49 49
Precision Fabrics Group, Inc. — 43 41
Klingel Italiana S.R.L. (Italy) — 40 —
Corporate Eagle Two, L.L.C. — — 50
Saturn Electronics Texas, L.L.C. — — 45
Nawon Ind. Co., Ltd. (Korea) — — 40
~~Notes to Consolidated Financial Statements — (Continued)~~

Summarized group financial information for affiliates accounted for under the equity method as of December 31, ~~2004~~2005 and ~~2003,~~2004, and for the years ended December 31, 2005, 2004 ~~2003~~ and ~~2002,~~2003, is shown below (unaudited; in millions):

December 31,

2004 2003

Balance sheet data:
Current assets $ 277.5 $ 227.3
Non-current assets 117.6 101.2
Current liabilities 279.4 218.0
Non-current liabilities 25.8 20.5

For the Year Ended December 31,

2004 2003 2002

Income statement data:
Net sales $ 1,127.1 $ 779.6 $ 728.0
Gross profit 87.7 92.9 76.4
Income before provision for income taxes 16.0 22.2 14.7
Net income 11.3 17.4 9.6

December 31,
2005 2004

Balance sheet data:
Current assets $ 183.8 $ 277.5
Non-current assets 64.5 117.6
Current liabilities 186.0 279.4
Non-current liabilities 16.5 25.8

71

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

For the Year Ended December 31,
2005 2004 2003

Income statement data:
Net sales $ 1,248.4 $ 1,127.1 $ 779.6
Gross profit 56.1 87.7 92.9
Income before provision for income taxes 0.9 16.0 22.2
Net income (loss) (4.2 ) 11.3 17.4

As of December 31, ~~2004~~2005 and ~~2003,~~2004, the Company’s aggregate investment in affiliates was ~~$52.9~~$28.5 million and ~~$54.6~~$52.9 million, respectively. In addition, the Company had notes and advances due from affiliates of ~~$69.6~~$2.8 million and ~~$40.9~~$69.6 million as of December 31, ~~2004~~2005 and ~~2003,~~2004, respectively.

A summary of transactions with affiliates and other related parties is shown below (in millions):

For the Year Ended
December 31,

2004 2003 2002

Sales to affiliates $ 140.3 $ 144.7 $ 73.2
Purchases from affiliates 120.9 96.1 74.9
Purchases from other related parties (1) 12.5 12.0 9.2
Management and other fees for services provided to affiliates 3.3 7.6 13.5
Dividends received from affiliates 3.2 8.7 5.9

For the Year Ended December 31,
2005 2004 2003

Sales to affiliates $ 144.9 $ 140.3 $ 144.7
Purchases from affiliates 224.9 120.9 96.1
Purchases from other related parties(1) 13.6 12.5 12.0
Management and other fees for services provided to affiliates 0.6 3.3 7.6
Dividends received from affiliates 5.3 3.2 8.7
(1) Includes $4.3 million, $3.5 million and $3.9 million in 2005, 2004 and ~~$2.6 million in 2004,~~ 2003, ~~and 2002,~~ respectively, paid to Trammel Crow Company for facilities maintenance and real estate brokerage services; includes $7.0 million, $7.3 million and $7.7 million in 2005, 2004 and ~~$6.3 million in 2004,~~ 2003, ~~and 2002,~~ respectively, paid to Analysts International, Sequoia Services Group for software services and computer equipment; includes $0.4 million, $0.4 million and ~~$0.3~~$0.4 million in 2005, 2004 ~~2003~~ and ~~2002,~~2003, respectively, paid to Elite Support Management Group, L.L.C. for the provision of information technology temporary support personnel; and includes $1.9 million and $1.3 million in 2005 and 2004, respectively, paid to Creative Seating Innovations, Inc. for certain manufacturing services. Each entity employs a relative of the Company’s Chairman and Chief Executive Officer. In addition, Elite Support Management and Creative Seating Innovations are each partially owned by relatives of the Company’s Chairman and Chief Executive Officer. As a result, such entities may be deemed to be related parties. These purchases were made in the ordinary course of the Company’s business and in accordance with the Company’s normal procedures for engaging service providers or normal sourcing procedures for suppliers, as applicable.

The Company’s investments in Honduras Electrical Distribution Systems S. de R.L. de C.V., Lear-Kyungshin Sales and Engineering LLC and Shanghai Lear ~~Furukawa Corporation is~~STEC Automotive Parts Co., Ltd. are accounted for under the equity method as ~~shareholder resolutions require a two-thirds majority vote for~~the result of certain approval ~~of corporate actions. Therefore, Lear does not control this affiliate. In~~
64
~~Lear Corporation and Subsidiaries~~
~~Notes~~rights granted to ~~Consolidated Financial Statements — (Continued)~~
~~January 2005,~~ the Company acquired an additional 29% of Lear Furukawa Corporation for $2.3 million, increasing its ownership interest to 80%. The acquisition will be accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed will be reflected in the consolidated balance sheet from the date of acquisition. The operating results of Lear Furukawa Corporation will be included in the consolidated statement of income from the date of acquisition.minority shareholder.

The Company guarantees ~~39% of certain of the debt of Total Interior Systems — America, LLC and~~ 60% of certain of the debt of Honduras Electrical Distribution Systems S. de R.L. de C.V., 40% of certain of the debt of Beijing Lear Dymos Automotive Seating and Interior Co., Ltd. and 39% of certain of the debt of Total Interior Systems — America, LLC. As of December 31, ~~2004,~~2005, the amount of debt guaranteed by the Company was ~~approximately $8.2~~$29.4 million.
~~2004~~
In December 2005, the Company engaged in the restructuring of two of its previously unconsolidated affiliates, Bing Assembly Systems, L.L.C. (“BAS”) and JL Automotive, LLC (“JLA”), which involved capital restructurings, changes in ownership and amendments to the related operating agreements. Each venture assembles, sequences and manufactures automotive interior components. These restructurings resulted in the recognition of a $29.8 million loss, which is reflected in equity in net (income) loss of affiliates in the accompanying statement of operations for the year ended December 31, 2005. In addition, as part of the restructurings, a new joint venture partner, Comer Holdings, LLC, acquired a 51% ownership interest in Integrated Manufacturing and Assembly, LLC (formerly BAS) and CL Automotive, LLC (formerly JLA) with Lear retaining a 49% ownership interest in both of these ventures. Upon the completion of these restructurings, which were effective December 31, 2005, it was
72

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

determined that both of these ventures are variable interest entities and that the Company is the primary beneficiary due to its financing of the ventures through member loans and through various amendments to the respective operating agreements. Accordingly, the assets and liabilities of these ventures are reflected in the consolidated balance sheet as of December 31, 2005. The equity interests of the ventures not owned by the Company are reflected as minority interest in the consolidated balance sheet as of December 31, 2005. The operating results of these ventures will be included in the consolidated statements of operations from the date of consolidation, December 31, 2005.

2005

In January 2005, the Company acquired an additional 29% of Lear Furukawa Corporation (“Lear Furukawa”) for $2.3 million, increasing its ownership interest to 80%. The acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are reflected in the consolidated balance sheet as of December 31, 2005. The operating results of Lear Furukawa are included in the consolidated statement of operations from the date of acquisition. The operating results of the Company, after giving pro forma effect to this acquisition, are not materially different from reported results. Previously, Lear Furukawa was accounted for under the equity method. Shareholder resolutions required a two-thirds majority vote for approval of corporate actions, and therefore, Lear did not control this affiliate.

In July 2005, the Company began reflecting the financial position and results of operations of Shenyang Lear Automotive Seating and Interior Systems Co., Ltd. (“Shenyang”) in its consolidated financial statements, due to a change in the approval rights granted to the minority shareholder. Previously, Shenyang was accounted for under the equity method. Certain shareholder resolutions required unanimous shareholder approval, and therefore, Lear did not control this affiliate.

Also in 2005, the Company divested its ownership interest in Precision Fabrics Group, Inc. (“Precision Fabrics”) and recognized a charge of $16.9 million. This charge is reflected in equity in net (income) loss of affiliates in the consolidated statement of operations for the year ended December 31, 2005. In addition, the Company sold its ownership interests in Klingel Italiana S.R.L and dissolved Lear-NHK Seating and Interior Co., Ltd.

2004

In December 2004, the Company formed Dong Kwang Lear Yuhan Hoesa, a joint venture with Dong Kwang Tech Co., Ltd., to manufacture and supply seat systems in Korea. In October 2004, the Company formed Beijing Lear Dymos Automotive Seating and Interior Co., Ltd., a joint venture with Dymos Incorporated, to manufacture and supply seat systems in China. In February 2004, the Company formed two joint ventures, Lear-Kyungshin Sales and Engineering LLC and Honduras Electrical Distribution Systems S. de R.L. de C.V. (collectively, the “Kyungshin affiliates”), with Kyungshin Industrial Co., Ltd. to manufacture and supply wire harnesses. ~~The Company’s investments in the Kyungshin affiliates are accounted for under the equity method as the result of certain approval rights granted to the minority shareholder.~~

In January 2004, the Company acquired an additional 17% of the publicly traded common equity of Hanyil Co., Ltd. (“Hanyil”) for $4.1 million, increasing its ownership interest in Hanyil to 99%.

Also in 2004, the Company sold its ownership interests in Corporate Eagle Two, L.L.C., Saturn Electronics Texas, L.L.C. and Nawon Ind. Co., Ltd. (“Nawon”). The Company’s ownership percentage of Precision Fabrics Group, Inc. increased from 41% to 43% due to a decrease in the number of shares outstanding, as the joint venture repurchased shares from other owners.

In conjunction with the acquisition of Grote & Hartmann in July 2004 (Note 4)4, “Acquisition”), the Company ~~effectively acquired~~assumed a 40% ownership interest in Klingel Italiana S.R.L. ~~As of the date of this Report, the Company has entered into an agreement to sell this interest.~~


	*~~2003~~*

2003

In August 2003, the Company acquired an additional 53% of the publicly traded common equity of Hanyil, an automotive seats supplier in Korea, for $9.4 million. The Company previously held a 29% equity interest in Hanyil.

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

The acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are reflected in the consolidated balance sheets as of December 31, 2004 and 2003. The operating results of Hanyil are included in the consolidated statements of ~~income~~operations for the years ended December 31, 2004 and 2003, since the date of acquisition. In conjunction with the purchase of Hanyil, the Company ~~effectively acquired~~assumed a 40% ownership interest in Nawon, a seating company in Korea. The operating results of the Company, after giving pro forma effect to this acquisition, are not materially different from reported results.

In July 2003, the Company formed Shanghai Lear STEC Automotive Parts Co., Ltd., a joint venture with Shanghai SIIC Transportation Electrical Co., Ltd., to manufacture and supply electronic products and electrical distribution systems and other automotive parts and components in China. In May 2003, the Company established Shenyang Lear Automotive Seating and Interior Systems Co., Ltd., a joint venture with Shanghai Shenhua Holdings Co., Ltd., to manufacture and supply automotive parts and components in China. ~~The Company’s investments in these affiliates are accounted for under the equity method as the result of certain approval rights granted to the minority shareholder.~~ In December 2003, the Company formed Lear

~~Lear Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements — (Continued)~~

Dongfeng Automotive Seating Co., Ltd., a joint venture with Dongfeng Industrial Co., Ltd., to manufacture automotive seats and components in China.

Also in 2003, the Company and its joint venture partner dissolved Lear Motorola Integrated Solutions, L.L.C., and the Company sold the remaining interest in NTTF Industries, Ltd. In addition, the Company’s ownership percentage in RecepTec Holdings, L.L.C., an investment previously accounted for under the cost method, increased from 18% to 21%. The Company’s ownership percentage of Precision Fabrics Group, Inc. increased from 40% to 41% due to a decrease in the number of shares outstanding, as the joint venture repurchased shares from other owners.


(6)	~~2002~~Short-Term Borrowings

Since January 1, 2002, the Company has accounted for its investment in Hanil Lear India Private Ltd. under the equity method, due to a change in the composition of the joint venture’s board of directors. Prior to January 1, 2002, the financial position and results of operations of this entity were included in the consolidated financial statements of the Company.

In 2002, the Company formed Lear Diamond Electro-Circuit Systems Co., Ltd., a joint venture with Mitsubishi Cable Industries, Ltd., to provide electronic products and electrical distribution systems to certain automotive manufacturers in Japan. The Company also formed Nanjing Lear Xindi Automotive Interiors Systems Co., Ltd., a joint venture with the Xindi subsidiary of Yuejin Motor Group Corporation, to supply seat systems and wire harnesses in China.

Also in 2002, the Company sold its interest in Interni S.A. and liquidated its interest in SALBI, A.B. The Company also sold its interest in Interiores Automotrices Summa, S.A. de C.V. and, in turn, acquired 100% of the related business. The acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are reflected in the consolidated balance sheets as of December 31, 2004 and 2003. The operating results are included in the consolidated statements of income for the years ended December 31, 2004, 2003 and 2002, since the date of acquisition. In addition, the Company’s ownership percentage of Precision Fabrics Group, Inc. increased from 38% to 40%, due to a decrease in the number of shares outstanding, as the joint venture repurchased shares from other owners. The Company’s ownership percentage of Jiangxi Jiangling Lear Interior Systems Co., Ltd. also increased from 33% to 41%, due to the purchase of additional equity shares.


~~(6)~~	~~Short-Term Borrowings~~

The Company utilizes uncommitted lines of credit as needed for its short-term working capital fluctuations. As of December 31, ~~2004,~~2005, the Company had unsecured lines of credit available from banks of ~~$412~~$264.5 million, subject to certain restrictions imposed by the ~~primary credit facility~~Amended and Restated Primary Credit Facility (Note 7)7, “Long-Term Debt”). As of December 31, ~~2004~~2005 and ~~2003,~~2004, the weighted average interest rate on outstanding borrowings was ~~4.3%~~5.0% and ~~2.8%~~4.3%, respectively.

~~Lear Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements — (Continued)~~


(7)	Long-Term Debt

A summary of long-term debt and the related weighted average interest rates, including the effect of hedging activities described in Note 12, “Financial Instruments,” is shown below (in millions):

December 31,

2004 2003

Long-Term Weighted Average Long-Term Weighted Average
Debt Instrument Debt Interest Rate Debt Interest Rate

5.75% Senior Notes, due 2014 $ 399.2 5.635% $ — —
Zero-coupon Convertible Senior Notes, due 2022 286.3 4.75 % 273.2 4.75 %
8.125% Senior Notes, due 2008 338.5 8.125% 313.8 8.125%
8.11% Senior Notes, due 2009 800.0 7.74 % 800.0 7.18 %
7.96% Senior Notes, due 2005 600.0 6.95 % 600.0 6.36 %
Other 75.7 4.22 % 74.2 4.34 %

2,499.7 2,061.2
Less — current portion (632.8 ) (4.0 )

Long-term debt $ 1,866.9 $ 2,057.2

2005 2004
Long-Term
Weighted Average
Long-Term
Weighted Average

December 31,
Debt Interest Rate Debt Interest Rate

Debt Instrument
Amended and Restated Primary Credit Facility $ 400.0 5.67 % $ — —
5.75% Senior Notes, due 2014 399.3 5.635 % 399.2 5.635 %
Zero-Coupon Convertible Senior Notes, due 2022 300.1 4.75 % 286.3 4.75 %
8.125% Senior Notes, due 2008 295.6 8.125 % 338.5 8.125 %
8.11% Senior Notes, due 2009 800.0 8.35 % 800.0 7.74 %
7.96% Senior Notes, due 2005 — — 600.0 6.95 %
Other 57.5 6.34 % 75.7 4.22 %

2,252.5 2,499.7
Less — current portion (9.4 ) (632.8 )

Long-term debt $ 2,243.1 $ 1,866.9

~~Primary Credit Facility~~

74

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Amended and Restated Primary Credit Facility

On March 23, 2005, the Company entered into a $1.7 billion credit and guarantee agreement (the “Primary Credit Facility”), which provides for maximum revolving borrowing commitments of ~~December 31, 2004,~~$1.7 billion and matures on March 23, 2010. The Primary Credit Facility replaced the Company’s ~~primary credit facility consisted of a~~existing $1.7 billion amended and restated credit facility, which ~~matures~~was due to mature on March 26, 2006. On August 3, 2005, the Primary Credit Facility was amended to (i) revise the leverage ratio covenant for the third quarter of 2005 through the first quarter of 2006, (ii) obtain the consent of the lenders to permit the Company to enter into a new18-month term loan facility (the “Term Loan Facility”) with a principal amount of up to $400 million and (iii) provide for the pledge of the capital stock of certain of the Company’s material subsidiaries to secure its obligations under the Primary Credit Facility and the Term Loan Facility. On August 11, 2005, the Company entered into an amended and restated credit and guarantee agreement (the “Amended and Restated Primary Credit Facility”). The Amended and Restated Primary Credit Facility effectively combined the Company’s existing Primary Credit Facility, as amended, with the new $400 million Term Loan Facility with a maturity date of February 11, 2007. The Amended and Restated Primary Credit Facility provides for multicurrency revolving borrowings in a maximum aggregate amount of $750 million, Canadian revolving borrowings in a maximum aggregate amount of $200 million and swing-line revolving borrowings in a maximum aggregate amount of $300 million, the commitments for which are part of the aggregate revolving credit facility commitment.

Revolving borrowings under the Amended and Restated Primary Credit Facility bear interest, payable no less frequently than quarterly, at (a) (1) applicable interbank rates, on Eurodollar and Eurocurrency loans, (2) the greater of the U.S. prime rate and the federal funds rate plus 0.50%, on base rate loans, (3) the greater of the rate publicly announced by the Canadian administrative agent and the federal funds rate plus 0.50%, on U.S. dollar denominated Canadian loans, (4) the greater of the prime rate announced by the Canadian administrative agent and the average Canadian interbank bid rate (CDOR) plus 1.0%, on Canadian dollar denominated Canadian loans, and (5) various published or quoted rates, on swing line and other loans, plus (b) a percentage spread ranging from 0% to 1.0%, depending on the type of loanand/or currency and the Company’s credit rating or leverage ratio. Borrowings under the Term Loan Facility bear interest at a percentage spread ranging from 0.50% to 0.75% for alternate base rate loans and 1.50% to 1.75% for Eurodollar loans depending on the Company’s credit rating or leverage ratio. Under the Amended and Restated Primary Credit Facility, the Company agrees to pay a facility fee, payable quarterly, at rates ranging from 0.10% to 0.35%, depending on its credit rating or leverage ratio, and when applicable, a utilization fee.

As of December 31, ~~2004,~~2005, the Company had no$400.0 million in borrowings outstanding under ~~its primary credit facility~~the Amended and ~~$52 million committed~~Restated Primary Credit Facility, all of which were outstanding under ~~outstanding letters~~the Term Loan Facility. There were no revolving borrowings outstanding. As of ~~credit, resulting in more than $1.6 billion of unused availability. The~~December 31, 2005 the Company pays a commitment fee on the $1.7 billion credit facility of ~~0.30%~~0.25% per annum. Borrowings and repayments under the Company’s ~~primary credit facility~~Amended and Restated Primary Credit Facility (as well as predecessor facilities) are shown below (in millions):

Year Borrowings Repayments

2004 $ 4,153.1 $ 4,153.1
2003 6,084.7 6,217.5
2002 7,557.0 8,138.5

The Company’s primary credit facility provides for multicurrency borrowings in a maximum aggregate amount of $500 million and Canadian borrowings in a maximum aggregate amount of $100 million, the commitments for which are part of the aggregate primary credit facility commitment. The Company is currently seeking to extend the maturity of its existing primary credit facility through a replacement facility with a syndicate of lenders.

Year
Borrowings Repayments

2005 $ 8,942.4 $ 8,542.4
2004 4,153.1 4,153.1
2003 6,084.7 6,217.5
In March 2003, the Company prepaid the final $50.0 million due on a $500 million term loan with scheduled amortization through May 2004. In June 2003, the Company reduced availability under its $500 million revolving credit facility to $250 million. This $250 million revolving credit facility matured on May 4, 2004, and included $115.7 million of multi-currency borrowing availability.
Zero-Coupon Convertible Senior Notes
~~Zero-Coupon Convertible Senior Notes~~

In February 2002, the Company issued $640.0 million aggregate principal amount at maturity of zero-coupon convertible senior notes due 2022 (the “Convertible Notes”), yielding gross proceeds of $250.3 million. The Convertible Notes are unsecured and rank equally with the Company’s other unsecured senior indebtedness, including the Company’s other senior notes. Each Convertible Note of $1,000 principal amount
67
~~Lear Corporation and Subsidiaries~~
~~Notes to Consolidated Financial Statements — (Continued)~~
at maturity was issued at a price of $391.06, representing a yield to maturity of 4.75%. Holders of the Convertible Notes may

75

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

convert their notes at any time on or before the maturity date at a conversion rate, subject to adjustment, of 7.5204 shares of the Company’s common stock per note, provided that the average per share price of the Company’s common stock for the 20 trading days immediately prior to the conversion date is at least a specified percentage, beginning at 120% upon issuance and declining 1/2% each year thereafter to 110% at maturity, of the accreted value of the Convertible Note, divided by the conversion rate (the “Contingent Conversion Trigger”). The average per share price of the Company’s common stock for the 20 trading days immediately prior to December 31, ~~2004,~~2005, was ~~$58.95.~~$28.01. As of December 31, ~~2004,~~2005, the Contingent Conversion Trigger was ~~$70.79.~~$73.87. The Convertible Notes are also convertible (1) if the long-term credit rating assigned to the Convertible Notes by either Moody’s Investors Service or Standard & Poor’s Ratings Services is reduced below Ba3 or BB-, respectively, or either ratings agency withdraws its long-term credit rating assigned to the notes, (2) if the Company calls the Convertible Notes for redemption or (3) upon the occurrence of specified other events.

The Company has an option to redeem all or a portion of the Convertible Notes for cash at their accreted value at any time on or after February 20, 2007. Should the Company exercise this option, holders of the Convertible Notes could exercise their option to convert the Convertible Notes into the Company’s common stock at the conversion rate, subject to adjustment, of 7.5204 shares per note. Holders may require the Company to purchase their Convertible Notes on each of February 20, 2007, 2012 and 2017, as well as upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes), at their accreted value on such dates. On August 26, 2004, the Company amended its outstanding Convertible Notes to require settlement of any repurchase obligation with respect to the Convertible Notes for ~~cash.~~cash only.

The Company used the proceeds from the Convertible Notes offering to repay indebtedness under the revolving portion of the Company’s then existing primary credit facilities. The offering of the Convertible Notes was made pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). In June 2002, a registration statement filed by the Company covering the resale of the Convertible Notes and the common stock issuable upon their conversion was declared effective by the Securities and Exchange Commission (the “SEC”).


	*~~Other Senior Notes~~*

Other Senior Notes

In August 2004, the Company issued $400 million aggregate principal amount of unsecured 5.75% senior notes due 2014 (the “2014 Notes”), yielding gross proceeds of $399.2 million. The notes are unsecured and rank equally with the Company’s other unsecured senior indebtedness, including the Company’s other senior notes. The ~~offering~~proceeds from these notes were ultimately utilized to refinance a portion of the $600 million senior notes ~~was not registered under the Securities Act. Under the terms of a registration rights agreement entered into in connection with the issuance of the notes,~~due May 2005. In April 2005, the Company ~~is required to complete~~completed an exchange offer of the ~~notes~~2014 Notes for substantially identical notes registered under the Securities Act. ~~The Company will be required to pay additional interest on the notes in the event the exchange offer is not completed by a specified date and under certain other circumstances.~~ Interest on the 2014 Notes is payable on February 1 and August 1 of each ~~year beginning February 1, 2005.~~year.

The Company has outstanding Euro 250 million ~~(approximately $338.5~~($295.6 million based on the exchange rate in effect as of December 31, ~~2004)~~2005) aggregate principal amount of senior notes due 2008 (the “Eurobonds”). Interest on the Eurobonds is payable on April 1 and October 1 of each year. In addition, the Company has outstanding ~~$600 million aggregate principal amount of senior notes due 2005 (the “2005 Notes”) and~~ $800 million aggregate principal amount of senior notes due 2009 (the “2009 Notes”). Interest on the ~~2005 Notes and the~~ 2009 Notes is payable on May 15 and November 15 of each year. The Company ~~intends to repay~~repaid the $600 million senior notes due May 2005 ~~Notes~~ at maturity with excess cash and borrowings under ~~its primary credit facility.~~the Primary Credit Facility.

The Company may redeem all or part of the 2014 Notes, the Eurobonds ~~the 2005 Notes~~ and the 2009 Notes at its option, at any time, at the redemption price equal to the greater of (a) 100% of the principal

~~Lear Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements — (Continued)~~

amount of the notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the redemption date to the maturity date, discounted to the redemption date on a semiannual basis at the applicable treasury rate plus 20 basis points in the case of the 2014 Notes, at the Bund rate in the case of the Eurobonds orand at the applicable treasury rate plus 50 basis points in the case of ~~the 2005 Notes and~~ the 2009 Notes, together with any interest accrued but not paid to the date of the redemption.


	*~~Guarantees~~*

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Guarantees

The senior notes of the Company are senior unsecured obligations and rank pari passu in right of payment with all of the Company’s existing and future unsubordinated unsecured indebtedness. The Company’s obligations under the senior notes are guaranteed, on a joint and several basis, by certain of its subsidiaries, which are primarily domestic subsidiaries and all of which are directly or indirectly 100% owned by the Company (Note ~~15)~~15, “Supplemental Guarantor Condensed Consolidating Financial Statements”). The Company’s obligations under the ~~primary credit facility~~Amended and Restated Primary Credit Facility are guaranteed by the same subsidiaries that guarantee the Company’s obligations under the senior notes. The Company’s obligations under the ~~primary credit facility~~Amended and Restated Primary Credit Facility are also (and solely) secured by the pledge of all or a portion of the capital stock of certain of its significant subsidiaries. ~~Pursuant~~

Covenants

The Amended and Restated Primary Credit Facility contains operating and financial covenants that, among other things, could limit the Company’s ability to obtain additional sources of capital. The principal financial covenants require that the ~~terms~~Company maintain a leverage ratio of not more than 3.75 to 1 as of December 31, 2005, 3.50 to 1 as of April 1, 2006 and 3.25 to 1 as of the ~~primary credit facility, the guarantees~~end of each quarter thereafter and stock pledges may be released, at the Company’s option, when and if certain conditions are satisfied, including credit ratings at or above BBB- from Standard & Poor’s Ratings Services and at or above Baa3 from Moody’s Investors Service and certain other conditions. These conditions were satisfied in May 2004, when Moody’s Investors Service raised its credit ratingan interest coverage ratio of not less than 3.5 to 1 as of the ~~Company’s senior unsecured debt to Baa3.~~end of each quarter. These ratios are calculated on a trailing four quarter basis. The leverage and interest coverage ratios, as well as the related components of their computations, are defined in the Amended and Restated Primary Credit Facility. As of ~~the date of the Report,~~December 31, 2005, the Company ~~has not sought to release the guarantees~~was in compliance with all covenants and ~~stock pledges. In the event that any such subsidiary ceases to be a guarantor under the primary credit facility, such subsidiary will be released as a guarantor of the senior notes.~~


	*~~Covenants~~*

other requirements set forth in its Amended and Restated Primary Credit Facility. The Company’s ~~primary credit facility contains numerous covenants related~~leverage and interest coverage ratios were 2.7 to ~~the maintenance of certain financial ratios~~1 and 4.2 to the management and operation of the Company. The covenants include, among other restrictions, limitations on indebtedness, guarantees, mergers, acquisitions, fundamental corporate changes, asset sales, investments, loans and advances, liens, dividends and other stock payments, transactions with affiliates and optional payments and modifications of debt instruments. 1, respectively.

The senior notes also contain covenants ~~restricting~~limiting the ability of the Company and its subsidiaries to incur liens and to enter into sale and leaseback transactions and ~~restricting~~limiting the ability of the Company to consolidate with, to merge with or into or to sell or otherwise dispose of all or substantially all of its assets to any person. As of December 31, ~~2004,~~2005, the Company was in compliance with all covenants and other requirements set forth in its ~~primary credit facility and~~ senior notes.


	*~~Other~~*

Other

As of December 31, ~~2004,~~2005, other long-term debt was principally made up of amounts outstanding under term loans and capital leases.

~~Lear Corporation and Subsidiaries~~Scheduled Maturities

~~Notes to Consolidated Financial Statements — (Continued)~~


	*~~Scheduled Maturities~~*

As of December 31, ~~2004,~~2005, the scheduled maturities of long-term debt for the five succeeding years are shown below (in millions):

Year Maturities

2005 $ 632.8
2006 6.8
2007 9.2
2008 342.3
2009 805.4

Year
Maturities

2006 $ 9.4
2007 722.0 (1)
2008 300.4
2009 799.8
2010 2.8
~~(8)~~(1) The Company’s zero-coupon convertible senior notes are reflected in the scheduled maturities table above at their book value of $300.1 million as of December 31, 2005. Their accreted value as of February 20, 2007 (the first date at which holders may require the Company to purchase the notes) will be $316.5 million.

77

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)


(8)	Income Taxes

A summary of income (loss) before provision for income taxes, minority interests in consolidated subsidiaries and equity in net ~~income~~(income) loss of affiliates ~~and cumulative effect of a change in accounting principle~~ and the components of provision for income taxes is shown below (in millions):

For the Year Ended
December 31,

2004 2003 2002

Income before provision for income taxes, minority interests in consolidated subsidiaries, equity in net income of affiliates and cumulative effect of a change in accounting principle:
Domestic $ 47.7 $ 240.9 $ 234.0
Foreign 516.6 293.5 246.5

$ 564.3 $ 534.4 $ 480.5

Domestic provision (benefit) for income taxes:
Current provision $ 7.2 $ 48.9 $ 101.1
Deferred benefit (4.0 ) (38.4 ) (15.3 )

Total domestic provision 3.2 10.5 85.8

Foreign provision (benefit) for income taxes:
Current provision 112.1 137.9 85.9

Deferred —
Deferred provision (benefit) 18.4 7.6 (6.8 )
Benefit of prior unrecognized net operating loss carryforwards (5.7 ) (2.3 ) (7.9 )

Total foreign deferred provision (benefit) 12.7 5.3 (14.7 )

Total foreign provision 124.8 143.2 71.2

Provision for income taxes $ 128.0 $ 153.7 $ 157.0

~~Lear Corporation~~

For the Year Ended December 31,
2005 2004 2003

Income (loss) before provision for income taxes, minority interests in consolidated subsidiaries, equity in net (income) loss of affiliates
Domestic $ (1,520.8 ) $ 47.7 $ 240.9
Foreign 392.2 516.6 293.5

$ (1,128.6 ) $ 564.3 $ 534.4

Domestic provision for income taxes:
Current provision (benefit) $ (12.9 ) $ 7.2 $ 48.9
Deferred provision (benefit) 65.3 (4.0 ) (38.4 )

Total domestic provision 52.4 3.2 10.5

Foreign provision for income taxes:
Current provision 162.5 112.1 137.9
Deferred provision (benefit) (20.6 ) 12.7 5.3

Total foreign provision 141.9 124.8 143.2

Provision for income taxes $ 194.3 $ 128.0 $ 153.7

The foreign deferred provision (benefit) includes the benefit of prior unrecognized net operating loss carryforwards of $1.8 million, $5.7 million and ~~Subsidiaries~~
~~Notes to Consolidated Financial Statements — (Continued)~~$2.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.

A summary of the differences between the provision (benefit) for income taxes calculated at the United States federal statutory income tax rate of 35% and the consolidated provision for income taxes is shown below (in millions):

For the Year Ended
December 31,

2004 2003 2002

Income before provision for income taxes, minority interests in consolidated subsidiaries, equity in net income of affiliates and cumulative effect of a change in accounting principle multiplied by the United States federal statutory rate $ 197.5 $ 187.0 $ 168.2
Differences in income taxes on foreign earnings, losses and remittances (46.5 ) (47.7 ) 18.3
Valuation adjustments 13.3 19.1 49.3
Research and development credits (16.6 ) (12.8 ) (25.0 )
Change in enacted tax rates on prior divestiture — — (14.5 )
Other (19.7 ) 8.1 (39.3 )

$ 128.0 $ 153.7 $ 157.0

For the Year Ended December 31,
2005 2004 2003

Income (loss) before provision for income taxes, minority interests in consolidated subsidiaries, equity in net (income) loss of affiliates multiplied by the United States federal statutory rate $ (395.0 ) $ 197.5 $ 187.0
Differences in income taxes on foreign earnings, losses and remittances (34.0 ) (46.5 ) (47.7 )
Valuation adjustments 275.2 13.3 19.1
Research and development credits (22.6 ) (16.6 ) (12.8 )
Goodwill impairment 354.4 — —
Investment credit/grants (22.8 ) (7.4 ) —
Other 39.1 (12.3 ) 8.1

Provision for income taxes $ 194.3 $ 128.0 $ 153.7

For the year ended December 31, 2005, investment credit / grants includes the tax benefit related to a tax law change in Poland of $17.8 million, which was recorded in the first quarter of 2005.
For the years ended December 31, 2005, 2004 ~~2003~~ and ~~2002,~~2003, income in foreign jurisdictions with tax holidays was $54.7 million, $143.4 million ~~$81.0 million~~ and ~~$55.7~~$81.0 million, respectively. Such tax holidays generally expire from ~~2005~~2006 through 2017.

78

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Deferred income taxes represent temporary differences in the recognition of certain items for income tax and financial reporting purposes. A summary of the components of the net deferred income tax liability is shown below (in millions):

December 31,

2004 2003

Deferred income tax liabilities:
Long-term asset basis differences $ 146.8 $ 125.3
Recoverable customer engineering and tooling 44.8 59.5
Undistributed earnings of foreign subsidiaries 83.4 84.5
Other 2.7 1.2

$ 277.7 $ 270.5

Deferred income tax assets:
Tax loss carryforwards $ (277.0 ) $ (231.1 )
Tax credit carryforwards (26.6 ) —
Retirement benefit plans (95.5 ) (70.3 )
Accrued liabilities (37.0 ) (59.7 )
Reserves related to current assets (35.2 ) (50.9 )
Self-insurance reserves (22.7 ) (18.1 )
Minimum pension liability (26.2 ) (21.4 )
Derivative instruments and hedging (34.0 ) (36.3 )

(554.2 ) (487.8 )
Valuation allowance 277.7 220.8

$ (276.5 ) $ (267.0 )

Net deferred income tax liability $ 1.2 $ 3.5

~~Lear Corporation~~

December 31,
2005 2004

Deferred income tax assets:
Tax loss carryforwards $ 259.0 $ 277.0
Tax credit carryforwards 85.7 26.6
Retirement benefit plans 90.1 85.1
Accrued liabilities 71.7 38.4
Reserves related to current assets 29.7 35.2
Self-insurance reserves 20.6 22.7
Minimum pension liability 39.5 26.2
Deferred compensation 20.2 9.0
Recoverable customer engineering and tooling 57.5 —
Derivative instruments and hedging 22.0 34.0

696.0 554.2
Valuation allowance (478.3 ) (277.7 )

$ 217.7 $ 276.5

Deferred income tax liabilities:
Long-term asset basis differences $ (137.4 ) $ (146.8 )
Recoverable customer engineering and tooling — (44.8 )
Undistributed earnings of foreign subsidiaries (86.8 ) (83.4 )
Other (4.3 ) (2.7 )

$ (228.5 ) $ (277.7 )

Net deferred income tax liability $ (10.8 ) $ (1.2 )

During 2005, operating losses generated in the United States resulted in an increase in the carrying value of its deferred tax assets. In light of the Company’s recent operating performance in the United States and ~~Subsidiaries~~
~~Notes to Consolidated Financial Statements — (Continued)~~
~~Deferred~~current industry conditions, the Company assessed, based upon all available evidence, whether it was more likely than not that it would realize its U.S. deferred tax assets. The Company concluded that it was no longer more likely than not that it would realize its U.S. deferred tax assets. As a result, in the fourth quarter of 2005, the Company recorded a tax charge of $300.3 million comprised of (i) a full valuation allowance of $255.0 million and (ii) an increase in related tax reserves of $45.3 million. The increase in tax reserve is reflected in the other component of the tax rate reconciliation table above. In addition, deferred income tax assets have been fully offset by a valuation allowance in certain foreign tax jurisdictions due to a history of operating losses. The classification of the net deferred income tax liability is shown below (in millions):

December 31,

2004 2003

Deferred income tax assets:
Current $ (148.1 ) $ (140.6 )
Long-term (50.4 ) (41.5 )
Deferred income tax liabilities:
Current 38.4 30.3
Long-term 161.3 155.3

Net deferred income tax liability $ 1.2 $ 3.5

December 31,
2005 2004

Deferred income tax assets:
Current $ 138.6 $ 148.1
Long-term 76.0 50.4
Deferred income tax liabilities:
Current (33.3 ) (38.4 )
Long-term (192.1 ) (161.3 )

Net deferred income tax liability $ (10.8 ) $ (1.2 )

Deferred income taxes have not been provided on ~~$527.6~~$789.5 million of certain undistributed earnings of the Company’s foreign subsidiaries as such amounts are considered to be permanently reinvested. It is not practicable to

79

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

determine the unrecognized deferred income tax liability on these earnings because the actual tax liability on these earnings, if any, is dependent on circumstances existing when remittance occurs.

As of December 31, ~~2004,~~2005, the Company had tax loss carryforwards of ~~$933.8 million, which relate to certain foreign subsidiaries.~~$866.9 million. Of the total loss carryforwards, ~~$609.2~~$605.4 million has no expiration date and ~~$324.6~~$261.5 million expires from ~~2005~~2006 through ~~2019.~~2025. In addition, the Company had tax credit carryforwards of $85.7 million comprised principally of U.S. foreign tax credits, research and development credits and investment tax credits that generally expire between 2015 and 2025.


	*~~American Jobs Creation Act of 2004~~*

American Jobs Creation Act of 2004

In October 2004, the American Jobs Creation Act of 2004 (“the Act”) was signed into law. The Act ~~creates~~created a temporary incentive for U.S. corporations to repatriate earnings from foreign subsidiaries by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations to the extent the dividends exceed a base amount and are invested in the United States pursuant to a domestic reinvestment plan. The temporary incentive iswas available to the Company inuntil December 31, 2005. The amount of the Company’s dividends potentially eligible for the deduction iswas limited to $500 million.

~~The deduction is subject~~

After completing its evaluation, the Company decided not to a number of limitations and uncertainty remains as to the interpretation of numerous provisions in the Act. The U.S. Treasury Department is in the process of providing clarifying guidance on key elements ofpursue dividends under the repatriation provision ~~and Congress may reintroduce legislation that provides for certain technical corrections to the Act. The Company has not completed its evaluation~~ of the ~~repatriation provision~~Act due to ~~the uncertainty associated with the interpretation of the provision, as well as~~ numerous tax ~~legal,~~and treasury ~~and business~~ considerations. ~~The Company expects to complete its evaluation of~~This decision had no effect on the ~~potential dividends it may pursue, if any, and~~Company’s provision for income taxes for the ~~related tax ramifications after additional guidance is issued.~~year ended December 31, 2005.


(9)	Pension and Other Postretirement Benefit Plans

The Company has noncontributory defined benefit pension plans covering certain domestic employees and certain employees in foreign countries, principally Canada. The Company’s salaried pension plans provide benefits based on final average earnings formulas. The Company’s hourly pension plans provide benefits under flat benefit and cash balance formulas. The Company also has contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, the Company’s policy is to fund its pension benefit obligation based on legal requirements, tax considerations and local practices.

The Company has postretirement benefit plans covering a portion of the Company’s domestic and Canadian employees. The Company’s postretirement benefit plans generally provide for the continuation of medical benefits for all eligible employees who complete ten years of service after age 45 and retire from the

~~Lear Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements — (Continued)~~

Company at age 55 or older. The Company does not fund its postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees.


	*~~Obligations and Funded Status~~*

Lear Corporation and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

Obligations and Funded Status

A reconciliation of the change in benefit obligation, the change in plan assets and the net amount recognized in the consolidated balance sheets is shown below (based on a September 30 measurement date, in millions):

December 31,

Pension Other Postretirement

2004 2003 2004 2003

Change in benefit obligation:
Benefit obligation at beginning of year $ 509.4 $ 397.2 $ 199.5 $ 181.5
Service cost 36.7 33.4 13.1 14.5
Interest cost 32.2 28.2 12.3 12.2
Amendments 8.5 4.4 (10.5 ) (35.2 )
Actuarial loss 27.8 25.5 7.0 22.5
Benefits paid (18.6 ) (15.6 ) (6.9 ) (5.4 )
Curtailment (gain) loss (1.7 ) (0.5 ) 1.4 0.5
Special termination benefits 1.0 2.3 0.2 0.2
Settlements (0.9 ) (0.9 ) — —
New plans 0.7 0.2 — —
Acquisitions 15.2 — — —
Transfers out — (0.2 ) — —
Translation adjustment 20.5 35.4 6.0 8.7

Benefit obligation at end of year $ 630.8 $ 509.4 $ 222.1 $ 199.5

Change in plan assets:
Fair value of plan assets at beginning of year $ 327.2 $ 219.6 $ — $ —
Actual return on plan assets 37.1 31.6 — —
Employer contributions 35.7 67.4 6.9 5.4
Benefits paid (18.6 ) (15.6 ) (6.9 ) (5.4 )
Settlements (0.9 ) (0.9 ) — —
Transfers out — (0.2 ) — —
Translation adjustment 14.0 25.3 — —

Fair value of plan assets at end of year $ 394.5 $ 327.2 $ — $ —

Funded status $ (236.3 ) $ (182.2 ) $ (222.1 ) $ (199.5 )
Unrecognized net actuarial loss 106.1 93.0 78.9 71.9
Unrecognized net transition (asset) obligation (0.4 ) (0.7 ) 12.7 13.4
Unrecognized prior service cost 49.4 43.9 (29.3 ) (29.3 )
Contributions between September 30 and December 31 10.2 5.6 1.8 1.3

Net amount recognized $ (71.0 ) $ (40.4 ) $ (158.0 ) $ (142.2 )

Pension Other Postretirement
December 31,
2005 2004 2005 2004

Change in benefit obligation:
Benefit obligation at beginning of year $ 630.8 $ 509.4 $ 222.1 $ 199.5
Service cost 41.0 36.7 11.7 13.1
Interest cost 37.6 32.2 13.5 12.3
Amendments 5.6 8.5 (1.0 ) (10.5 )
Actuarial loss 96.0 27.8 22.4 7.0
Benefits paid (21.6 ) (18.6 ) (7.8 ) (6.9 )
Curtailment (gain) loss (1.7 ) (1.7 ) 0.1 1.4
Special termination benefits 0.1 1.0 0.3 0.2
Settlements (1.5 ) (0.9 ) — —
New plans 0.1 0.7 — —
Acquisitions 0.4 15.2 — —
Translation adjustment 1.5 20.5 4.2 6.0

Benefit obligation at end of year $ 788.3 $ 630.8 $ 265.5 $ 222.1

Change in plan assets:
Fair value of plan assets at beginning of year $ 394.5 $ 327.2 $ — $ —
Actual return on plan assets 45.6 37.1 — —
Employer contributions 48.7 35.7 7.8 6.9
Benefits paid (21.6 ) (18.6 ) (7.8 ) (6.9 )
Settlements (1.5 ) (0.9 ) — —
Acquisitions 0.2 — — —
Translation adjustment 8.3 14.0 — —

Fair value of plan assets at end of year $ 474.2 $ 394.5 $ — $ —

Funded status $ (314.1 ) $ (236.3 ) $ (265.5 ) $ (222.1 )
Unrecognized net actuarial loss 182.9 106.1 111.3 78.9
Unrecognized net transition (asset) obligation (0.2 ) (0.4 ) 8.9 12.7
Unrecognized prior service cost 50.5 49.4 (37.1 ) (29.3 )
Contributions between September 30 and December 31 15.8 10.2 1.8 1.8

Net amount recognized $ (65.1 ) $ (71.0 ) $ (180.6 ) $ (158.0 )

Amounts recognized in the consolidated balance sheets:
Accrued benefit liability $ (228.6 ) $ (187.4 ) $ (180.6 ) $ (158.0 )
Intangible asset 48.5 43.8 — —
Accumulated other comprehensive loss 115.0 72.6 — —

Net amount recognized $ (65.1 ) $ (71.0 ) $ (180.6 ) $ (158.0 )

73
81


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, ~~2004.~~2005.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to .


Delaware		13-3386776
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

21557 Telegraph Road, Southfield, MI (Address of principal executive offices)		48034 (Zip ~~Code)~~code)


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share		New York Stock Exchange


			Page Number
			or ~~Reference (1)~~		Reference(1)

PART I
ITEM 1.	Business			3
ITEM 1A.	Risk factors			12
ITEM 1B.	Unresolved staff comments			16
ITEM 2.	Properties			1316
ITEM 3.	Legal proceedings			1517
ITEM 4.	Submission of matters to a vote of security holders			1720
SUPPLEMENTARY ITEM.
~~SUPPLEMENTARY ITEM.~~ Executive officers of the Company		1721

PART II
ITEM 5.	Market for the Company’s common ~~stock,~~equity, related stockholder matters and issuer purchases of equity securities			1923
ITEM 6.	Selected financial data			2124
ITEM 7.	Management’s discussion and analysis of financial condition and results of operations			2327
ITEM 7A.	Quantitative and qualitative disclosures about market risk (included in Item 7)
ITEM 8.	Consolidated financial statements and supplementary data			4853
ITEM 9.	Changes in and disagreements with accountants on accounting and financial disclosure			96106
ITEM 9A.	Controls and procedures			96106
ITEM 9B.	Other information			96106

PART III
ITEM 10.	Directors and executive officers of the ~~Company (2)~~Company(2)			97107
ITEM 11.	Executive ~~compensation (3)~~compensation(3)			97107
ITEM 12.	Security ownership of certain beneficial owners and management and related stockholder ~~matters (4)~~matters(4)			97107
ITEM 13.	Certain relationships and related ~~transactions (5)~~transactions(5)			98108
ITEM 14.	Principal accountant fees and ~~services (6)~~services(6)			98108

PART IV
ITEM 15.	Exhibits and financial statement schedule			98108

~~Exhibit 10.32 2005~~Certificate of Incorporation of Lear Corporation (Germany) Ltd.
Certificate of Amendment of Certificate of Incorporation of Lear Corporation (Germany) Ltd.
Amended and Restated By-laws of Lear Corporation (Germany) Ltd.
Second Amendment to the Lear Corporation Long-Term Stock Incentive Plan
2006 Management Stock Purchase Plan (U.S.) Terms and Conditions
~~Exhibit 10.33 2005~~2006 Management Stock Purchase Plan (Non-U.S.) Terms and Conditions
~~Exhibit 10.35 Estate Preservation Plan~~
~~Exhibit 10.36~~First Amendment to the Lear Corporation Executive Supplemental Savings Plan
~~Exhibit 10.37 Pension Equalization Program~~
~~Exhibit 11.1~~ Computation of Net Income ~~Per~~per Share
~~Exhibit 12.1~~ Computation of Ratios of Earnings to Fixed Charges
~~Exhibit 21.1~~ List of Subsidiaries of the Company
~~Exhibit 23.1~~ Consent of Ernst & Young LLP
~~Exhibit 31.1~~ Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
~~Exhibit 31.2~~ Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
~~Exhibit 32.1~~Section 906 Certification by Chief Executive Officer
~~Exhibit 32.2~~Section 906 Certification by Chief Financial Officer


		market for automotive manufacturers and suppliers alike. We are continuing to improve our financial results in Europe by focusing significant new product initiatives on seating ~~electronics~~ and ~~cockpit programs,~~electronics, where there are opportunities for significant scale and we have a strong competitive position. We ~~are~~have also ~~improving~~improved our overall business structure in Europe by consolidating administrative functions and reducing manufacturing costs ~~by relocating~~through the relocation and ~~expanding~~expansion of component production in countries with lower labor costs.

	•	Capitalize on Systems and Integration Opportunities. The same competitive pressures that led automotive manufacturers to outsource individual automotive interior components to independent suppliers have caused our customers to demand delivery of fully integrated automotive interior systems for new vehicle models. As automotive manufacturers continue to seek ways to differentiate their vehicles in the marketplace, improve quality and reduce costs, we believe they will increasingly seek fewer independent suppliers to manage the design, engineering, sourcing, manufacturing and delivery of fully integrated automotive interior systems. We were awarded the first-ever total interior integrator program by General Motors for the 2006 Cadillac DTS and Buick Lucerne models. We intend to leverage our leadership position in total interiors, particularly in North America, to offer one-stop interior solutions to our customers.

	•	Leverage Electronic Capabilities and Invest in Product ~~Technology and Design Capability.~~Technology. Consumers are demanding more in their automotive interiors, focusing on convenience, communication and safety, and automotive manufacturers ~~increasingly~~ view the vehicle interior as a major selling point to their customers. Because electronic products and electrical distribution systems are an important part of automotive interior systems, we seek to take advantage of our capabilities in these areas to develop new products that respond to customer and consumer demands. We will also continue to make targeted investments in technology ~~and design capabilities~~ to support our existing products,


(1)		Certain information is incorporated by reference, as indicated below, to the registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May ~~5, 2005~~11, 2006 (the “Proxy Statement”).

(2)		A portion of the information required is incorporated by reference to the Proxy Statement sections entitled “Election of Directors” and “Directors and Beneficial Ownership.”

(3)		Incorporated by reference to Proxy Statement sections entitled “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Performance Graph.”

(4)		Incorporated by reference to Proxy Statement section entitled “Directors and Beneficial Ownership — Security Ownership of Certain Beneficial Owners and Management.”

(5)		Incorporated by reference to Proxy Statement section entitled “Certain Transactions.”

(6)		Incorporated by reference to Proxy Statement section entitled “Fees of Independent Accountants.”


	•	Enhance Strong Relationships with our Customers by Focusing on Customer Service, Quality and Cost. We seek to ~~be viewed~~have our customers view us as a ~~partner to our customers.~~partner. We believe that strong relationships with our


		customers allow us to identify business opportunities and anticipate the needs of our customers in the early stages of vehicle design. Working closely with our customers in the early stages of designing and engineering automotive interior systems gives us a competitive advantage in securing new business. ~~In addition, we believe that strong design and engineering capabilities are critical to securing total interior integrator programs.~~ The keys to enhancing customer relationships are service and quality. We work to maintain an excellent reputation with our customers for timely delivery and customer service and for providing world-class quality at competitive prices. According to the ~~2004~~2005 J.D. Power and Associates Seat Quality Report^tm, we rank as the ~~highest~~ highest-


		quality major seat ~~supplier that serves multiple automotive manufacturers, achieving~~manufacturer for the fifth consecutive year and have achieved a ~~30%~~35% improvement in “Things Gone Wrong” since 1999. ~~Also in 2005, we were ranked for the third consecutive year as America’s “Most Admired” Company in the motor vehicle parts industry by~~~~Fortune~~~~magazine.~~ In recognition of our efforts, many of our facilities have won awards from automotive manufacturers. We intend to maintain and improve the quality of our products and services through our ongoing “Quality First” initiatives.


	•	Expand our Business in Asian Markets and with Asian Automotive Manufacturers Worldwide. We believe that it is important to have a manufacturing footprint that aligns with our customers’ global presence. Our ~~Asian~~ strategy includes expanding our business in Asian markets and with Asian automotive manufacturers worldwide:


	•	Expansion in Asian Markets. The Asian markets present growth opportunities, as all major global automotive manufacturers expand production in this region to meet increasing demand. In particular, the Chinese automotive market is expanding rapidly, with an estimated ~~4.8~~5.0 million units produced in ~~2004~~2005 according to J.D. Power and Associates. We seek to partner with ~~Chinese~~ automotive manufacturers in China through joint venture arrangements, and we are well-positioned to take advantage of China’s emerging growth. We currently have twelve joint ventures in China, where the majority of our production is for the local market. We are focused on ~~our core competencies, including~~ seating, electrical distribution systems, door panels and flooring and acoustics. In ~~2004, we and/or~~2005, our joint ventures in China were awarded seating business with ~~FAW-Volkswagen,~~Chang’an Ford, the joint venture between ~~Volkswagen AG~~Ford Motor Company and ~~First~~Chang’an Automobile ~~Works, China’s largest automaker,~~Co. Ltd., seating business with Beijing Hyundai Motor Co. and seating business with ~~Dongfeng Peugeot Citroen Automobile~~BMW Brilliance Automotive Co. ~~in China.~~ In addition, ~~one of our joint ventures opened an electronics plant~~Lear has established two wholly-owned subsidiaries in China to supply seats to the joint venture between First Automobile Works Group and Volkswagen and the joint venture between Shanghai ~~GM in China, Honda in Japan~~Automotive Industry Corp. and General Motors ~~in the United States. We also entered into strategic alliances to support future business with both Hyundai and Nissan in North America, Asia and Europe.~~Corporation. We also see opportunities for growth with customers in ~~Korea.~~Korea, India and elsewhere in Asia. In ~~2004,~~2005, our joint ventures were awarded seating business with General Motors/Daewoo in Korea and ~~Hyundai~~with Nissan in ~~China.~~China, India and Thailand. Finally, we have ~~a manufacturing presence in Thailand,~~significantly expanded our manufacturing and engineering operations in India and the Philippines and have maintained our strategic sales and engineering offices in Japan.

	•	Asian Automotive Manufacturers. Asian automotive manufacturers are continuing to invest and expand their manufacturing operations in Asia (especially China), North America and Europe. In ~~2004,~~2005, we expanded our business with ~~Japanese~~Asian automotive manufacturers ~~with an award of new seating business with Mazda~~ in the United States through awards and/or launches of seating and ~~by entering~~electrical business with Hyundai, seating and flooring business with Nissan and interiors business with Toyota. We have also entered into a strategic ~~alliances~~alliance to support future seating business with ~~both Hyundai and~~ Nissan in North America, Asia and Europe. We currently have ~~twenty-two~~twenty-four strategic joint ventures based in the Americas and Asia serving our Asian customers, including ~~Toyota, Honda, Nissan, Hyundai, Shanghai GM,~~ Chang’an Ford, Dongfeng Peugeot Citroen ~~Dongfeng Motor Co. and~~Automobile, Honda, Hyundai, Jiangling Motor Co. ~~In addition, many of our North American~~, Nissan, Shanghai Automotive Industry Corp., Shanghai GM and European customers have made substantial investments in, or developed joint ventures with, Asian automotive manufacturers, including General Motors’ investments in Daewoo Motor, Subaru, Suzuki Motor and Isuzu Motor; Ford’s investment in Mazda; and Renault’s investment in Nissan.Toyota. As a result of our strong customer relationships, strategic alliances and full-service capabilities, we are well-positioned to expand our business with Asian automotive manufacturers, both in Asia and elsewhere.


	•	Improve European Business Structure and Expand European Market ~~Share.~~Share of our Seating and Electronic and Electrical Segments. In Europe, the automotive market remains relatively fragmented with significant overcapacity, making Europe a difficult


		as well as our new product development efforts. The focus of our research and development efforts is to identify new interior features that make vehicles safer, more comfortable and more attractive to consumers. We believe that in order to effectively develop total automotive interiors, it is necessary to integrate the engineering, research, design, development and validation of all of the automotive interior systems. WeTo further these efforts, we conduct extensive analysis and testing of consumer responses to automotive interior styling and innovations. We also havestate-of-the-art acoustics testing and instrumentation and data analysis capabilities. We maintain six advanced technology centers and several customer-focused product engineering centers where we design and develop new products and conduct extensive product testing. In addition, our advanced technology center in Southfield, Michigan, demonstrates our ability to integrate engineering, research, design, development and validation testing capabilities ~~for all five automotive interior systems~~ at one location.


	•	Maintain ~~Flexible and~~an Efficient Cost Structure. ~~By maintaining a relatively flexible~~An efficient cost structure ~~we are better able~~is necessary to withstand fluctuations in industry demand over time, as well as changing competitive and macroeconomic conditions. Our relatively variable cost structure is maintained, in part, through ongoing ~~Six Sigma~~productivity initiatives throughout the organization, as well as initiatives to promote and enhance the sharing of technology, engineering, purchasing and capital investments across customer ~~platforms and facility consolidation actions to align our business with changing market conditions. We~~platforms. In this regard, we are working to leverage our scale and interior expertise to develop common vehicle architecture to reduce the complexity and variety of substructures that are not seen by consumers. One example is the Lear Flexible Seat Architecture, a modular system that incorporates many desired comfort and required safety features utilizing validated common components that can be packaged in multiple seat systems. The advantage is reduced design, engineering and development costs to deliver an enhanced end product with improved quality and craftsmanship. We also have a ~~low-cost country~~global sourcing strategy designed to increase our ~~global~~ competitiveness from both a manufacturing and sourcing standpoint. ~~Over sixty~~More than eighty of our facilities are currently located in low-cost ~~regions,~~countries, including Mexico, Hungary, Poland, China, South Africa, the Philippines, ~~China,~~ Honduras, ~~Slovakia, Turkey,~~ the Czech Republic, ~~Tunisia,~~Slovakia, Turkey, Romania, Morocco and ~~Romania. In an effort to continue to strengthen our relationships with~~Tunisia. We have also joined our customers ~~we have partnered with them~~ to ~~work~~ proactively to reduce costs and eliminate waste by establishing Cost Technology Optimization centers in the United States, Germany, Spain, the Philippines and Brazil. Our Cost Technology Optimization centers provide a venue where our engineers can


		~~meet~~ work with our customers to identify and address cost discrepancies among similar products and inconsistencies in features among vehicles in similar segments.

	•	~~Strategic Acquisitions. We intend~~Product-Line Focus. In response to ~~selectively pursue strategic acquisitions, where appropriate,~~the recent industry trend away from total interior integration, we are taking a more product-focused approach to ~~expand or complement~~managing our existing business while maintaining a strong balance sheet. We will focus on financially attractive acquisitions that strengthen our relationships with our customers, enhance our existing products, processes and technological capabilities or lower our costs. We expect that any such acquisitions will be consistent with our core business of providing high-quality automotive interior systems and components.business. In ~~particular, we may seek acquisitions that further our strategy of expanding our business in Asian markets and with Asian automotive manufacturers or complement our focus in Europe on~~ our seating and electronic and electrical ~~segments.~~segments, we are seeking growth by penetrating new markets and new customers, as well as through selective vertical integration. In ~~2004, we expanded~~ our electronic and electrical ~~capabilities by acquiring a~~segment, our acquisition of terminals and connectors ~~business located principally~~capabilities in ~~Europe. This acquisition provides~~Europe allows us ~~with increased technical~~to provide electrical distribution systems at lower costs to our customers. In our seating segment, we are focused on expanding our capabilities ~~to design~~in structural components and produce terminals and connectors, which represent approximately 40% of the value of a wire harness, and junction boxes containing integrated electronic functions. We plan to leverage these new capabilities on a worldwide basis.selected trim products.


—• BMW		~~— Daewoo~~		—• DaimlerChrysler		—• Dongfeng
~~— Fiat~~		—• Fiat
• First Autoworks		—• Ford		—• GAZ
~~— General Motors~~		—• General Motors
• Honda		—• Hyundai		—• Isuzu
—	• Mahindra & Mahindra
	—• Mazda		—• Mitsubishi		—• Porsche
~~— PSA~~		—• PSA
• Renault-Nissan		~~— Shanghai GM~~• Subaru		~~— Subaru~~
—• Suzuki		—• Toyota
	—• Volkswagen		~~— Volvo~~


	For the Year Ended
	December 31,

	2004			2003			2002

Seating		67	%		68	%		68	%
Interior		17			18			18
Electronic and electrical		16			14			14


For the Year Ended December 31,	2005			2004			2003

Seating		65	%		67	%		68	%
Interior		18			17			18
Electronic and electrical		17			16			14


	•	*Seating.* The seating segment consists of the manufacture, assembly and supply of vehicle seating requirements. Seat systems typically represent 30% to 40% of the total cost of an automotive interior. We produce seat systems for automobiles and light trucks that are fully assembled and ready for installation. In most cases, seat systems are designed and engineered for specific vehicle models or platforms. We have recently developed Lear Flexible Seat Architecture, whereby we can assist our customers in achieving a fastertime-to-market by building a program-specific seat incorporating the latest performance requirements and safety technology in a shorter period of time. Seat systems are designed to achieve maximum passenger comfort by adding a wide range of manual and power features, such as lumbar supports, cushion and back bolsters and leg supports.


		~~Dodge Durango use our reconfigurable seating technology, and the 2006 Ford Explorer and Dodge Durango use our thin profile seating technology for their third row seats.~~

	•	*Interior.* The interior segment consists of the manufacture, assembly and supply of interior systems and components. Interior products are designed to provide a harmonious and comfortable interior for ~~the~~ vehicle occupants, as well as a variety of functional and safety features. Set forth below is a description of our principal interior products:


	•	Instrument Panels and Cockpit Systems. The instrument panel is a complex system of coverings and foam, as well as plastic and metal parts designed to house various components and to act as a safety device for the vehicle occupant. The cockpit system consists of, among other things, the instrument panel trim/pad, structural subsystem, electrical distribution system, climate control, driver control pedals, steering controls and driver and passenger safety systems. Specific components of the cockpit system include the instrument cluster/gauges, cross car structure, electronic and electrical components, wire harness, audio system, heating, ventilation and air conditioning module, air distribution ducts, air vents, steering column and wheel and glove compartment assemblies. Airbag technologies also continue to be an important component of cockpit systems. As a result of our research and development efforts, we have introduced cost-effective, integrated, seamless airbag covers, which ~~we believe will increase occupant safety, as well as~~ provide greater styling flexibility for the automotive manufacturer. We believe that future trends in instrument panels and cockpit systems will focus on safety-related features. We have also developed Spray PUR^tm, a seamless polyurethane coating for instrument panels, which eliminates visual seams. This process ~~will be~~is currently being used on several vehicle models, including the 2006 Cadillac DTS and Buick ~~Lucerne models beginning in 2006 and the Cadillac Escalade beginning in 2007.~~Lucerne.


	•	Headliners and Overhead Systems. Overhead systems consist of a headliner, lighting, visors, consoles, wiring and electronics, as well as all other products located in the interior of the vehicle roof. Headliners consist of a substrate, as well as a finished interior layer made of a variety of fabrics and materials. While headliners are an important contributor to interior aesthetics, they also provide insulation from road noise and can serve as carriers for a variety of other components, such as visors, overhead consoles, grab handles, coat hooks, electrical wiring, speakers, lighting and other electronic and electrical products. As the amount of electronic and electrical content available in vehicles has increased, headliners have emerged as an important carrier of technology since electronic features ranging from garage door openers to lighting systems are often optimally situated in the headliner. In addition, headliners provide an important safety function by mitigating the effects of head impact. We have developed a system that molds the protective foam directly onto the back of the headliner. This system will be used on several vehicle models that are being launched in 2006.

	•	Door Panels. Door panels consist of several component parts, which are attached to a substrate by various methods. Specific components include vinyl or cloth-covered appliqués, armrests, radio speaker grilles, map pocket compartments, carpet and sound-reducing insulation. In addition, door systems often incorporate electronic products and electrical distribution systems, including lock and latch, window glass, window regulators and audio systems, as well as wire harnesses for the control of power seats, windows, mirrors and door locks. We have recently introduced a two-shot molding process that allows a door panel with multiple materials to be produced in a single injection molding machine. This technology, which results in improved craftsmanship and lower costs, will be used on several vehicle models that are being launched in 2006.

	•	Flooring and Acoustic Systems. We have an extensive and comprehensive portfolio of ~~SonoTec®~~SonoTec^® acoustic products, including flooring systems and dash insulators. These acoustic products provide noise, vibration and harshness resistance. Carpet flooring systems generally consist of tufted or non-woven carpet with a thermoplastic backcoating, which when heated, allows the carpet to be fitted precisely to the interior or trunk compartment of the vehicle. Non-carpeted flooring systems, used primarily in commercial and fleet vehicles, offer improved wear and maintenance characteristics. The dash insulator, mounted onto the firewall, separates the passenger compartment from the engine compartment and is the primary component for preventing engine noise from entering the passenger compartment.


	•	*Electronic and Electrical.* The migration from conventional electrical distribution systems to electronic products and electrical distribution systems is facilitating the integration of wiring ~~electronics~~ and ~~switch/control~~electronic products within the overall electrical architecture of a vehicle. This migration can reduce the overall system cost and weight and improve reliability and packaging by optimizing the overall system architecture and eliminating a portion of the terminals, connectors and wires normally


		required for a conventional electrical distribution system. Our umbrella technology, ~~Intertronics®~~Intertronics^®, reflects our ability to integrate electronic products with automotive interior systems. This technology is already having an impact on a number of new and next generation products. For example, our integrated seat adjuster module has two dozen fewer cut circuits and five fewer connectors, weighs a half of a pound less and costs twenty percent less than a traditional separated electronic control unit and seat wiring system. In addition, our smart junction box expands the traditional junction box functionality by utilizing printed circuit board technologies.


	•	Electrical Distribution Systems. Wire harness assemblies are a collection of terminals, connectors and wires that connect all of the various electronic/electrical devices in the vehicle to each otherand/or to a power source. Terminals and connectors are components of wire harnesses and other electronic/electrical devices that connect wire harnesses and electronic/electrical devices. Fuse boxes are centrally located boxes in the vehicle that contain fusesand/or relays for circuit and device protection, as well as power distribution. Junction boxes serve as a connection point for multiple wire harnesses. They may also contain fuses and relays for circuit and device protection. Smart junction boxes are junction boxes with integrated electronic functions, which eliminate interconnections and increase overall system reliability. Certain vehicles may have two or three smart junction boxes linked as a multiplexed buss line.


	•	Interior Control and Entertainment Systems. The instrument panel center console module provides a control panel for the entertainment system, accessory switch functions, heating, ventilation and air conditioning. The multifunction turn signal module consolidates various combinations of hazard lights, headlamps, parking lamps, fog lamps, wiper and washer, cruise control, high/low headlamp beams and turn signal functions. The integrated seat adjuster module combines seat adjustment, power lumbar support, memory function and seat heating into one package. The integrated door module consolidates the controls for window lift, door lock, power mirror and seat heating and ventilation. ~~Lear’s Intertronics Flip Pack~~^tm ~~integrates electrical and interior components and performs all power seat and power door functions from two stacked panels, improving access for drivers. The~~Our Mechatronic^tm lighting control module integrates electronic control logic and diagnostics with the headlamp switch. Entertainment products include ~~audio amplifiers, video~~sound systems, television modules and the ~~floor-mounted~~floor-, seat- or center console-mounted MediaConsole with aflip-up screen that provides DVD and video game viewing for back-seat passengers.

	•	Wireless systems. Wireless products send and receive signals using radio frequency technology. Our wireless systems include passive entry systems, dual range/dual function remote keyless entry systems and tire pressure monitoring systems. Passive entry systems allow the vehicle operator to unlock the door without using a key or physically activating a remote keyless fob. Dual range/dual function remote keyless entry systems allow a single transmitter to perform multiple ~~functions depending on the operator’s distance from the vehicle. Our~~functions. For example, our Car2U^tm remote keyless entry system can control and display the status of the vehicle, such as starting the engine, locking and unlocking the doors, opening the trunk and setting the cabin temperature. In addition, dual range/dual function remote keyless entry systems combine remote keyless operations with vehicle immobilizer capability. ~~We have also created custom key fobs with personalized decorative molding which include a wide variety of design patterns and colors, including textures, logos and text.~~ Our tire pressure monitoring system, known as the Lear ~~Intellitire®~~Intellitire^® Tire Pressure Monitoring System, alerts drivers when a tire has low pressure. ~~Intellitire has~~We have received production awards for Intellitire^® from Ford for many of their North American vehicles and from Hyundai for several models beginning in ~~2006. Some form of tire pressure monitoring system will be~~2005. Automotive manufacturers are required ~~on all new vehicles in the United States. For model year 2006, it is expected that manufacturers will need~~ to ~~include~~have tire pressure monitoring systems on ~~50%~~a portion of new vehicles ~~increasing to 100%~~sold in the United States beginning with model year 2006 and on all new vehicles sold in the United States by model year 2008.


	•	*Seating.* Our seating facilities generally usejust-in-time manufacturing techniques, and products are delivered to the automotive manufacturers on ajust-in-time basis. These facilities are typically located near our customers’ manufacturing and assembly sites. Our seating facilities utilize a variety of methods whereby foam and fabric are affixed to an underlying seat frame. Raw materials used in our seat systems, including steel, aluminum and foam chemicals, are generally available and obtained from multiple suppliers under various types of supply agreements. Leather, fabric and certain components are also purchased from multiple suppliers under various types of supply agreements. The majority of our steel purchases are comprised of engineered parts that are integrated into a seat system, such as seat frames, mechanisms and mechanical components. Therefore, our exposure to changes in steel prices is primarily indirect, through the supply base. ~~Historically, these purchased components have not been covered by~~We are increasingly using long-term, fixed-price supply ~~agreements.~~agreements to purchase key components. We generally retain the right to terminate these agreements if our supplier does not remain competitive in terms of cost, quality, delivery, technology or customer support.

	•	*Interior.* Our interior systems process capabilities include injection molding, low-pressure injection molding, blow molding, compression molding, rotational molding, urethane foaming and vacuum forming, as well as various trimming and finishing methods. Raw materials, including resin and chemical products, and finished components are assembled into end products and are obtained from multiple suppliers, under supply agreements which typically last for up to one year. In addition, we produce carpet at one North American plant.

	•	*Electronic and Electrical.* Electrical distribution systems are networks of wiring and associated control devices that route electrical power and signals throughout the vehicle. Wire harness assemblies consist of raw, coiled wire, which is automatically cut to length and terminated. Individual circuits are assembled together on a jig or table, inserted into connectors and wrapped or taped to form wire harness assemblies. All materials are purchased from suppliers, with the exception of a portion of the terminals and connectors that are produced internally. Certain materials are available from a limited number of suppliers. Supply agreements typically last for up to one year. The assembly process is labor intensive, and as a result,


		production is generally performed in low-cost labor sites in Mexico, Honduras, the Philippines, Eastern Europe and Northern Africa.


	Some of the principal components attached to the wire harness assemblies that we manufacture include junction boxes, electronic control modules and switches. Junction boxes are manufactured in both North America and Europe with a proprietary, capital-intensive assembly process, using printed circuit boards purchased from selected suppliers. Proprietary processes have been developed to improve the function of these junction boxes in harsh environments, including high temperatures and humidity. Electronic control modules are assembled using high-speed surface mount placement equipment in both North America and Europe. Switches are assembled from electrical, mechanical and decorated plastic parts purchased in the United States, Mexico and Europe, using a combination of manual and automated assembly and test methods.

	While we internally manufacture many of the components that are described above, a substantial portion of these components are furnished by independent, tier II automotive suppliers and other vendors throughout the world. In certain instances, it would be difficult and expensive for us to change suppliers of products and services that are critical to our business. With the recent decline in automotive production and substantial and continuing pressures to reduce costs, certain of our suppliers have experienced, or may experience, financial difficulties. We seek to carefully manage our supplier relationships to minimize any significant disruptions of our operations. However, adverse developments affecting one or more of our major suppliers, including certain sole-source suppliers, could negatively impact our operating results. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors — Adverse developments affecting one or more of our major suppliers could harm our profitability.”


	•	*Seating.* We are one of two primary independent suppliers in the outsourced North American seat systems market. Our primary independent competitor in this market is Johnson Controls. Intier Automotive (the automotive interior segment of Magna International Inc.) and Faurecia also have a presence in this market. Our major independent competitors ~~in Europe~~ are Johnson Controls and ~~Faurecia.~~Faurecia in Europe and Johnson Controls, TS Tech Co., Ltd. and Toyota Boshoku in Asia.

	•	*Interior.* We are one of three primary independent suppliers in the outsourced North American flooring and acoustic systems market, as well as one of the largest global suppliers of door panels and headliners and overhead systems. Our primary independent competitors in the flooring and acoustic systems market are Collins & Aikman and Rieter Automotive. Our major independent competitors in the remaining interior markets include Johnson Controls, Intier, Faurecia, Collins & Aikman, Visteon, Delphi and a large number of smaller operations.

	•	*Electronic and Electrical.* We are one of the leading independent suppliers of automotive electrical distribution systems in North America and Europe. Our major competitors in this market include Delphi, Yazaki, Sumitomo, Alcoa-Fujikura and Valeo. However, the automotive electronic products industry remains highly fragmented. Participants in this segment include Alps, Bosch, Cherry, Delphi, Denso, Kostal, Methode, Niles, Omron, Siemens VDO, TRW, Tokai Rika, Valeo, Visteon and others.


~~ITEM 4 —~~	*~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~*


Name	Age			Position

Shari L. Burgess		4647	Vice President and Treasurer

Douglas G. DelGrosso		4344	President and Chief Operating Officer ~~— Americas~~

~~William C. Dircks~~		44	~~Vice President and Corporate Controller~~

Roger A. Jackson		5859	Senior Vice President — Human Resources
James L. Murawski		54	Vice President and Corporate Controller
Daniel A. Ninivaggi		4041	Senior Vice President, Secretary and General Counsel

Robert E. Rossiter		5960	Chairman and Chief Executive Officer

~~Donald J. Stebbins~~Raymond E. Scott		4740		Senior Vice President and ~~Chief Operating Officer — Europe, Asia and Africa~~President, North American Customer Group
Matthew J. Simoncini		45	Vice President of Global Finance
James H. Vandenberghe		5556	Vice Chairman

David C. Wajsgras		4546	Executive Vice President and Chief Financial Officer
P. Joseph Zimmer		47	Senior Vice President and ~~Chief Financial Officer~~President, Global Seating Systems Product Group


Shari L. Burgess		Ms. Burgess is our Vice President and Treasurer, a position she has held since August 2002. Previously, she served as our Assistant Treasurer since July 2000 and in various financial positions since November 1992.

Douglas G. DelGrosso		Mr. DelGrosso is our President and Chief Operating Officer, ~~— Americas,~~ a position he has held since ~~August 2004.~~May 2005. Previously, he served as our President and Chief Operating Officer — Americas since August 2004, our President and Chief Operating Officer — Europe, Asia and Africa since August 2002, our Executive Vice ~~Presi-~~


		~~dent~~President — International since September 2001, our Senior Vice President — Product Focus Group since October 2000 and our Senior Vice President and President — North American and South American Operations since May 1999, our Senior Vice President — Interior Systems Group and Seat Trim Division since January 1999, our Vice President and President — GM Division since May 1997 and our Vice President and President — Chrysler Division since December 1995.

~~William C. Dircks~~		~~Mr. Dircks is our Vice President and Corporate Controller, a position he has held since May 2002. Previously, he served as our Assistant Corporate Controller since May 2000.~~1999. Prior to ~~joining~~this, Mr. DelGrosso held several senior operational positions and has been employed by Lear ~~Mr. Dircks was employed in various financial positions at Honeywell International Inc., including Corporate Finance Director for Enterprise Resource Planning.~~since 1984.

Roger A. Jackson		Mr. Jackson is our Senior Vice President — Human Resources, a position he has held since October 1995. Prior to joining Lear, he was employed as Vice President — Human Resources at Allen Bradley, a ~~wholly—owned~~wholly-owned subsidiary of Rockwell International, since 1991. Mr. Jackson was employed by Rockwell International or one of its subsidiaries from December 1977 until September 1995.

James L. Murawski		Mr. Murawski is our Vice President and Corporate Controller, a position he has held since March 2005. Previously, he served as our Vice President of Internal Audit since June 2003. Prior to joining Lear, Mr. Murawski was employed in public accounting at Deloitte & Touche for fourteen years and in various financial positions at Collins & Aikman Corporation, TRW Automotive and LucasVarity.

Daniel A. Ninivaggi		Mr. Ninivaggi is our Senior Vice President, Secretary and General Counsel. He has been Senior Vice President since June 2004 and


ITEM 5 —	*MARKET FOR THE COMPANY’S COMMON ~~STOCK,~~EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*


	Price Range of
	Common Stock				Cash Dividend
For the Year Ended December 31, 2005:	High		Low		per Share

4^th Quarter	$	33.50	$	27.09	$	0.25
3^rd Quarter	$	42.77	$	32.43	$	0.25
2^nd Quarter	$	44.29	$	33.89	$	0.25
1^st Quarter	$	60.05	$	43.96	$	0.25