American Axle & Manufacturing Holdings , a Delaware corporation, is a successor to American Axle & Manufacturing of Michigan, Inc., a Michigan corporation, pursuant to a migratory merger between these entities in 1999.
In 2008, and continuing in 2009, the domestic automotive industry experienced a severe downturn. The collapse of the U.S. housing market, the global financial crisis, a lack of available consumer credit and financing options, rising unemployment, exceptionally low consumer confidence and wildly fluctuating fuel and commodity prices, among other factors, resulted in a sudden and major drop in industry production and sales volumes. These difficult market conditions exacerbated the financial pressure on the entire domestic automotive industry, and especially the domestic original equipment manufacturers (OEMs), resulting in the unprecedented bankruptcy filings by General Motors and Chrysler. The U.S. seasonally adjusted annual rate of sales (SAAR) declined from 16.1 million units in 2007 to 13.2 million in 2008 and 10.4 million in 2009 – the lowest U.S. domestic auto industry selling rate in over 25 years.
As part of the restructuring activities by our largest customers, GM implemented an extended summer production shutdown in the second and third quarters of 2009 for many of their facilities we support and Chrysler temporarily idled its manufacturing operations through its exit from bankruptcy.
On September 16, 2009, AAM and GM entered into a settlement and commercial agreement (2009 Settlement and Commercial Agreement). As part of the 2009 Settlement and Commercial Agreement we received $110.0 million from GM for cure costs associated with contracts assumed and/or terminated during GM’s chapter 11 bankruptcy proceedings and resolved certain commercial and financial obligations then outstanding between AAM and GM, which resulted in, among other things, AAM retaining all but one program that had previously been sourced to us and an adjustment of our installed capacity levels reserved for existing and awarded GM programs to reflect new estimates of market demand. Also, as part of this agreement, we entered into a $100.0 million second lien term loan facility with GM, issued 4.1 million warrants to GM to purchase AAM common stock, and expedited the payment terms on our receivables from GM from approximately 45 days to approximately 10 days in exchange for a 1% early payment discount. See Item 8, “Financial Statements and Supplementary Data – Note 2 – 2009 Settlement and Commercial Agreement” for more detail.
We are a Tier I supplier to the automotive industry. We manufacture, engineer, design and validate driveline and drivetrain systems and related components and chassis modules for light trucks, sport utility vehicles (SUVs), passenger cars, crossover vehicles and commercial vehicles. Driveline and drivetrain systems include components that transfer power from the transmission and deliver it to the drive wheels. Our driveline, drivetrain and related products include axles, chassis modules, driveshafts, power transfer units, transfer cases, chassis and steering components, driveheads, crankshafts, transmission parts and metal-formed products.
We are the sole-source supplier to GM for certain axles and other driveline products for the life of each GM vehicle program which was previously covered by a Lifetime Program Contract (LPC). As part of the 2009 Settlement and Commercial Agreement, GM terminated the existing LPCs and entered into new LPCs. Substantially all of our sales to GM are made pursuant to the new LPCs. The new LPCs have terms equal to the lives of the relevant vehicle programs or their respective derivatives, which typically run 6 to 10 years, and require us to remain competitive with respect to technology, design and quality.
We are also the principal supplier of driveline system products for Chrysler’s heavy-duty Dodge Ram full-size pickup trucks (Dodge Ram program) and its derivatives. Sales to Chrysler were approximately 8% of our total net sales in 2009, 10% in 2008 and 12% in 2007.
In addition to GM and Chrysler, we supply driveline systems and other related components to PACCAR Inc., Volkswagen, Harley-Davidson, Deere & Company, Tata Motors, Mack Truck, Ford Motor Company and other OEMs and Tier I supplier companies such as Hino Motors Ltd. and Jatco Ltd. Our net sales to customers other than GM and Chrysler were approximately 14% of sales in 2009 as compared to 16% in 2008 and 10% in 2007.
Our principal served market of $34 billion, as estimated based on information available at the end of 2008, is the global driveline market, which consists of driveline, drivetrain and related components and chassis modules for light trucks, SUVs, passenger cars, crossover vehicles and commercial vehicles.
We are focused on increasing our net sales, profitability and cash flow, and strengthening our balance sheet by providing exceptional value to our customers, capitalizing on our competitive strengths and continuing to diversify our customer, product, and geographic sales mix. In 2006, we initiated a Restructuring, Resizing, and Profit Recovery plan in order for us to achieve a cost structure in line with current and projected levels of customer demand and market requirements. The comprehensive, multi-year plan has proven successful, yielding significant, permanent structural cost reductions and driving our operating breakeven level down to a U.S. SAAR equivalent of approximately 10 million vehicle units. These actions position us to significantly improve profitability and free cash flow performance as global economic conditions improve.
While continuing to emphasize our outstanding track record of operational excellence, we are now focused on accelerating progress on two critical business objectives: profitable growth and business diversification.We have invested more than $830 million in research and development since 1994, resulting in the development of products with industry leading technology for driveline and drivetrain systems and related components for light trucks, SUVs, passenger cars, crossover vehicles, and commercial vehicles.
We have accelerated the development and launch of products for passenger cars and crossover vehicles and the global light truck and commercial vehicle markets. As of February 5, 2010, we had approximately $1.0 billion of new and incremental business backlog launching from 2010 to 2014, of which approximately 45% relates to AWD and RWD applications for passenger cars and crossover vehicles and of which approximately 35% relates to driveline applications for the global non-U.S. light truck and commercial vehicle markets.
Growing new customer relationships to continue the diversification of our customer base and product portfolio. We have focused on generating profitable growth with new and existing global OEM customers, as well as commercial vehicle, off-road, and emerging market OEMs. As a result, new business launches in 2010 and 2011 include business with Volkswagen, Audi, Nissan, Mack Truck, Tata Motors, Brilliance China Automotive Co., Ltd., Chery Automobile Co., Ltd., and Mahindra Navistar Automotives Ltd.
We have more than doubled our global installed capacity to support current and future opportunities. Specific actions include expanding facilities in Mexico, Brazil, and Poland, increasing our investment in our China joint venture, and constructing new facilities in India and Thailand. As of February 5, 2010, approximately 70% of our $1.0 billion of new and incremental business backlog launching from 2010 to 2014 is for end use markets outside of North America and approximately 80% has been sourced to our manufacturing facilities outside the U.S.
Sustaining our operational excellence and focus on cost management to deliver exceptional value to our customers and enhance profitability. Our focus on cost management has led to annual structural labor cost reductions in excess of $700 million due to our 2008 labor agreements at our original U.S. locations, reductions in our salaried workforce, and other labor, benefits, and selling, general and administrative spending cuts.