INVENTORIES

Inventories consist of the following:



	September 26, 2014		December 31, 2013
In thousands
Merchandise for resale	$	152,348	$	152,194
Raw materials	22,600		20,609
Contracts and other work in process	192,999		205,220
Finished goods (including certain general stock materials)	11,354		12,472
Total	$	379,301	$	390,495

Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:



	September 26, 2014		December 31, 2013
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	9,308	$	11,581
Total	$	9,308	$	11,581

The reduction in this balance is due to the settlement of a claim related to a commercial composite structures program.

K-MAX® inventory of $18.0 million and $17.0 million as of September 26, 2014, and December 31, 2013, respectively, is included in contracts and other work in process inventory and finished goods. Management believes that a significant portion of this K-MAX® inventory will be sold after September 26, 2015, based upon the anticipation of supporting the fleet for the foreseeable future.

At September 26, 2014, and December 31, 2013, $30.7 million and $43.8 million, respectively, of SH-2G(I), formerly SH-2G(A), inventory was included on the Company's balance sheet in contracts and other work in process inventory. On May 8, 2013, the Company announced that it had entered into a $120.6 million contract with the New Zealand Ministry of Defence for the sale of ten SH-2G(I) Super Seasprite aircraft, spare parts, a full mission flight simulator, and related logistics support. Although a substantial portion of the SH-2G(I) inventory will be used in the performance of this contract, management believes that $6.5 million of the SH-2G(I) inventory will be sold after September 26, 2015, based upon the time needed to prepare the aircraft for sale and the requirements of our customer.

Long-term Contracts

For long-term aerospace contracts, the Company generally recognizes revenue and cost based on the percentage-of-completion method of accounting, which allows for recognition of revenue as work on a contract progresses. The Company recognizes revenues and cost based on either (1) the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to estimated total costs to complete the contract, or (2) the units-of-delivery method, in which sales are recognized as deliveries are made and cost of sales is computed on the basis of the estimated ratio of total cost to total sales.

8. INVENTORIES (CONTINUED)

Long-term Contracts - continued

Revenue and cost estimates for all significant long-term contracts for which revenue is recognized using the percentage-of-completion method of accounting are reviewed and reassessed quarterly. Based upon these reviews, the Company records the effects of adjustments in profit estimates each period. If at any time the Company determines that in the case of a particular contract total costs will exceed total contract revenue, the Company will record a provision for the entire anticipated contract loss at that time. There was a net increase to the Company's operating income from changes in contract estimates of $1.3 million and $1.5 million, respectively, for the three-month and nine-month periods ended September 26, 2014. The increases were primarily a result of improved performance on the New Zealand SH-2G(I) program, the Joint Programmable Fuze ("JPF") program and a mix of other legacy fuze and composite programs. These improvements were slightly offset by cost growth on the Sikorsky BLACK HAWK helicopter program and Boeing A-10 program. There was a net decrease to the Company's operating income from changes in contract estimates of $0.1 million and $2.8 million, respectively, for the three-month and nine-month periods ended September 27, 2013. These decreases were a result of cost growth due to revised estimates in various programs, including the Sikorsky BLACK HAWK helicopter program, Bell helicopter offload program and a fuze program.