INVENTORIES

Inventories consist of the following:



	September 30, 2016		December 31, 2015
In thousands
Merchandise for resale	$	147,437	$	161,691
Raw materials	20,647		24,721
Contracts and other work in process	198,595		176,130
Finished goods (including certain general stock materials)	27,544		23,205
Total	$	394,223	$	385,747

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



	September 30, 2016		December 31, 2015
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	4,077	$	7,137

K-MAX® inventory of $15.4 million and $14.9 million as of September 30, 2016, and December 31, 2015, respectively, was included in contracts and other work in process inventory and finished goods on the Company's Condensed Consolidated Balance Sheet. These amounts exclude the inventory associated with our new build aircraft currently under contract. Management believes that a significant portion of this K-MAX® inventory will be sold after September 30, 2017, based upon the anticipation of additional aircraft manufacturing and supporting the fleet for the foreseeable future.

7. INVENTORIES (CONTINUED)

At September 30, 2016, and December 31, 2015, $7.6 million and $9.0 million, respectively, of SH-2G(I) inventory was included in contracts and other work in process inventory on the Company's Condensed Consolidated Balance Sheet. Management believes that approximately $3.8 million of the SH-2G(I) inventory will be sold after September 30, 2017. This balance represents spares requirements and inventory to be used on SH-2G programs.

At September 30, 2016, backlog for the A-10 program with Boeing was $7.1 million, representing 15 shipsets, and total program inventory was $12.7 million, of which $8.8 million is associated with nonrecurring costs. Through September 30, 2016, the Company has delivered 158 shipsets over the life of the program. During 2016, the U.S. Air Force ("USAF") indicated that they would delay the retirement of the A-10 fleet due to its vital close air support, search and rescue capabilities and the lack of a suitable replacement. The Company continues to monitor the defense budget and understands that despite this positive indication, the future of this program could be at risk without the continued support of Congress. As of the date of this filing, the Company believes congressional support remains strong and it has confidence that this program will continue. The Company has not received any orders for additional shipsets in 2016; however, the customer has not given any indication that this program will be terminated. Production and deliveries under this contract have been extended through the first quarter of 2017. Tooling and nonrecurring costs on this program are being amortized over 242 shipsets, the number of shipsets under the program of record. These nonrecurring costs may not be recoverable in the event of a significant break in production or contract termination prior to the completion of the 242 shipsets.

Long-term Contracts

For long-term aerospace contracts, the Company generally recognizes revenue and cost of sales using 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 of sales based on either (1) the cost-to-cost method, in which case 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 case 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.

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. For the three-month and nine-month fiscal periods ended September 30, 2016, there were net decreases in the Company's operating income attributable to changes in contract estimates of $1.3 million and $3.9 million, respectively. These decreases were primarily a result of cost growth on various programs, including the Boeing 767/777 program, the A-10 program and a composites assembly program. For the nine-month fiscal period, these decreases were partially offset by improved performance on the Joint Programmable Fuze ("JPF") program. There were increases in the Company's operating income from changes in contract estimates of $2.1 million and $5.0 million for the three-month and nine-month fiscal periods ended October 2, 2015. The increases were primarily a result of improved performance on the JPF program and another legacy bomb fuze program.