INVENTORIES

Inventories consist of the following:



	March 31, 2017		December 31, 2016
In thousands
Merchandise for resale	$	154,397	$	158,618
Raw materials	18,977		20,592
Contracts and other work in process (including certain general stock materials)	187,716		189,295
Finished goods	29,057		25,309
Total	$	390,147	$	393,814

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



	March 31, 2017		December 31, 2016
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	3,788	$	3,629

K-MAX® inventory of $16.3 million and $15.9 million as of March 31, 2017, and December 31, 2016, 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 March 31, 2018, based upon the anticipation of additional aircraft manufacturing and supporting the fleet for the foreseeable future.

At March 31, 2017, and December 31, 2016, $7.0 million and $7.2 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 $3.7 million of the SH-2G(I) inventory will be sold after March 31, 2018. This balance represents spares requirements and inventory to be used on SH-2G programs.

6. INVENTORIES (CONTINUED)

At March 31, 2017, backlog for the A-10 program with Boeing was $3.8 million, representing 8 shipsets, and total program inventory was $11.1 million, of which $8.2 million is associated with nonrecurring costs. Through March 31, 2017, the Company has delivered 165 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. The Company has not received any orders for additional shipsets in 2017, and as such, expects a break in production as it completes the units currently on order and waits for follow-on orders from the customer. The customer has not given any indication that this program will be terminated. Final production and deliveries of existing orders under this contract are anticipated to be completed during the second 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 an extended 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 fiscal period ended March 31, 2017, there was a net increase in the Company's operating income attributable to changes in contract estimates of $1.0 million. This increase was primarily a result of improved performance on the JPF and AH-1Z programs. These improvements were partially offset by cost growth on the K-MAX® program. There was a net decrease in the Company's operating income from changes in contract estimates of $1.0 million for the three-month fiscal period ended April 1, 2016. This decrease was primarily a result of cost growth on the Boeing 767/777 program.