Caterpillar Inc. (CAT) reported lower-than-expected quarterly earnings on Thursday as higher raw material prices and retirement benefits hurt profits, sending its shares down more than 4 percent.

While fourth-quarter profits surged nearly 60 percent on strong demand, Chairman and Chief Executive Officer Jim Owens said he was not satisfied with the performance at the world's largest maker of construction machinery.

"While we remain committed to satisfying our customers, we're disappointed with our cost structure, particularly steel-related costs," and manufacturing bottlenecks due to component shortages, Owens said in statement.

The stock, a component of the Dow Jones industrial average (search), dragged down other construction equipment stocks as well as the broader market.

Net income increased to $551 million, or $1.55 a share, from $349 million, or 97 cents a share, in the year-earlier period. Analysts' estimates had ranged from $1.57 to $1.70 a share for an average of $1.63 a share, according to Reuters Estimates.

Sales and revenue increased to $8.57 billion from $6.46 billion, beating expectations.

Caterpillar attributed higher operating expenses in the quarter to higher material costs, especially steel, and higher freight and expediting costs to ensure timely delivery of material.

Machinery operating profit of $1.83 billion was up 46 percent from the year-earlier level, while profits at its engines unit more than doubled to $597 million from $188 million.

At its financial products unit, operating profit increased 27 percent to $437 million.

Caterpillar and other machinery companies have been enjoying an unprecedented surge in orders as the recovering U.S. economy has prompted construction companies to replace aging equipment. Increased steel prices have also stimulated mining activity.

Analysts said they were disappointed that Caterpillar has not been able to translate that surge into profits.

"They've been struggling all year with some of these raw material issues and management keeps promising that they're going to push these bottlenecks through," said Scott Burns, an analyst with Morningstar. "It doesn't look like it's translating as well as I think people were promised."

He noted that some of Caterpillar's orders, ironically, are the result of those higher steel prices, which has sparked increased mining and boosted machinery demand.

"These high steel prices aren't going anywhere," Burns said. "They've announced some price increases but I think they need to step that up."

Analysts noted that Caterpillar also increased its 2005 earnings outlook, although it said it expects the second half of the year to be stronger than the first as material cost pressures improve.

The Peoria, Ill.-based company said it expects profit per share to increase about 25 percent, with sales and revenue up 12 percent to 15 percent.

It had said in December that it expected 2005 revenue to be up about 10 percent, with "record" per-share profit.

Analysts' full-year estimates ranged from $6.70 to $7.85 a share, averaging $7.25 a share, according to Reuters Estimates.

"It's good news/bad news situation," said Mark Koznarek, an analyst with FTN Midwest Securities who has a "neutral" rating on the stock.

"The revenue outlook is substantially better than they had indicated back in October," he said, noting the company is expecting much more strength in North America that it did previously.

"The disappointment is the leverage, which is phenomenally low," he said, noting the sale/profits ratio should be closer to 3-to-1 or 4-to-1. "Sales up 12 to 15 percent and earnings up 25 (percent). That's got people thinking that we're missing a sizable profit opportunity here."

Caterpillar shares fell $4.10, or 4.5 percent, to $87.04 on the New York Stock Exchange (search) . Terex Corp.(TEX) shares declined 85 cents, or 1.97 percent to $42.40.

Among agricultural equipment makers, Deere & Co. (DE) fell $1.18 to $66.53, Agco Corp. (AG) dropped 59 cents to $19.75 and CNH Global (CNH) declined 13 cents to $17.62.