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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2005
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             

PRAXAIR, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
(State or Other jurisdiction of incorporation)
 
1-11037
 
06-1249050
(Commission File Number)
 
(IRS Employer Identification No.)
 
 
 
39 OLD RIDGEBURY ROAD, DANBURY, CT
 
06810-5113
(Address of principal executive offices)
 
(Zip Code)
 
(203) 837-2000
(Registrant’s telephone number, including area code)
 
N/A
(Former name or former address, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x    No  ¨

At March 31, 2005, 323,482,263 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 
 
 
 
1

INDEX
     
     
     
     
PAGE
     
Financial Statements
  
     
 
Consolidated Statements of Income - Praxair, Inc. and Subsidiaries
Quarter Ended March 31, 2005 and 2004 (Unaudited)
 
3
     
 
Condensed Consolidated Balance Sheets - Praxair, Inc. and Subsidiaries
March 31, 2005 and December 31, 2004 (Unaudited)
 
4
     
 
Condensed Consolidated Statements of Cash Flows - Praxair, Inc. and Subsidiaries
Quarter Ended March 31, 2005 and 2004 (Unaudited)
 
5
     
 
Consolidated Statement of Shareholders’ Equity - Praxair, Inc. and Subsidiaries
Quarter Ended March 31, 2005 (Unaudited)
 
6
     
 
Notes to Condensed Consolidated Financial Statements - Praxair, Inc.
and Subsidiaries (Unaudited)
 
7
     
Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
13
     
Quantitative and Qualitative Disclosures about Market Risk
20
     
Controls and Procedures
20
     
 
     
Legal Proceedings
21
     
Unregistered Sales of Equity Securities and Use of Proceeds
21
     
Defaults Upon Senior Securities
21
     
Submission of Matters to a Vote of Security Holders
21
     
Other Information
21
     
Exhibits
22
     
23
     
 
 
  

 
 
 
2
 
PART I - FINANCIAL INFORMATION

Praxair, Inc. and Subsidiaries

Item 1. Financial Statements

 
PRAXAIR, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF INCOME
  
(Millions of dollars, except per share data)
  
(UNAUDITED)
  
           
           
           
   
Quarter Ended March 31,
  
   
2005
  
2004
  
           
SALES
  
$
1,827
  
$
1,531
  
Cost of sales, exclusive of
             
     depreciation and amortization
    
1,109
   
908
 
Selling, general and administrative
    
245
   
204
 
Depreciation and amortization
    
162
   
139
 
Research and development
    
20
   
19
 
Other income (expense) - net
    
18
   
(1
)
OPERATING PROFIT
    
309
   
260
 
Interest expense - net
    
42
   
37
 
INCOME BEFORE INCOME TAXES
    
267
   
223
 
Income taxes
    
69
   
56
 
     
198
   
167
 
Minority interests
    
(7
)
  
(6
)
Income from equity investments
    
4
   
3
 
NET INCOME
 
$
195
  
$
164
  
               
PER SHARE DATA:
              
               
Basic earnings per share
  
$
0.60
  
$
0.50
  
               
Diluted earnings per share
  
$
0.59
  
$
0.49
  
               
Cash dividends per share
  
$
0.18
  
$
0.15
  
               
WEIGHTED AVERAGE SHARES OUTSTANDING (000's):
              
Basic shares outstanding
    
323,818
   
326,394
 
Diluted shares outstanding
    
329,669
   
331,573
 
               
The accompanying notes are an integral part of these financial statements.



 
 
3

PRAXAIR, INC. AND SUBSIDIARIES
  
CONDENSED CONSOLIDATED BALANCE SHEETS
  
(Millions of dollars)
  
(UNAUDITED)
  
           
           
           
           
           
   
March 31,
  
December 31,
  
   
2005
  
2004
  
           
ASSETS
              
               
Cash and cash equivalents
  
$
26
  
$
25
  
Accounts receivable - net
    
1,264
    
1,231
  
Inventories
    
340
    
328
  
Prepaid and other current assets
    
143
    
160
  
     TOTAL CURRENT ASSETS
    
1,773
    
1,744
  
               
Property, plant and equipment - net
    
5,886
    
5,946
  
Goodwill
    
1,532
    
1,551
  
Other intangible assets
    
82
    
88
  
Other assets
    
559
    
549
  
     TOTAL ASSETS
  
$
9,832
  
$
9,878
  
               
LIABILITIES AND EQUITY
              
               
Accounts payable
  
$
541
  
$
502
  
Short-term debt
    
420
    
454
  
Current portion of long-term debt
    
188
    
195
  
Other current liabilities
    
678
    
724
  
     TOTAL CURRENT LIABILITIES
    
1,827
    
1,875
  
               
Long-term debt
    
2,841
    
2,876
  
Other long-term obligations
    
1,292
    
1,294
  
     TOTAL LIABILITIES
    
5,960
    
6,045
  
               
Commitments and contingencies (Note 9)
              
               
Minority interests
    
221
    
225
  
Shareholders' equity
    
3,651
    
3,608
  
     TOTAL LIABILITIES AND EQUITY
  
$
9,832
  
$
9,878
  
           
 
               
The accompanying notes are an integral part of these financial statements.
 

 
 
4
 
PRAXAIR, INC. AND SUBSIDIARIES
  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(Millions of dollars)
  
(UNAUDITED)
  
           
           
           
           
   
Quarter Ended
March 31,
  
   
2005
  
2004
  
OPERATIONS
              
  Net income
  
$
195
  
$
164
  
  Adjustments to reconcile net income to net cash
             
  provided by operating activities:
              
    Depreciation and amortization
    
162
   
139
 
    Deferred income taxes
    
35
   
8
 
    Other non-cash charges
    
(3
)
  
(7
)
    Working capital
    
(60
)
  
(104
)
    Long-term assets, liabilities and other
    
(40
)
  
(19
)
        Net cash provided by operating activities
    
289
   
181
 
               
INVESTING
              
  Capital expenditures
   
(165
)
  
(124
)
  Acquisitions
    
(2
)
  
-
 
  Divestitures and asset sales
    
13
   
14
 
        Net cash used for investing activities
    
(154
)
  
(110
)
               
FINANCING
              
  Short-term repayments - net
    
(33
)
  
(2
)
  Long-term borrowings
    
5
   
108
 
  Long-term debt repayments
    
(12
)
  
(80
)
  Minority interest transactions and other
    
(4
)
  
(3
)
  Issuance of common stock
    
61
   
66
 
  Purchases of common stock
    
(92
)
  
(123
)
  Cash dividends
    
(58
)
  
(49
)
        Net cash used for financing activities
   
(133
)
  
(83
)
               
Effect of exchange rate changes on cash and
              
    cash equivalents
    
(1
)
  
(1
)
Change in cash and cash equivalents
    
1
   
(13
)
Cash and cash equivalents, beginning-of-period
    
25
   
50
 
Cash and cash equivalents, end-of-period
  
$
26
  
$
37
  
               
               
               
 The accompanying notes are an integral part of these financial statements.
 
5
PRAXAIR, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
  
(Dollar amounts in millions, except share data, shares in thousands)
  
(UNAUDITED)
  
                         
 Accumulated
    
           
Additional
            
 Other
    
   
Common Stock
  
Paid-In
  
Treasury Stock
  
Retained
 Comprehensive
    
Activity
  
Shares
  
Amounts
  
Capital
  
Shares
  
Amounts
  
Earnings
 Income (Loss)(b)
Total
  
                                   
Balance, January 1, 2005
    
359,791
  
$
4
  
$
2,314
    
36,170
 
$
(1,059
)
$
3,529
  
$
(1,180
)
$
3,608
  
                                                   
Net income
                                  
195
         
195
 
                                                   
Translation adjustments
                                        
(69
)
  
(69
)
                                                   
Derivative instruments,
                                                  
  net of tax
                                        
1
    
1
  
Minimum pension liability,
                                                  
  net of $1 million taxes
                                        
(2
)
  
(2
)
Comprehensive income(a)
                                              
125
 
                                                   
Dividends on common stock
   ($0.18 per share)
                                  
(58
)
        
(58
)
                                                   
Issuances of common stock:
                                                  
  For the dividend reinvestment
                                                  
    and stock purchase plan
    
25
                                            
                                                   
  For employee savings and
                                                  
    incentive plans
    
1,232
          
48
    
(712
)
  
21
               
69
 
                                                   
Purchases of common stock
                      
2,108
   
(93
)
              
(93
)
                                                   
Balance, March 31, 2005
    
361,048
  
$
4
  
$
2,362
    
37,566
 
$
(1,131
)
$
3,666
  
$
(1,250
)
$
3,651
  
                                                   

(a) The components of comprehensive income are as follows:
  
   
Quarter Ended March 31,
  
   
2005
  
2004
  
           
    Net income
  
$
195
  
$
164
  
    Translation adjustments
    
(69
)
  
(5
)
    Derivative Instruments
    
1
   
-
 
    Minimum pension liability
    
(2
)
  
(7
)
 
  
$
125
  
$
152
  
               

(b) The components of accumulated other comprehensive income (loss) are as follows:
  
   
March 31,
2005
  
December 31,
2004
  
           
   Accumulated translation adjustments
  
$
(1,091
)
$
(1,022
)
   Accumulated minimum pension liability
    
(159
)
  
(157
)
   Accumulated derivatives
    
-
    
(1
)
   
$
(1,250
)
$
(1,180
)
 
The accompanying notes are an integral part of these financial statements.
6
PRAXAIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.  
Summary of Significant Accounting Policies 

Presentation of Condensed Consolidated Financial Statements - - In the opinion of Praxair, Inc. (Praxair) management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods presented and such adjustments are of a normal recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to the consolidated financial statements of Praxair, Inc. and subsidiaries in Praxair's 2004 Annual Report.

Stock-Based Compensation - Praxair accounts for incentive plans and stock options using the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Pro forma information required by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, requires Praxair to disclose pro forma net income and pro forma earnings per share amounts as if compensation expense was recognized. Pro forma net income and the related basic and diluted earnings per share amounts would be as follows:


   
Quarter Ended
March 31,
  
   
2005
  
2004
  
(Millions of dollars, except per share data)
          
           
NET INCOME:
          
As reported
  
$
195
  
$
164
  
Less: total stock-based employee compensation
              
  expense determined under fair value based method
              
  for all awards, net of related tax effects
    
(6
)
  
(7
)
Pro forma net income
 
$
189
  
$
157
  
               
BASIC EARNINGS PER SHARE:
              
As reported
  
$
0.60
  
$
0.50
  
Pro forma
  
$
0.58
  
$
0.48
  
DILUTED EARNINGS PER SHARE:
              
As reported
  
$
0.59
  
$
0.49
  
Pro forma
 
$
0.57
  
$
0.47
  



These pro forma disclosures may not be representative of the effects for future years as options vest over several years and additional awards generally are made each year.
 
During the quarter ended March 31, 2005, Praxair granted options for 3,925,400 shares (3,826,100 shares during the quarter ended March 31, 2004) of common stock having option prices of $44.25 per share ($36.58 per share in 2004), the closing market price of Praxair’s common stock on the day of the grants. At March 31, 2005, there were 24,239,838 shares under option at prices ranging from $13.13 to $44.27 per share (weighted-average of $29.36) of which options for 16,350,348 shares were exercisable at prices ranging from $13.13 to $36.58 per share (weighted-average of $24.83). During the quarter ended March 31, 2005, options for 1,213,169 shares (1,330,565 in 2004) of common stock were exercised.
 
 

 
7


2.  
Recently Issued Accounting Standards

In May 2004, the FASB issued FASB Staff Position (FSP) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” which provides guidance on how to account for the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on postretirement health care plans. The act established a prescription drug benefit under Medicare, known as “Medicare Part D,” and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In late January 2005, the Center for Medicare and Medicaid Services released the regulations for implementing the act. Based on these regulations, the Company believes the benefits provided to certain participants will be at least actuarially equivalent to Medicare Part D and, accordingly, the Company will be entitled to a subsidy. During the first quarter of 2005, the Company determined that the subsidy will be insignificant to its financial position and results of operations. Accordingly, the plan obligations will be remeasured incorporating the effects of the subsidy at calendar year-end as required by SFAS No. 106.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This statement, among other things, requires companies to expense the value of employee stock options and similar awards and becomes effective for interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested share-based payment awards at the company’s adoption date. In April 2005, the Securities and Exchange Commission (SEC) issued a new rule that extends the compliance dates for SFAS No. 123(R). Registrants may adopt the provisions of SFAS No. 123(R) as of the beginning of the first annual period beginning after June 15, 2005. Praxair currently plans to adopt the provisions of this statement for its annual period beginning January 1, 2006.

In March 2005, the FASB issued FASB Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations,” which provides guidance on when a company has sufficient information to reasonably estimate an asset-retirement obligation’s fair value. Currently, certain of the Company’s on-site supply arrangements have termination provisions that contain asset removal obligations. Given the infrequency of asset removals due to customer contract renewals, the long-term nature of the asset lives, and the wide range of potential outcomes, it is generally not possible at the time an asset is placed in service to reasonably estimate an obligation’s fair value. Praxair currently records its asset retirement obligations when sufficient information becomes available to reasonably estimate the obligation’s fair value, which is generally the point at which a contract termination, or another definitive event, occurs. Historically, the cost of removal obligations has been immaterial and is generally recoverable. Praxair is required to adopt FIN 47 by calendar year-end 2005. Praxair is in the process of evaluating the interpretation, however, it believes that the interpretation will not impact the manner in which it presently accounts for asset retirement obligations.

3.  
Inventories

The following is a summary of Praxair’s consolidated inventories:

           
   
March 31,
  
December 31,
  
(Millions of dollars)
  
2005
  
2004
  
           
           
Raw materials and supplies
  
$
87
  
$
87
  
Work in process
    
50
   
37
 
Finished goods
    
203
   
204
 
   
$
340
  
$
328
  

 
 
 
8
 
4.  
Debt

The following is a summary of Praxair’s outstanding debt at March 31, 2005 and December 31, 2004:

   
March 31,
  
December 31,
  
(Millions of dollars)
  
2005
  
2004
  
           
SHORT-TERM
              
  Commercial paper and U.S. borrowings
  
$
221
  
$
296
  
  Canadian borrowings
    
93
   
83
 
  South American borrowings
    
35
   
39
 
  Asian borrowings
    
57
   
29
 
  Other international borrowings
    
14
   
7
 
Total short-term debt
    
420
   
454
 
               
LONG-TERM
              
U.S. borrowings
              
  6.85% Notes due 2005
    
150
   
150
 
  6.90% Notes due 2006
    
250
   
250
 
  4.75% Notes due 2007 (a)
    
249
   
249
 
  6.625% Notes due 2007
    
250
   
250
 
  6.50% Notes due 2008
    
250
   
250
 
  2.75% Notes due 2008 (a)
    
299
   
299
 
  6.375% Notes due 2012 (a, b)
    
532
   
534
 
  3.95% Notes due 2013 (a)
    
349
   
349
 
  Other
   
14
   
23
 
               
European borrowings
    
585
   
613
 
South American borrowings
    
45
   
48
 
Asian borrowings
    
42
   
39
 
Other international borrowings
    
2
   
5
 
Obligations under capital leases
    
12
   
12
 
     
3,029
   
3,071
 
Less: current portion of long-term debt
    
(188
)
  
(195
)
Total long-term debt
    
2,841
   
2,876
 
Total debt
  
$
3,449
  
$
3,525
  
               
(a)  
Amounts are net of unamortized discounts.
(b)  
March 31, 2005 and December 31, 2004 include a $34 million and $35 million fair value increase, respectively, related to SFAS 133 hedge accounting. See Note 15 on page 55 of the 2004 Annual Report.
(c)  
European borrowings (€450 million) are classified as long-term because of the Company’s intent to refinance this debt on a long-term basis and the availability of such financing under the terms of this agreement.

 
 
 
9
 

5.  
Financial Instruments

The following table is a summary of the notional amount of currency derivatives outstanding at March 31, 2005 and December 31, 2004 (all maturities within one year):

   
March 31,
  
December 31,
  
   
2005
  
2004
  
(Millions of dollars)
          
           
CURRENCY CONTRACTS
          
   Balance sheet items
  
$
540
  
$
679
  
   Firm commitments
    
-
   
-
 
   Anticipated net income
    
-
   
-
 
   
$
540
  
$
679
  


Praxair enters into currency exchange forward contracts to manage its exposure to fluctuations in foreign currency exchange rates. Hedges of balance sheet items are related to recorded balance sheet exposures, including intercompany transactions. Hedges of firm commitments are for the purchase of equipment related to in-progress construction projects. Additionally, there is $125 million notional value of currency exchange contracts that effectively offset each other at March 31, 2005 ($7 million at December 31, 2004).

There were no net income hedges outstanding at March 31, 2005 and December 31, 2004. Other income (expense) - net includes no gain or loss for the quarters ended March 31, 2005 and March 31, 2004, respectively, relating to net income hedges.

At March 31, 2005, the fair value of all derivative instruments has been recorded in the condensed consolidated balance sheet as $1 million in current assets and $16 million in current liabilities ($11 million in current assets at December 31, 2004). There were no interest-rate derivatives outstanding at March 31, 2005 or December 31, 2004.


6.  
Earnings Per Share

Basic earnings per share is computed by dividing net income for the period by the weighted-average number of Praxair common shares outstanding. Diluted earnings per share is computed by dividing net income for the period by the weighted-average number of Praxair common shares outstanding and dilutive common stock equivalents. The difference between the number of shares used in the basic earnings per share calculation compared to the diluted earnings per share calculation is due to the dilutive effect of outstanding stock options. There were no stock options for the quarter ended March 31, 2005 (3,826,100 during the quarter ended March 31, 2004), that were excluded in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common stock.
 
 
 
 
10

 
7.  
Goodwill and Other Intangible Assets

Praxair adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, effective January 1, 2002. The standard required the Company to perform an initial assessment (see Note 2 on page 47 of the 2004 Annual Report) of whether there was an indication that the carrying value of goodwill was impaired and to conduct a new test at least annually at the reporting unit level. The annual impairment test is performed during the second quarter of each year.

Changes in the carrying amount of goodwill for the quarter ended March 31, 2005 were as follows:
   
North
  
South
          
Surface
      
(Millions of dollars)
  
America
  
America
  
Europe
  
Asia
  
Technologies
  
Total
  
                           
Balance, December 31, 2004
  
$
974
  
$
138
  
$
331
  
$
28
  
$
80
  
$
1,551
  
                                       
Acquisitions
    
1
   
-
    
-
    
-
    
-
    
1
 
Purchase adjustments
    
-
    
-
    
3
   
-
    
-
    
3
 
Foreign currency translation
    
(1
)
  
(1
)
  
(17
)
        
(3
)
  
(22
)
Other
    
-
    
-
    
-
    
(1
)
  
-
    
(1
)
                                       
Balance, March 31, 2005
  
$
974
  
$
137
  
$
317
  
$
27
  
$
77
  
$
1,532
  
                                       

Changes in the carrying amount of other intangibles for the quarter ended March 31, 2005 were as follows:

   
License/Use
  
Non-compete
  
Patents
      
Accumulated
      
(Millions of dollars)
  
Agreements
  
Agreements
  
& Other
  
Sub-total
  
Amortization
  
Total
  
                           
Balance, December 31, 2004
  
$
70
  
$
36
  
$
17
  
$
123
  
$
(35
)
$
88
  
                                       
Additions
    
-
    
-
    
-
    
-
    
(4
)
  
(4
)
Foreign currency translation
    
(1
)
  
-
    
-
    
(1
)
  
-
    
(1
)
Other
    
(4
)
  
-
    
-
    
(4
)
  
3
   
(1
)
                                       
Balance, March 31, 2005
  
$
65
  
$
36
  
$
17
  
$
118
  
$
(36
)
$
82
  
 

There are no expected residual values related to these intangible assets. The remaining weighted-average amortization period for intangible assets is approximately 12 years. Total estimated annual amortization expense is $10 million for the remainder of 2005; $13 million, $12 million, $7 million and $6 million for the years ended December 31, 2006, 2007, 2008 and 2009, respectively; and $34 million thereafter.
 
 
 
 
11

 
8.  
Pension and OPEB

The components of net pension and postretirement benefits other than pensions (OPEB) costs for the quarters ended March 31, 2005 and 2004 are shown below:

   
Quarter Ended March 31,
 
   
Pensions
  
OPEB
  
(Millions of dollars)
  
2005
  
2004
  
2005
  
2004
  
                   
Service cost
  
$
9
  
$
8
  
$
1
  
$
2
  
Interest cost
    
22
   
21
   
4
    
4
 
Expected return on plan assets
    
(25
)
  
(22
)
  
-
    
-
 
Net amortization and deferral
    
5
   
2
   
-
    
(1
)
                           
Net periodic benefit cost
  
$
11
  
$
9
  
$
5
  
$
5
  

Praxair estimates that 2005 contributions to its pension plans will be in the range of $80 million to $85 million, including required contributions. As of March 31, 2005, $71 million of contributions have been made worldwide.


9.  
Legal Proceedings

In the normal course of business, Praxair is involved in legal proceedings and claims with both private and governmental parties (see Note 20 on page 61 of the 2004 Annual Report).

Among such matters are claims brought by welders alleging that exposure to manganese contained in welding fumes caused neurological injury. Praxair has never manufactured welding consumables. Such products were manufactured prior to 1985 by a predecessor company of Praxair. As of March 31, 2005, Praxair was a co-defendant with many other companies in 848 lawsuits alleging personal injury caused by manganese contained in welding fumes. The cases were pending in state and federal courts in California, Iowa, Illinois, Mississippi, Missouri, Texas, Louisiana, Georgia, West Virginia, Ohio, Arkansas, Indiana, Utah, Pennsylvania, Minnesota, Alabama, Massachusetts, and Virginia. There were a total of 10,809 individual claimants in these cases. Six cases are class actions seeking to recover costs to monitor plaintiff’s alleged personal injuries caused by exposure to manganese contained in welding fumes, none of which have been certified. All of the cases filed in or removed to federal courts have been (or are in the process of being) transferred by the Judicial Panel for Multidistrict Litigation to the U.S. District Court for the Northern District of Ohio for coordinated pretrial proceedings. The plaintiffs seek unspecified compensatory and, in most instances, punitive damages. In the past, Praxair has either been dismissed from the cases with no payment or has settled a few cases for nominal amounts. Praxair believes that it has meritorious defenses to these cases and intends to defend itself vigorously.

While the outcome of litigation is uncertain, Praxair believes that the resolution of these cases will not have a material adverse effect on its consolidated financial position, results of operations or cash flows in any given year.
 
 
 
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results

The following table provides summary data for the quarters ended March 31, 2005 and 2004:

   
Quarter Ended March 31,
  
(Dollar amounts in millions)
  
2005
  
2004
  
Variance
  
               
Sales
  
$
1,827
  
$
1,531
    
+ 19
%
Gross margin (a)
  
$
718
  
$
623
    
+ 15
%
   As a percent of sales
    
39.3
%
  
40.7
%
      
Selling, general and administrative
  
$
245
  
$
204
    
+ 20
%
   As a percent of sales
    
13.4
%
  
13.3
%
      
Depreciation and amortization
  
$
162
  
$
139
    
+ 17
%
Other income (expenses) - net
  
$
18
  
$
(1
)
      
Operating profit
  
$
309
  
$
260
    
+ 19
%
Interest expense - net
  
$
42
  
$
37
    
+ 14
%
Effective tax rate
    
26
%
  
25
%
      
Net income
 
$
195
  
$
164
    
+ 19
%
                     
(a) Gross margin excludes depreciation and amortization expense.

Sales increased $296 million, or 19%, in the first quarter versus 2004. Strong volume growth, primarily in the global energy, industrial manufacturing and metals markets, increased sales by 6%. Price increases of 3% were predominantly realized in North and South American markets. Acquisitions contributed 7% to sales growth in the quarter due to the German and Home Care Supply acquisitions in 2004. Currency movements in South America, Europe and Canada generated 3% of sales growth for the quarter.
 
Gross margin in 2005 improved $95 million, or 15%, in the first quarter versus 2004. The 140 basis point reduction in gross margin percentage to 39.3% for the first quarter of 2005 was due primarily to the increase in hydrogen revenues related to added capacity and strong demand on the U.S. Gulf Coast which have lower margins, natural gas pricing and general inflation pressures, which were partially mitigated by pricing increases.
 
Selling, general and administrative expenses for the first quarter were $245 million, or 13.4% of sales, versus $204 million, or 13.3% of sales, for 2004. The $41 million increase for the quarter was due to acquisitions and currency movements as general cost inflation was partially offset by pricing initiatives.
 
Depreciation and amortization expense increased $23 million, or 17%, in the quarter ended March 31, 2005 versus 2004. The increase was principally due to acquisitions and currency effects.

Other income (expenses) - net for the first quarter is an $18 million gain versus a $1 million loss in 2004. The first quarter 2005 balance includes a $20 million gain resulting from a favorable settlement of a customer obligation. Partially offsetting this gain was a $9 million charge for various legal matters and insurance accruals. Underlying 2005 other income improved $6 million due to higher partnership income and lower restructuring charges versus 2004.

Operating profit increased $49 million, or 19%, in the quarter ended March 31, 2005 versus 2004. Strong sales volumes, the continued impact of productivity initiatives and the contribution from acquisitions were primarily responsible for the first quarter operating profit growth.

Interest expense - net increased $5 million, or 14%, in the first quarter of 2005 versus 2004 as a result of the increase in debt levels compared with the corresponding period in the prior year.

The effective income tax rate was 26% for the quarter versus 25% in 2004. The increase in the effective rate for the quarter was due primarily to higher earnings contributions in countries with higher marginal tax rates.
 
 
 
13

Net income increased $31 million, or 19%, in the first quarter versus 2004. The increase was due to improved operating profit which was partially offset by the higher effective tax rate.

The number of employees at March 31, 2005 was 27,082, reflecting an increase of 62 employees from December 31, 2004.

Segment Discussion

The following summary of sales and operating profit by segment provides a basis for the discussion that follows (for a description of Praxair’s operating segments, refer to Note 4 to the consolidated financial statements included on page 48 of Praxair’s 2004 Annual Report to shareholders):

   
Quarter Ended March 31,
  
(Millions of Dollars)
  
2005
  
2004
  
Variance
  
               
SALES
              
  North America
  
$
1,115
  
$
960
    
+ 16
%
  Europe
    
287
   
208
   
+ 38
%
  South America
    
245
   
200
   
+ 23
%
  Asia
    
122
   
109
   
+ 12
%
  Surface Technologies
    
118
   
111
   
+ 6
%
  Eliminations
    
(60
)
  
(57
)
      
   
$
1,827
  
$
1,531
    
+ 19
%
                     
OPERATING PROFIT
                    
  North America
  
$
166
  
$
149
    
+ 11
%
  Europe
    
67
   
52
   
+ 29
%
  South America
    
43
   
32
   
+ 34
%
  Asia
    
22
   
17
   
+ 29
%
  Surface Technologies
    
11
   
10
   
+ 10
%
   
$
309
  
$
260
    
+ 19
%
                     

North America

Sales increased $155 million, or 16%, in the quarter ended March 31, 2005 versus 2004. Growth was driven by higher demand in the energy, including hydrogen for refining and products and services for oil and gas production; manufacturing and metals markets. Overall volumes remained strong for on-site, merchant and packaged gases, which led to volume growth of 7% for the quarter. Acquisition activity contributed 4% to sales growth while realized price increases were 3% for the quarter. The increase in raw material costs tied to natural gas prices, which Praxair is contractually entitled to pass on to on-site hydrogen customers, increased sales by 1% in the first quarter with minimal impact on operating profit.
 
Operating profit increased $17 million, or 11%, in the quarter ended March 31, 2005 versus 2004. The increase in operating profit was principally due to strong sales volume and a small contribution from acquisitions. Operating profit included a net gain of $8 million associated with a favorable settlement of a customer obligation, various legal matters and insurance accruals, referenced in the consolidated results, which was partially offset by the unfavorable impact of customer plant turnarounds. Operating profit as a percentage of sales decreased 60 basis points for the quarter. The decrease is a result of the Home Care Supply acquisition and the increase in hydrogen revenues related to added capacity and strong demand on the U.S. Gulf Coast which have lower margins. Excluding the effect of the acquisition and the new hydrogen volume, first quarter operating profit, as a percentage of sales, was marginally higher than 2004 levels.

 

 
14
 
Europe
 
Sales for the 2005 first quarter increased $79 million, or 38%, versus 2004. Sales growth of 32% was due to the December 2004 German Acquisition. Sales growth in Italy slowed due to a stronger euro and weaker demand from the automotive and construction sectors and Spain had weaker sales growth driven by a reduction in the operating rate for a large on-site customer due to technical constraints. Offsetting these weaker end-user market conditions were strong home healthcare and general manufacturing end-user sales. The stronger euro increased sales by 6% in the quarter.

Operating profit increased $15 million, or 29%, in the quarter ended March 31, 2005 versus the corresponding period in 2004. The contributions of the German Acquisition and the favorable impact of currency movements principally drove operating profit growth.

South America

Sales increased $45 million, or 23%, in the quarter ended March 31, 2005 versus 2004. Underlying sales grew 8% and 7% from higher volumes and pricing, respectively, for on-site, liquid and packaged gases. The strongest end-user sales growth came from the metals and manufacturing markets. Healthy year-over-year growth from sales of cylinders and natural gas conversion kits for automobiles continued due to high gas prices. Currency contributed 8% to sales growth.

Operating profit increased $11 million, or 34%, in the quarter ended March 31, 2005 versus 2004. The growth in operating profit for the quarter is primarily attributable to higher sales volume. Higher pricing and productivity programs outpaced underlying inflation pressures, favorably impacting operating profit.

Asia

Sales increased $13 million, or 12%, in the quarter ended March 31, 2005 versus 2004. Strong volume growth, primarily in the metals, electronics, food, and manufacturing markets, increased sales by 7%. Underpinning the growth to these markets was solid growth in the on-site and liquid product lines. Favorable currency movements improved sales by 5% for the quarter.

Operating profit increased $5 million, or 29%, in the quarter ended March 31, 2005 versus 2004. The improvement in operating profit is primarily a result of strong sales volumes, cost efficiency improvements in the supply system and increases in merchant volume pricing in China and India. Overall pricing is marginally down due to an increasing mix of on-site business, which has a lower average price.

Surface Technologies

Sales for the 2005 first quarter increased $7 million, or 6%, versus 2004. Higher volumes of industrial coatings for power turbines and oil field service components and improved sales of coatings for OEM aircraft engine parts contributed growth of 3% in the quarter. Favorable currency movements, primarily in Europe, increased sales by 3%. The aviation repair business remains weak.
 
Operating profit increased $1 million, or 10%, in the quarter ended March 31, 2005 versus 2004. The increase was driven by higher volumes and ongoing cost reduction actions.

Currency

Praxair’s results of foreign operations are generally translated to the Company’s reporting currency, the U.S. dollar, from the functional currencies used in the countries in which the Company operates. In general, Praxair uses the local currency as its operation’s functional currency with the exception of hyperinflationary countries where the U.S. dollar is used as the functional currency. There is inherent variability and unpredictability in the relationship of these functional currencies to the U.S. dollar and such currency movements may materially impact Praxair’s results of operations in any given period.
 
 
15

To help understand the reported results, the following is a summary of the significant currencies underlying Praxair’s consolidated results and the exchange rates used to translate the financial statements (rates of exchange expressed in units of local currency per U.S. dollar):

   
Percent of
                
   
Q1 2005
  
Income Statement
  
Balance Sheet
   
Consolidated
  
First Quarter Average
  
March 31,
 
December 31,
Currency
  
Sales (a)
  
2005
  
2004
  
2005
  
2004
European euro
  
18%
  
0.75
  
0.80
  
0.77
  
0.73
Brazilian real
  
11%
  
2.66
  
2.90
  
2.67
  
2.65
Canadian dollar
  
9%
  
1.23
  
1.33
  
1.21
  
1.21
Mexican peso
  
4%
  
11.16
  
11.12
  
11.28
  
11.13
Venezuelan bolivar
  
<1%
  
1,987
  
1,780
  
2,150
  
1,920
Argentinean peso
  
<1%
  
2.93
  
2.91
  
2.93
  
2.98

(a)  
Certain Surface Technologies segment sales are included in European and Brazilian sales. 
 

 
Liquidity, Capital Resources and Other Financial Data

The following selected cash flow information provides a basis for the discussion that follows:
 
(Millions of dollars)
  
Quarter Ended March 31,
  
   
2005
  
2004
  
NET CASH PROVIDED BY (USED FOR):
          
           
OPERATING ACTIVITIES
              
  Net income
 
$
195
  
$
164
  
  Depreciation and amortization
    
162
   
139
 
  Working capital
    
(60
)
  
(104
)
  Other - net
    
(8
)
  
(18
)
      Net cash provided by operating activities
  
$
289
  
$
181
  
               
INVESTING ACTIVITIES
              
  Capital expenditures
  
$
(165
)
$
(124
)
  Acquisitions
    
(2
)
  
-
  
  Divestitures and asset sales
    
13
   
14
 
      Net cash used for investing activities
  
$
(154
)
$
(110
)
               
FINANCING ACTIVITIES
              
  Debt (reductions) increases - net
 
$
(40
)
$
26
  
  Issuances of common stock
    
61
   
66
 
  Purchases of common stock
    
(92
)
  
(123
)
  Cash dividends
    
(58
)
  
(49
)
  Minority transactions and other
   
(4
)
  
(3
)
      Net cash used for financing activities
  
$
(133
)
$
(83
)


 
16
 
 
Cash Flow from Operations

Cash flow from operations of $289 million in the quarter ended March 31, 2005 increased $108 million, or 60%, versus 2004. The growth is a result of strong cash flow generated from higher sales and net income and an improvement in working capital principally related to accounts payable. 
 
Investing

Net cash used for investing of $154 million in the quarter ended March 31, 2005 increased $44 million, or 40%, versus 2004 due primarily to an increase in capital expenditures in North America and Asia.

Financing

At March 31, 2005, Praxair's total debt outstanding was $3,449 million, $76 million lower than $3,525 million at December 31, 2004. This decrease resulted from net cash repayments of $40 million and currency and other changes of $36 million. Cash used for financing activities of $133 million for the quarter ended March 31, 2005 increased $50 million versus 2004. The increase in funds used was principally due to a net debt reduction of $40 million in 2005 compared to a net debt increase of $26 million in the prior year and an increase in cash dividends of $9 million, partially offset by a $26 million reduction in common stock repurchases. In the quarter ended March 31, 2005, cash dividends were $0.18 per share compared to $0.15 per share for 2004, an increase of 20%.

Legal Proceedings

See Note 9 to the Condensed Consolidated Financial Statements for a description of current legal proceedings.


Other Financial Data

Definitions of the following non-GAAP measures may not be comparable to similar definitions used by other companies. Praxair believes that its debt-to-capital ratio is appropriate for measuring its financial leverage. The Company believes that its after-tax return on invested capital ratio is an appropriate measure for judging performance as it reflects the approximate after-tax profit earned as a percentage of investments by all parties in the business (debt, minority interests and shareholders’ equity).

(Dollar amounts in millions)
  
March 31,
  
December 31,
  
   
2005
  
2004
  
TOTAL CAPITAL
          
Debt
  
$
3,449
  
$
3,525
  
Minority interests
    
221
    
225
  
Shareholders' equity
    
3,651
    
3,608
  
   
$
7,321
  
$
7,358
  
               
DEBT-TO-CAPITAL RATIO
    
47.1
%
  
47.9
%
 

 
17
 

 
   
Quarter Ended
  
   
March 31,
  
   
2005
  
2004
  
           
AFTER-TAX RETURN ON CAPITAL (ROC)
          
Operating profit
 
$
309
  
$
260
  
Less: reported taxes
    
(69
)
  
(56
)
Less: tax benefit on interest expense(a)
    
(11
)
  
(9
)
Add: equity income
    
4
   
3
 
 Net operating profit after-tax (NOPAT)
  
$
233
  
$
198
  
               
Beginning capital
  
$
7,358
  
$
6,099
  
Ending capital
  
$
7,321
  
$
6,177
  
Average capital
  
$
7,340
  
$
6,138
  
               
ROC %
    
3.2
%
  
3.2
%
               
 ROC % (annualized)
    
12.7
%
  
12.9
%
               

(a) Tax benefit on interest expense is based on Praxair’s effective tax rates of 26% for 2005 and 25% for 2004.
 
Praxair’s debt-to-capital ratio decreased from 47.9% at December 31, 2004 to 47.1% at March 31, 2005.

Annualized after-tax return on capital declined slightly to 12.7% from 12.9% for the quarter ended March 31, 2005 versus 2004. The decrease was principally related to the German and Home Care Supply acquisitions, which will initially operate at lower than average Praxair returns, and a higher effective tax rate. Excluding the effects of these two recent acquisitions, underlying return on capital was 13.7%.


New Accounting Standards

See Note 2 to the Condensed Consolidated Financial Statements for information concerning new accounting standards.


Outlook
 
In the second quarter of 2005, diluted earnings per share are expected to be in the range of $0.60 to $0.62. For the full year of 2005, Praxair expects sales growth of 12% to 15% and operating profit growth in the range of 13% to 17%. Diluted earnings per share are expected to be in the range of $2.40 to $2.48. On a worldwide basis, capital expenditures for the full year of 2005 are expected to be in the range of $750 million to $800 million. Praxair expects an effective tax rate of approximately 26% to continue for the remainder of 2005. This guidance excludes any potential tax impact that may occur should Praxair take advantage of the American Jobs Creation Act of 2004 repatriation provision. Based on recent SEC guidance, the Company does not currently plan to begin expensing stock options until Fiscal 2006.
 
Praxair provides quarterly updates on operating results, material trends that may affect financial performance, and financial earnings guidance via quarterly earnings releases and investor teleconferences. In addition, Praxair issues press releases whenever significant events occur which may affect financial performance. These updates are available on its website: www.praxair.com.
 
 
18
 
Forward-looking Statements

The forward-looking statements contained in this document concerning demand for products and services, the expected macroeconomic environment, sales, margins and earnings growth rates, projected capital and acquisition spending, the impact of required changes in accounting, the impact of accounting and other estimates, and other financial goals involve risks and uncertainties, and are subject to change based on various factors. These risk factors include the impact of changes in worldwide and national economies, the performance of stock markets, the cost and availability of electric power, natural gas and other materials, and the ability to achieve price increases to offset such cost increases, inflation in wages and other compensation, development of operational efficiencies, changes in foreign currencies, changes in interest rates, the continued timely development and acceptance of new products and processes, the impact of competitive products and pricing, and the impact of tax, accounting and other legislation, litigation, government regulation in the jurisdictions in which the Company operates and the effectiveness and speed of integrating new acquisitions into the business.
 
 
19

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

Refer to the “Market Risks and Sensitivity Analyses” discussion on page 41 in the Management's Discussion and Analysis section of Praxair's 2004 Annual Report.



Item 4. Controls and Procedures

(a)  
Based on an evaluation of the effectiveness of Praxair’s disclosure controls and procedures (the “Evaluation”), which evaluation was made under the supervision and with the participation of management, including Praxair’s principal executive officer and principal financial officer, the principal executive officer and principal financial officer have each concluded that, as of the end of the quarterly period covered by this report, such disclosure controls and procedures are effective in ensuring that information required to be disclosed by Praxair in reports that it files under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)  
There were no changes in Praxair’s internal control over financial reporting identified in connection with the Evaluation that occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, Praxair’s internal control over financial reporting.
 
 
 
 
 
20
 
PART II - OTHER INFORMATION

Praxair, Inc. and Subsidiaries


Item 1. Legal Proceedings

See Note 9 to the Condensed Consolidated Financial Statements for a description of current legal proceedings.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities - Certain information regarding purchases made by or on behalf of the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of its common stock during the quarter ended March 31, 2005 is provided below: 




Period
  
Total Number of Shares Purchased
  
Average Price Paid
Per Share
  
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
  
Maximum Number of Shares that May Yet be Purchased Under the Program(2)
  
   
(Thousands)
      
(Thousands)
      
January 2005
    
1,875
  
$
43.94
    
1,875
    
N/A
  
February 2005
    
-
    
N/A
    
-
    
N/A
  
March 2005
    
233
  
$
47.89
    
233
    
N/A
  
First Quarter 2005
    
2,108
  
$
44.38
    
2,108
    
N/A
  

(1)
On January 20, 1997, the Company’s Board of Directors approved a share repurchase program which authorized the Company to repurchase shares of its common stock from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to the Company in order to offset some or all of such shares issued pursuant to the Company’s employee benefit plans and its Dividend Reinvestment and Stock Purchase Plan. The Company announced this program on January 21, 1997. The program has no expiration date.

(2)
The Board-approved program does not contain any quantitative limit on the total number of shares, or dollar value, that may be purchased.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of Praxair, Inc. was held on April 26, 2005. The results of the matters submitted to a vote of security holders are filed within the Company’s Current Report on Form 8-K dated April 29, 2005 and incorporated herein by reference.

Item 5. Other Information

None

 
 
21
 
Item 6. Exhibits 

(a)  
Exhibits:


 
 
Computation of Ratio of Earnings to Fixed Charges
 
 
Rule 13a-14(a) Certification
 
 
Rule 13a-14(a) Certification
 
 
Section 1350 Certification (such certifications are furnished for the information of the Commission and shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act)
 
 
Section 1350 Certification (such certifications are furnished for the information of the Commission and shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act)
 
 
 

 
22
 
SIGNATURE
Praxair, Inc. and Subsidiaries



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



   
PRAXAIR, INC.
     
   
(Registrant)
     
     
     
     
Date: May 4, 2005
  
By:  /s/ Patrick M. Clark
     
   
Patrick M. Clark
   
Vice President and Controller
   
(On behalf of the Registrant
   
and as Chief Accounting Officer)
 
 
 
 
 

23