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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 September 30, 2003

OR

/  /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 1-11037

Praxair, Inc.
(Exact name of registrant as specified in its charter)

(203) 837-2000

Registrant’s telephone number, including area code

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

At October 31, 2003, 162,588,281 shares of common stock ($0.01 par value) of the Registrant were outstanding.

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Forward-Looking Statements

The forward-looking statements contained in this document concerning demand for products and services, the expected macroeconomic environment, sales and earnings growth, 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 services, the impact of competitive products and pricing, and the impact of tax and other legislation and regulation in the jurisdictions in which the company operates as well as new accounting rules and practices.

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INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)

The accompanying notes are an integral part of these financial statements.

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PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)

The accompanying notes are an integral part of these financial statements.

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PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
(UNAUDITED)

The accompanying notes are an integral part of these financial statements.

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PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)

The accompanying notes are an integral part of these financial statements

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PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Dollar amounts in millions, except share data, shares in thousands)
(UNAUDITED)

(a) The components of comprehensive income are as follows:

(b) The components of accumulated other comprehensive income (loss) are as follows:

The accompanying notes are an integral part of these financial statements

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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. These consisted of only normal recurring adjustments. 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 2002 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 No. (“SFAS”) 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 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:

* The above options are granted primarily in the U.S. and are shown net of Praxair's U.S. marginal tax rate of 35%.

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 and nine months ended September 30, 2003, Praxair granted options for 3,000 and 1,983,300 shares (5,000 and 1,323,500 shares during the quarter and nine months ended September 30, 2002), respectively, of common stock having option prices ranging from $52.85 to $60.01 per share ($50.75 to $58.65 per share in 2002) and a weighted average price of $52.92 ($56.75 in 2002), the closing market price of Praxair’s common stock on the day of the grants. At September 30, 2003 there were 12,346,624 shares under option at prices ranging from $17.85 to $60.01 per share (weighted average of $46.56) of which options for 7,675,367 shares were exercisable at prices ranging from $17.85 to $58.65 per share (weighted average of $43.23). During the quarter and nine months ended September 30, 2003, options for 748,247 and 2,468,401 (397,229 and 3,380,542 in 2002) shares of common stock were exercised.

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2. Recently Issued Accounting Standards and Accounting Change

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment to FASB Statement 123". This standard provides alternative methods of transition for a voluntary change to the fair value based method (expense treatment) of accounting for stock-based employee compensation. Praxair adopted this standard as it pertains to the new disclosure requirements effective December 31, 2002 (see Note 1). In 2003, the FASB added stock-based compensation to its technical agenda and may require all companies to expense the fair value of employee stock options as earned. Until a new statement is issued, the provisions of SFAS 123 (as amended by SFAS 148), which permit the continued use of the intrinsic value method, remain in effect.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”, which is effective January 1, 2004 for variable interest entities (“VIE’s”) created before February 1, 2003. A VIE is a corporation, partnership, trust or other legal entity that does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its own activities. This interpretation requires a company to consolidate a VIE when the company has a majority of the risk of loss from the VIE’s activities or is entitled to receive a majority of the VIE’s residual returns or both. From time to time, Praxair invests in subsidiary companies that may not have sufficient equity to fund their operations without assistance from Praxair or other investors. As of September 30, 2003 all significant VIE’s of which Praxair is the primary beneficiary are already consolidated.

In April 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies financial accounting for reporting for derivative instruments, including derivatives embedded in other contracts and hedging activities. SFAS 149 was effective for contracts entered into or modified after June 30, 2003, and did not have a material effect on Praxair’s financial condition or results of operations.

In May 2003, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue 01-8, “Determining Whether an Arrangement Contains a Lease” (“EITF 01-8”), that outlines specific criteria for determining when a supply arrangement or portion thereof should be accounted for as a lease. EITF 01-8 became effective for Praxair for certain on-site supply arrangements entered into or modified after June 30, 2003 that are dependent upon specific assets used to supply primarily one customer. An arrangement may be considered in part a lease if, among other things, no other asset can be effectively substituted to supply the customer and if there are no other customers using more than a minor amount of the asset in question. Praxair believes that certain of its product supply arrangements may be considered leases under EITF 01-8, however, any resulting prospective change in accounting treatment is not expected to have a material impact on Praxair’s financial condition or results of operations.

In May 2003, the EITF finalized Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 requires that elements of a revenue arrangement be accounted for separately when those elements have a separate value to the customer on a standalone basis, there is objective and reliable evidence of the element’s fair value, and delivery of undelivered items are considered probable and in the seller’s control. EITF 00-21 is effective for arrangements entered into after June 30, 2003. Praxair will apply EITF 00-21 to any arrangements in which the Company identifies a lease element under EITF 01-8 (see above) by accounting for any rental revenues separately from product sales. The impact of adopting EITF 00-21 was not material to Praxair’s financial condition or results of operations.

In May 2003, the EITF reached a consensus on Issue 03-4, “Determining the Classification and Benefit Attribution Method for a ‘Cash Balance’ Pension Plan.” The issue requires certain cash balance plans to be accounted for as a defined benefit plans and clarifies what the appropriate pattern of benefit accruals is for such cash balance plans. Effective January 1, 2004, Praxair will apply the traditional unit credit benefit attribution method instead of the projected unit credit method to the portion of its Retirement Program as amended on July 1, 2002 (see Note 19 on page 56 of Praxair’s Annual Report). This change is not expected to have a material impact on Praxair’s financial condition or results of operations as the Company has historically accounted for its cash plan as a defined benefit plan.

2002 Accounting Change — Praxair adopted SFAS 142, “Goodwill and Other Intangible Assets”, effective January 1, 2002. Under the new standard, companies no longer amortize goodwill or indefinite-lived intangible assets. The standard required the Company to perform an initial assessment of whether there was an indication that the carrying value of goodwill was impaired. During the second quarter of 2002, Praxair completed the initial impairment test and concluded that certain of its goodwill was impaired, resulting in a non-cash after-tax charge of $139 million, or $0.85 per share on a diluted basis. The charge included the $144 million goodwill write-down, a $2 million charge for goodwill held on an equity investment, which was recorded as a write-down of the investment, and was also net of a $7 million tax benefit. The charge was recorded as a cumulative effect of an accounting change, retroactive to January 1, 2002. Such an assessment must be conducted at least annually at the reporting unit level, and any such impairment must be recorded as a charge to operating earnings. The annual impairment tests for 2002 and 2003 were performed during the second quarter of each year and no additional impairments were indicated.

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3. Leases

As summarized in the “Off-Balance Sheet Arrangements and Contractual Obligations” section on page 33 of the 2002 Annual Report, Praxair had leases for U.S. liquid storage and distribution equipment, and for production facilities along the U.S. Gulf Coast. During June 2003, Praxair terminated these leases and purchased the underlying equipment and facilities for a total of approximately $339 million.

The equipment leases originated in 1998 and 1999 in sale-leaseback transactions (see Note 5 on page 47 of the 2002 Annual Report). On June 30, 2003, Praxair purchased the equipment for $230 million and reduced the carrying value of the equipment by deferred gains of $152 million from the original sale-leaseback transactions. The U.S. Gulf Coast leases were initiated by CBI Industries, Inc. (“CBI”) and were subsequently assumed by Praxair in its acquisition of CBI in 1996. On June 27, 2003, Praxair terminated the leases and purchased the production facility assets for approximately $109 million.

As a result of the foregoing lease terminations, commitments for minimum lease obligations at December 31, 2002 as disclosed in Note 5 on page 47 of the 2002 Annual Report have decreased by approximately $11 million for the remainder of 2003, $17 million for 2004 and approximately $16 million annually thereafter through 2015.

4. Inventories

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

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5. Debt

The following is a summary of Praxair’s outstanding debt at September 30, 2003 and December 31, 2002.

During the first quarter of 2003, Praxair repaid $300 million of 6.75% notes and $75 million of 6.625% notes that were due on March 1, 2003 and March 15, 2003, respectively. On April 15, 2003, Praxair repaid $250 million of 6.15% notes that were due. The repayments were funded through the issuance of commercial paper. On May 27, 2003 and June 2, 2003, respectively, Praxair issued $350 million of 3.95% notes due 2013 and $300 million 2.75% notes due 2008. The proceeds of these debt issuances were used to refinance commercial paper and purchase $339 million of previously leased assets.

At September 30, 2003, $342 million of commercial paper ($711 million notes due in 2003 and commercial paper at December 31, 2002) has been 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 its credit agreement (see Note 14 on page 52 of the 2002 Annual Report). In July 2003, Praxair terminated its $500 million 364-day revolving credit facility and maintains its $1 billion credit agreement that expires in 2005. No borrowings were outstanding under the credit agreement at September 30, 2003.

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6. Financial Instruments

The following table is a summary of the notional amount of interest rate and currency derivatives outstanding:

Interest Rate Swaps – During the first quarter of 2003, Praxair’s $100 million notional amount interest rate swap agreement outstanding at December 31, 2002, that converted variable rate lease payments to fixed rate lease payments, matured with an immaterial loss recognized in earnings.

Currency Contracts — Praxair is a party to currency exchange forward contracts (that mature within one year) to manage its exposure to fluctuations in foreign currency exchange rates. Additionally, there was $45 million notional value of currency exchange contracts outstanding that effectively offset each other ($39 million at December 31, 2002).

The net income hedges outstanding at September 30, 2003 are related to anticipated net income for the three months ending December 31, 2003 in Brazil, Korea, Thailand, India, Peru, Colombia and China. The net income hedges outstanding at December 31, 2002, were related to anticipated 2003 net income for the full year in China, Peru, Colombia, India, Thailand and Korea; for nine months in Brazil, and; for six months in Europe.

Other income (expense) — net includes no gain or loss for the quarter and a $8 million loss for the nine months ended September 30, 2003 as a result of recognizing net income hedge contracts at fair value, of which gains of $-0- and $1 million, respectively, related to hedges of anticipated fourth quarter net income. Other income (expense) — net includes a $10 million gain for the quarter and a $16 million gain for the nine months ended September 30, 2002 of which $5 million and $8 million, respectively, related to hedges of anticipated fourth quarter net income.

At September 30, 2003 the fair value of all derivative instruments has been recorded in the condensed consolidated balance sheet as follows: $17 million in current assets and $21 million in current liabilities ($4 million in current assets and $2 million in current liabilities at December 31, 2002).

7. 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. Stock options for -0- and 3,000 shares (2,839,280 and 1,221,480 during the quarter and nine months ended September 30, 2002, respectively) were excluded in the computation of diluted earnings per share for the quarter and nine months ended September 30, 2003, respectively, because the exercise prices were greater than the average market price of the common stock.

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8. Goodwill and Other Intangible Assets

See Note 2 for a description of the test for goodwill impairment. Changes in the carrying amount of goodwill for the nine months ended September 30, 2003, were as follows:

Changes in the carrying amount of other intangibles for the nine months ended September 30, 2003, were as follows:

There are no expected residual values related to these intangible assets. The weighted average amortization period for intangible assets is approximately 11 years. Estimated annual amortization expense is as follows:

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9. Subsequent Event

On October 28, 2003, Praxair’s Board of Directors declared a dividend increase and a two-for-one split of the Company’s common stock. The fourth quarter dividend, on a pre-split basis, will increase from $0.215 per share to $0.27 per share, or 26%. The stock split will be effected in the form of a stock dividend of one additional share for each share owned by stockholders of record on December 5, 2003, and each share held in treasury as of the record date. Both the cash and the stock dividend will be distributed to such holders on December 15, 2003.

Information pertaining to shares and earnings per share has not been restated in the accompanying financial statements and related footnotes to reflect this split. This information will be presented effective with the Company’s annual reporting for the year ended December 31, 2003. Information on a pro forma basis, reflecting the impact of this split on all periods presented in this Form 10-Q is as follows:

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10. 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 58 of the 2002 Annual Report). These arise from current and past operations or products and include product liability and environmental matters. 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 to1985 by a predecessor company of Praxair.

As of September 30,2003, Praxair was a co-defendant with many other companies in 141 lawsuits alleging personal injury caused by manganese contained in welding fumes. The cases were pending in state and federal courts in Illinois, Mississippi, Missouri, Texas, Louisiana, Georgia, West Virginia, Ohio, and Arkansas. There were a total of 9,714 individual claimants in these cases. Nine of the cases are class actions. None of the class actions have been certified. All of the cases that have been filed in the federal courts have been transferred, under the Multidistrict Litigation procedure to U.S. District Court for the Northern District of Ohio for coordinated or consolidated 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 or on its consolidated results of operations or cash flows in any given year.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results

* Gross margin excludes depreciation and amortization expense

Sales increased $122 million, or 9%, for the quarter and $321 million, or 8%, for the nine months ended September 30, 2003 versus the respective 2002 periods. The escalation in our costs for natural gas, which we are contractually obligated to pass on to on-site hydrogen customers, increased sales $20 million, or 1% in the third quarter (2% on a year-to-date basis), with no impact on operating profit. Excluding currency appreciation and the natural gas pass-through, third quarter sales increased 5%, due to higher pricing and volume growth in overseas marketplaces. On a year-to-date basis, sales grew 5% excluding currency appreciation and the natural gas pass-through, primarily attributable to favorable pricing, increased volumes and acquisitions.

Gross margin, as a percent of sales, declined 1%, to 41%, in the third quarter and on a year-to-date basis. In the third quarter and year to date, a majority of the decline was driven by the dilution effect of the natural gas pass-through costs.

Selling, general and administrative expenses as a percent of sales declined 1% to 14% on a year-to-date basis, as a result of continued cost control initiatives.

Other income (expense) – net decreased $15 million for the quarter and decreased $41 million for the nine months ended September 30, 2003 versus the respective 2002 periods. Other income (expense) — net includes no gain or loss for the quarter and a $8 million loss for the nine months ended September 30, 2003 as a result of recognizing net income hedge contracts at fair value. Other income (expense) — net includes a $10 million gain for the quarter and a $16 million gain for the nine months ended September 30, 2002. The nine-month period also included a $7 million recovery related to a litigation settlement in 2002.

Operating profit increased $5 million, or 2%, for the quarter and decreased $18 million, or 3%, for the nine months ended September 30, 2003 versus the respective 2002 periods. Third quarter operating profit increased principally due to the continued realization of productivity initiatives and pricing actions which more than offset cost inflation. On a year-to-date basis, operating profit improvements related to sales growth in Asia, South America and Europe which offset soft volumes in North America and Surface Technologies while currency adversely impacted growth by 3%. Cost reductions, pricing and productivity initiatives offset inflationary pressures.

Interest expense decreased $25 million, or 40%, for the quarter and $46 million, or 29%, for the nine months ended September 30, 2003 versus the respective 2002 periods. In the third quarter of 2002, $15 million of additional interest expense was incurred related to the early retirement of debt. The remaining decrease for the quarter and nine months is primarily due to lower effective interest rates.

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The effective income tax rate increased 2% to 24% for the quarter but remained at 22% for the nine months ended September 30, 2003, versus the respective 2002 periods. A $10 million tax benefit was recorded in the second quarter of 2003 resulting from the resolution of various tax matters for previous years. We expect and effective tax rate of 24% to continue for the remainder of 2003.

Income before cumulative effect of an accounting change increased $19 million, or 15%, for the quarter and increased $22 million, or 5%, for the nine months ended September 30, 2003 versus the respective 2002 periods. The quarter increase was due to lower interest expense and improved operating profit, which was partially offset by the higher effective tax rate. The year-to-date increase was primarily a result of lower interest expense.

The number of employees at September 30, 2003 was 25,361, reflecting a increase of 351 employees from December 31, 2002 due primarily to increased services operations in South America (+830), the sale of operations in Poland (-300), restructuring actions in the Surface Technologies segment (-130) and by other increases related to acquisitions and decreases related to normal productivity improvement initiatives since December 31, 2002.

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 in Praxair’s 2002 Annual Report to shareholders):

North America

Sales increased $73 million, or 9%, for the quarter and $205 million, or 8%, for the nine months ended September 30, 2003 versus the respective 2002 periods. The escalation in our costs for natural gas, which we are contractually obligated to pass on to on-site hydrogen customers, increased sales $20 million, or 3% in the third quarter (3% on a year-to-date basis), with no impact on operating profit. For the quarter and on a year-to-date basis, sales increased by 5%, excluding currency impacts and the natural gas pass-through, primarily due to price increases, acquisitions, and slightly higher sales volumes to the energy and healthcare markets.

Operating profit increased $2 million, or 1%, for the quarter and decreased $8 million, or 2%, for the nine months ended September 30, 2003 versus the respective 2002 periods. For the quarter and nine months, the benefits from pricing actions and marginal sales growth were offset by higher transportation costs and higher energy costs.

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South America

Sales increased $33 million, or 21%, for the quarter and increased $24 million, or 5%, for the nine months ended September 30, 2003 versus the respective 2002 periods. Excluding the impact of currency, sales grew 17% during the quarter from realized price increases of 10% and volume increases of 7%. On a year-to-date basis, favorable pricing of 11% and volume increases of 8% were partially offset by currency declines of 14%. Volume growth continued to be driven by increased sales to the metals and healthcare markets.

Operating profit decreased $8 million, or 22%, for the quarter and $25 million, or 23%, for the nine months ended September 30, 2003 versus the respective 2002 periods. Operating profit for the 2003 quarter included a $5 million charge related to the settlement of legal matters and a $1 million net income currency hedge loss related to future periods. Operating profit for the third quarter of 2002 included a $5 million net income currency hedge gain related to future periods. Excluding these items and currency translation decreases of $4 million, the increase in operating profit was a result of higher on-site volumes to metal producers and exporters, stronger merchant and packaged volumes to metals and healthcare markets and continued focus on cost reduction initiatives. Year-to-date 2003 operating profit includes a $2 million net income currency hedge gain related to future periods compared to $8 million in the 2002 period. Excluding the hedges, the litigation and currency translation decreases of $32 million, the increase in operating profit was due to realized price increases, higher on-site volumes to metal producers, increased services volumes and continued focus on productivity initiatives.

Investor concerns over Argentina and Brazil appear to be moderating since December 31, 2002 as evidenced by recent improvements in the foreign exchange rates. There are significant uncertainties surrounding the economic and political stability in Venezuela resulting in lower economic activity as evidenced by the suspension of its foreign exchange trading in February 2003.

To help understand the reported results and potential impacts of currency movements, the following is a summary of the exchange rates used to translate the financial statements in Brazil, Argentina and Venezuela (rates of exchange expressed in units of local currency per U.S. dollar):

Future currency movements versus the U.S. dollar, if any, will continue to impact reported results. In the first nine months of 2003, Brazil represented 79% of South America’s sales, while Argentina represented 5% and Venezuela represented 4% of South America’s sales. The functional currency used for translation to the U.S. dollar for Argentina and Brazil are the Peso and Real, respectively, while the Company uses the U.S. dollar in Venezuela, as it is a highly inflationary economy in accordance with SFAS 52. Praxair will continue to monitor developments in these countries and if the cumulative inflation rate in Argentina or Brazil exceeds 100% for a consecutive three-year period, we will change the functional currency to the U.S. dollar.

Europe

Sales increased $17 million, or 11%, for the quarter and $76 million, or 18%, for the nine months ended September 30, 2003 versus the respective 2002 periods. The increase in third quarter sales was primarily due to the strong Euro currency impact of 13% and favorable pricing of 2% partially offset by a 5% decrease in sales due to the divestiture of assets related to our operations in Poland. The increase in year-to-date sales was primarily due 19% to currency and 2% to volume, partially offset by a 4% decrease due to the divestiture. Volume growth continued due to improvements in merchant and packaged product line sales to the metals and food marketplaces

Operating profit increased $8 million, or 22%, for the quarter and $23 million, or 23%, for the nine months ended September 30, 2003 versus the respective 2002 periods. The change in operating profit included a $5 million and an $18 million increase related to currency for the quarter and the nine months, respectively. Excluding the impact of currency, operating profit improved $3 million for the quarter and $5 million for the nine months compared to 2002. Underlying operating profit for the quarter increased primarily due to increased pricing and successful cost reduction initiatives. Underlying operating profit for the nine-month period increased primarily due to higher volumes and successful cost reduction initiatives.

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On January 31, 2003, Praxair completed the previously announced sale of the assets of Praxair Polska, its Polish subsidiary, to the BOC Group for approximately $50 million, which marginally exceeded its carrying value. For the year ended December 31, 2002, Praxair Polska had sales of $26 million.

Asia

Sales increased $19 million, or 23%, for the quarter and $43 million, or 18%, for the nine months ended September 30, 2003 versus the respective 2002 periods. The third quarter sales growth was driven 13% by higher volumes (principally in the chemicals, metals and electronics markets) and 5% by the consolidation of a former joint venture in China. Additionally, there were favorable currency and pricing impacts of 3% and 2%, respectively. On a year-to-date basis, strong volume increases, favorable currency movements, and the consolidation impacted sales by 13%, 3% and 2%, respectively. Volume growth was sustained by increased sales to the electronics, metals and food markets.

Operating profit increased $3 million, or 21%, for the quarter and $8 million, or 22%, for the nine months ended September 30, 2003 versus the respective 2002 periods. The change in operating profit included a $1 million increase related to currency for the nine-month period. Excluding the impact of currency, operating profit improved $3 million for the quarter and $7 million for the nine months compared to 2002 primarily due to higher sales volume and successful cost reduction initiatives.

Surface Technologies

Sales were unchanged for the quarter and the nine months ended September 30, 2003 versus the respective 2002 periods. For the quarter and year to date, sales weakness in the aviation repair market due to the slowdown of the commercial airline industry was offset by favorable currency impacts.

Operating profit was unchanged for the quarter and decreased $9 million, or 32%, for the nine months ended September 30, 2003 versus the respective 2002 periods. Favorable currency impacts have begun to offset the impact of restructuring costs and weakness in the aviation repair market. The nine months of 2003 included restructuring costs of $2 million as we continue to reduce costs in a weak environment. Cost benefits of these actions will be realized in future quarters.

Liquidity, Capital Resources and Other Financial Data

The following selected cash flow information provides a basis for the discussion that follows:

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Cash Flow from Operations

Cash flow from operations of $750 million in the nine months ended September 30, 2003 increased $87 million, or 13%, versus 2002. The improved operating cash flow is primarily due to higher net income before depreciation and amortization of $43 million and reduced cash payments of $21 million related to the 2001 special charge (see Note 3 on page 44 of the 2002 Annual Report). Working capital increased primarily due to higher accounts receivable at September 30, 2003 compared to the prior period, largely from currency appreciation in Europe and South America.

Investing

Net cash used for investing in the first nine months of 2003 totaled $770 million, an increase of $375 million from the first nine months of 2002. This increase is due to an increase in capital expenditures, partially offset by lower acquisitions, and higher asset sales.

Capital expenditures for the nine months ended September 30, 2003 totaled $784 million, an increase of $444 million from the respective period in 2002. The increase is primarily related to the purchase of leased assets for $339 in June 2003 in response to favorable financing conditions (see Note 3 to the Condensed Consolidated Financial Statements). On a worldwide basis, capital expenditures for the full year 2003 are expected to be approximately $625 million excluding the purchase of leased assets.

Acquisition expenditures for the nine months ended September 30, 2003 totaled $42 million, a decrease of $34 million from the corresponding period in 2002. Acquisitions in the first nine months of 2003 were focused on small electronics, packaged gases and healthcare businesses, while larger healthcare acquisitions were made in the 2002 period.

On January 31, 2003, Praxair completed the previously announced sale of the assets of Praxair Polska, its Polish subsidiary, to the BOC Group for approximately $50 million. For the year ended December 31, 2002, Praxair Polska had sales of $26 million.

Financing

At September 30, 2003, Praxair’s total debt outstanding was $2,958 million, $210 million higher than December 31, 2002 levels primarily due to the $339 million purchase of leased assets. Cash provided by financing activities in the nine months ended September 30, 2003 was $26 million versus $261 million of cash used for financing activities for the nine months ended September 30, 2002, primarily due to the increase in debt. In the first nine months of 2003, cash dividends were $0.645 per share compared to $0.57 per share in the first nine months of 2002, an increase of 13% (see “Subsequent Event” section below).

During the first quarter of 2003, Praxair repaid $300 million of 6.75% notes and $75 million of 6.625% notes that were due on March 1, 2003 and March 15, 2003, respectively. On April 15, 2003, Praxair repaid $250 million of 6.15% notes that were due. The repayments were initially funded through the issuance of commercial paper. During the second quarter of 2003, Praxair issued $350 million of 3.95% notes due 2013 and $300 million 2.75% notes due 2008. In July 2003, Praxair terminated its $500 million 364-day revolving credit facility and maintains its $1 billion credit agreement that expires in 2005. No borrowings were outstanding under the credit agreement at September 30, 2003.

Subsequent Event

On October 28, 2003, Praxair’s Board of Directors declared a dividend increase and a two-for-one split of the Company’s common stock. The fourth quarter dividend, on a pre-split basis, will increase from $0.215 per share to $0.27 per share, or 26%. The stock split will be effected in the form of a stock dividend of one additional share for each share owned by stockholders of record on December 5, 2003, and each share held in treasury as of the record date. Both the cash and the stock dividend will be distributed to such holders on December 15, 2003. See Note 9 to the Condensed Consolidated Financial Statements for pro forma earnings per share information.

Legal Proceedings

See Note 10 to the Condensed Consolidated Financial Statements for a description of current legal proceedings.

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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 (“ROC”) 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 interest, preferred stock, and shareholders’ equity).

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Praxair’s debt-to-capital ratio decreased from 52.3% at December 31, 2002 to 49.2% at September 30, 2003. This improvement primarily resulted from higher shareholders’ equity levels due to net income of $430 million and favorable currency translation of $251 million for the nine months ended September 30, 2003.

After-tax return on capital calculated on an annualized basis decreased to 12.3% from 13.8% for the quarter ended September 30, 2003 versus September 30, 2002 and to 12.7% from 13.5% for the nine months ended September 30, 2003 versus September 30, 2002. These decreases are primarily due to the impacts of the purchase of leased assets (0.8%) and increasing currency translation movements on the capital base.

Pension Plans Update

The Company will complete its year-end pension plan calculations in early January 2004, because such amounts are based on December 31, 2003 interest rates and asset values. At that time, the Company will determine the amount, if any, which is required to be recorded as a minimum pension liability at year-end. However, assuming interest rates and asset returns remain essentially unchanged in the 2003 fourth quarter from the 2003 third quarter, a minimum liability increase of approximately $5 million to $25 million after-tax, may be required related to the U.S. plans. The actual amount of required adjustment, if any, remains highly dependent upon the market conditions at year-end and the required adjustment could be significantly higher or lower than this amount. Any such liability increase required at year-end will be recorded as a direct charge to the accumulated other comprehensive income (loss) component of shareholders’ equity with no impact on 2003 net income, earnings per share, or cash flows.

Pension contributions of $25 million were made to the U.S. plans in 2003 and no additional contributions are required in the fourth quarter. The Company estimates pension expense to be approximately $25 million to $30 million for 2003 and approximately $10 million to $15 million higher for 2004. The estimate of the 2004 expense, and any contributions that may be required, will be influenced by market conditions existing at year-end similar to those that influence the pension benefit obligation described above.

New Accounting Standards

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Refer to the “Raw Materials and Energy Costs”, “Customer Markets”, and “Market Risks and Sensitivity Analysis” discussions in the Management’s Discussion and Analysis section of Praxair’s 2002 Annual Report.

Item 4. Controls and Procedures

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

See Note 10 to the Condensed Consolidated Financial Statements for a description of current legal proceedings.

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

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

(b) The following reports on Form 8-K have been filed or furnished since June 30, 2003:

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SIGNATURE

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.

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