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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, 2004

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

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, 2004, 324,974,238 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.

INDEX

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)

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

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PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(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 STATEMENTS 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. 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 2003 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:

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, 2004, Praxair granted options for 3,826,100 shares (3,915,600 shares during the quarter ended March 31, 2003) of common stock having option prices of $36.58 per share ($26.43 to $26.62 per share in 2003) and a weighted average price of $36.58 ($26.43 in 2003), the closing market price of Praxair’s common stock on the day of the grants. At March 31, 2004, there were 24,930,560 shares under option at prices ranging from $10.25 to $36.58 per share (weighted average of $25.62) of which options for 16,691,762 shares were exercisable at prices ranging from $10.25 to $29.33 per share (weighted average of $22.77). During the quarter ended March 31, 2004, options for 1,330,565 shares (950,286 in 2003) of common stock were exercised.

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2. Recently Issued Accounting Standards

In December 2003, the FASB issued a revision to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” which requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations, and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. This statement is effective December 31, 2003 for Praxair except for the requirements to disclose future benefit payments and international plan asset information, which will be effective December 31, 2004. Praxair has included the required quarterly pension disclosures in Note 8.

In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to defer accounting for the effects of the Act until the impact can be determined. For the quarter ended March 31, 2004, the consolidated financial statements and accompanying notes do not reflect the effects of the Act on the Plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and Praxair will account for the impact when the standard is finalized.

3. Inventories

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

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4. Debt

The following is a summary of Praxair’s outstanding debt at March 31, 2004 and December 31, 2003.

At March 31, 2004, $278 million of commercial paper, short-term borrowings and notes due in 2004 ($234 million commercial paper and notes due in 2004 at December 31, 2003) have 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 $1 billion credit agreement that expires in 2005. No borrowings were outstanding under the credit agreement at March 31, 2004.

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5. Financial Instruments

The following table is a summary of the notional amount of currency derivatives outstanding at March 31, 2004 and December 31, 2003 (all maturities within one year):

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. The net income hedges outstanding at March 31, 2004 are related to anticipated 2004 second quarter net income in Brazil. The December 31, 2003 net income hedges were related to anticipated 2004 net income in Canada.

At March 31, 2004, the fair value of all derivative instruments has been recorded in the condensed consolidated balance sheet as $6 million in current liabilities ($4 million in current assets and $2 million in current liabilities at December 31, 2003). No interest rate derivatives were outstanding for either period.

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. Stock options for 3,826,100 shares (5,567,740 during the quarter ended March 31, 2003) were excluded in the computation of diluted earnings per share for the quarter ended March 31, 2004 because the exercise prices were greater than the average market price of the common stock.

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7. Goodwill and Other Intangible Assets

See Note 2 on page 45 of the 2003 Annual Report for a description of the test for goodwill impairment. Changes in the carrying amount of goodwill for the quarter ended March 31, 2004 were as follows:

Changes in the carrying amount of other intangibles for the quarter ended March 31, 2004 were as follows:

There are no expected residual values related to these intangible assets. The weighted average amortization period for intangible assets is approximately 10 years. Estimated annual amortization expense is $6 million for the remainder of 2004; $6 million, $7 million, $6 million and $4 million for the years ended December 31, 2005, 2006, 2007 and 2008, respectively; and $26 million thereafter.

8. Pension and OPEB

The components of net pension and postretirement benefits other than pensions (OPEB) costs for the quarters ended March 31, 2004 and 2003 are shown below:

Praxair continues to estimate that required 2004 contributions to its pension plans will be in the range of $80 million. As of March 31, 2004, $66 million of contributions have been made worldwide.

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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 60 of the 2003 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 to 1985 by a predecessor company of Praxair. As of March 31, 2004, Praxair was a co-defendant with many other companies in 217 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, Arkansas, Indiana, Utah, Pennsylvania, Minnesota and Alabama. There were a total of 8,536 individual claimants in these cases. One case is a class action which has not 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

The following table provides summary data for the quarters ended March 31, 2004 and 2003:

* Gross margin excludes depreciation and amortization expense

Sales increased $194 million, or 15%, in the first quarter versus 2003. Currency appreciation primarily in Europe and South America favorably impacted sales growth by 6%. Strong volume growth in all operating segments increased sales by 7% as manufacturing activity strengthened throughout the quarter. Price increases were principally realized in our overseas markets and increased overall sales by 2%. The reduction in our costs for natural gas, which we are contractually obligated to pass on to on-site hydrogen customers, decreased sales $8 million, or 1%, with no impact on operating profit.

Gross margin in 2004 improved $90 million, or 17%, in the first quarter versus 2003. The improvement in gross margin, as a percent of sales to 40.7%, an 80 basis point increase, was due primarily to improved operating leverage on the strong sales volume and continued success from the combination of pricing and productivity initiatives which outpaced underlying inflationary pressures.

Selling, general and administrative expenses were $204 million, or 13.3% of sales, for the first quarter versus $185 million, or 13.8% of sales, for the respective 2003 period. The $19 million increase was primarily due to currency increases and general cost inflation.

Depreciation and amortization expense increased $17 million, or 14%, in the first quarter versus 2003. The increase was principally due to increased capital spending and currency appreciation in Europe and South America.

Operating profit increased $45 million, or 21%, in the first quarter versus 2003. Currency appreciation primarily in Europe and South America was responsible for 7% of the growth and the remaining 14% of growth was driven by strong sales volumes and continued productivity initiatives.

Interest expense decreased $5 million, or 12%, in the first quarter versus 2003 due to lower effective interest rates.

The effective income tax rate was 25.1% for the quarter versus 23.7% in 2003 due to higher earnings contributions in countries with higher marginal tax rates. We expect an effective tax rate of approximately 25% to continue for the remainder of 2004.

Net income increased $34 million, or 26%, in the first quarter versus 2003. The increase was due to improved operating profit and lower interest expense, which was partially offset by the higher effective tax rate.

The number of employees at March 31, 2004 was 25,281, reflecting a decrease of 157 employees from December 31, 2003 due primarily to headcount reductions in South America (-125) during the first quarter of 2004.

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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 2003 Annual Report to shareholders):

North America

Sales increased $67 million, or 8%, in the first quarter versus 2003. Higher demand across all end-user markets, but principally in the manufacturing, energy, healthcare, metals and electronics marketplaces, led to strong volume growth of 6%. Realized price increases were 1%. The decrease in our costs for natural gas, which we are contractually obligated to pass on to on-site hydrogen customers, decreased sales $8 million, or 1% in the first quarter, with no impact on operating profit.

Operating profit increased $18 million, or 14%, in the first quarter versus 2003. The operating profit growth was principally driven by strong operating leverage on incremental sales volume. Continued focus on productivity and cost initiatives outpaced underlying inflationary pressures.

Europe

Sales increased $43 million, or 26%, in the first quarter versus 2003. The stronger Euro increased sales by 16% and sales volume gains of 5% were primarily in our on-site metals and merchant markets in Spain and Western Europe. Realized price increases were 2%. The impact of the 2003 consolidation of Indugas, a former joint venture, increased sales by 3%.

Operating profit increased $14 million, or 37%, in the first quarter versus 2003. The increase in operating profit was principally due to the Euro currency appreciation and sales volume increases. Additionally, a property sale in 2004 resulted in a net gain of several million dollars.

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South America

Sales increased $52 million, or 35%, in the first quarter versus 2003. Excluding the 17% impact of currency on sales growth, underlying sales improvement was driven by realized price increases of 11% and sales volume increases of 7%. Continued strong volume growth in the export market, and volume increases in the metals, manufacturing and healthcare markets underpinned the sales improvement.

Operating profit increased $3 million, or 10%, in the first quarter versus 2003. The growth in operating profit is primarily attributable to continued cost savings initiatives partially offset by the impact of several million dollars for headcount reductions. The unfavorable inflationary impacts on local costs were offset by higher prices and volumes.

There are significant uncertainties surrounding the economic and political stability in South America which may result in significant currency movements versus the U.S. dollar. The devaluation of the Venezuelan bolivar adversely impacted operating profit by $1 million in the first quarter of 2004. Looking forward, it is not possible to accurately predict how currency fluctuations will impact financial results.

Currency movements versus the U.S. dollar have historically impacted reported results, especially in Brazil, Argentina and Venezuela. In the first three months of 2004, Brazil represented approximately 79% of the company’s South American sales, Venezuela represented approximately 4% and Argentina represented approximately 5%. The functional currency used for translation to the U.S. dollar for Argentina and Brazil are the peso and real, respectively. The company uses the U.S. dollar in Venezuela as its functional currency as it is a highly inflationary economy in accordance with SFAS 52.

To help understand the reported results, 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):

Asia

Sales increased $25 million, or 30%, in the first quarter versus 2003. Substantially stronger volumes, primarily in the metals and electronics marketplaces, increased sales by 18%. The consolidation of a former joint venture in China increased sales by 6%. Realized price increases resulted in 4% growth.

Operating profit increased $4 million, or 31%, in the first quarter versus 2003. The improvement in operating profit is primarily a result of strong sales volumes. The consolidation of the former joint venture added marginally to operating profit.

Surface Technologies

Sales increased $13 million, or 13%, in the first quarter versus 2003. Currency appreciation in Europe increased sales by 7% and stronger sales volumes and pricing in the metals and energy marketplaces increased sales by 6%.

Operating profit increased $6 million, or 150%, in the first quarter versus 2003. The increase in operating profit was driven by cost reduction efforts, the realization of benefits from previous restructuring actions and increased sales volumes. First quarter 2003 operating profit included $2 million of restructuring charges that did not recur in 2004.

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Liquidity, Capital Resources and Other Financial Data

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

Cash Flow from Operations

Cash flow from operations of $181 million in the quarter ended March 31, 2004 increased $10 million, or 6%, versus 2003. The improvement in net income of $34 million was the principle component of this increase. The use of funds from working capital of $104 million in 2004 was primarily driven by two factors: a domestic pension plan contribution of $60 million, and an increase in accounts receivable of $52 million due to higher sales revenues. At December 31, 2003, domestic pension plan liabilities of $60 million were classified as other current liabilities which were paid in the first quarter of 2004, resulting in a use of funds in working capital. The change in working capital in 2003 was principally a result of in increased accounts receivable of $74 million.

Investing

Net cash used for investing of $110 million in the quarter ended March 31, 2004 increased $25 million, or 29%, versus the respective 2003 period. Proceeds from divestitures and asset sales were lower in 2004 because 2003 included the impact of the sale of Praxair’s Poland operations for $50 million.

Capital expenditures for the quarter ended March 31, 2004 totaled $124 million, relatively unchanged from the respective period in 2003. On a worldwide basis, capital expenditures for the full year 2004 are expected to be approximately $700 million.

There were no acquisition expenditures for the quarter ended March 31, 2004, a decrease of $14 million from the corresponding period in 2003. Acquisitions in the first three months of 2003 were primarily small electronics, packaged gases and healthcare businesses.

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Financing

At March 31, 2004, Praxair’s total debt outstanding was $2,843 million, slightly higher than December 31, 2003 levels. Cash used for financing activities of $83 million for the quarter ended March 31, 2004 increased $17 million, or 26%, versus the respective 2003 period. The increase in funds used was primarily due to increases in the purchases of common stock and dividend payouts. Purchases of Praxair’s common stock during the first quarter of 2004 were nearly double compared to the respective 2003 period in order to manage dilution created by the increased exercise of stock options. In the first three months of 2004, cash dividends were $0.15 per share compared to $0.1075 per share for the 2003 period, an increase of 40%.

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 (“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 46.2% at December 31, 2003 to 46.0% at March 31, 2004. This improvement primarily resulted from higher shareholders' equity levels due to net income of $164 million largely offset by stock repurchases and dividend distributions.

After-tax return on capital calculated on an annualized basis increased to 12.9% from 12.6% for the quarter ended March 31, 2004 versus March 31, 2003, due to the increase in operating profit.

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 "Market Risks and Sensitivity Analyses" discussion on page 39 in the Management's Discussion and Analysis section of Praxair's 2003 Annual Report.

Item 4. Controls and Procedures

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

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 our common stock during the three months ended March 31, 2004 is provided below:

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

The other directors whose term of office continues after that meeting are: Claire W. Gargalli, Raymond W. LeBoeuf, Benjamin F. Payton, G. Jackson Ratcliffe, Jr., Dennis H. Reilley and Wayne T. Smith.

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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 December 31, 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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