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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 THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

OR

/  /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 July 31, 2003, 162,965,533 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

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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)

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:

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 six months ended June 30, 2003, Praxair granted options for 22,500 and 1,980,300 shares, respectively, of common stock having option prices ranging from $52.85 to $57.52 per share (weighted average price of $52.91), the closing market price of Praxair’s common stock on the day of the grants. At June 30, 2003 there were 13,118,247 shares under option at prices ranging from $15.75 to $58.65 per share (weighted average of $46.30) of which options for 8,421,056 shares were exercisable at prices ranging from $15.75 to $58.65 per share (weighted average of $43.12). During the quarter and six months ended June 30, 2003, options for 1,245,011 and 1,720,154 shares of common stock were exercised.

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2.   Recently Issued Accounting Standards and Accounting Change

In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 became effective for disposal activities initiated after December 31, 2002 and did not have a material effect on Praxair’s financial position or results of operations in the first half of 2003.

In December 2002, the FASB issued Interpretation No. (“FIN”) 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This interpretation expands the disclosures to be made by Praxair about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of the guarantee, a liability for the fair value of the obligation underlying the guarantee. Praxair was required to disclose its issued guarantees beginning December 31, 2002 and, on a prospective basis, is required to record the fair value of certain guarantees that it may issue beginning in 2003. This interpretation did not have a material impact on Praxair’s financial position or results of operations in the first half of 2003.

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 plans to issue a new standard which may go into effect as early as 2004, 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 for Praxair as of July 1, 2003. A variable interest entity (“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 June 30, 2003 all significant VIE’s of which Praxair is the primary beneficiary were 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 is effective for contracts entered into or modified after June 30, 2003, and will 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 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. Praxair is currently evaluating the impact, if any, of adopting EITF 00-21.

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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.

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 June 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 June 30, 2003, $327 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 June 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. This swap agreement was designated as, and was effective as, a cash flow hedge of an outstanding lease obligation. During the first quarter of 2003, Praxair recognized in earnings an insignificant deferred loss from accumulated other comprehensive income (loss) as the underlying hedged transaction occurred and was recognized in earnings.

Currency Contracts — Praxair is a party to currency exchange forward contracts (that mature within one year) to manage its exposure to changing currency exchange rates. At June 30, 2003, Praxair had $442 million notional amount of currency exchange forward contracts outstanding ($433 million at December 31, 2002); $371 million to hedge recorded balance sheet exposures ($222 million at December 31, 2002); $1 million at June 30, 2003 and December 31, 2002 to hedge firm commitments for the purchase of equipment related to construction projects; and $70 million to hedge anticipated future net income ($210 million at December 31, 2002). Additionally, there was $85 million notional value of currency exchange contracts that effectively offset each other ($39 million at December 31, 2002).

The net income hedges at June 30, 2003 are related to anticipated net income for balance of the year in China, Peru, Colombia, India, Thailand and Korea and for the three months ending September 30, 2003 in Brazil, Europe, Canada and Mexico. Other income (expense) — net includes a $9 million loss for the quarter and a $8 million loss for the six months ended June 30, 2003 as a result of recognizing these contracts at fair value, of which $5 million and $2 million, respectively, related to anticipated second half net income. Other income (expense) — net includes a $9 million gain for the quarter and a $6 million gain for the six months ended June 30, 2002 of which $7 million and $6 million, respectively, related to anticipated second half net income.

At June 30, 2003 the fair value of all derivative instruments has been recorded in the condensed consolidated balance sheet as follows: $16 million in current assets and $28 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 882,596 shares (899,300 during the quarter and six months ended June 30, 2002) were excluded in the computation of diluted earnings per share for the quarter and six months ended June 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 six months ended June 30, 2003, were as follows:

Changes in the carrying amount of other intangibles for the six months ended June 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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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results