##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended September 9, 2006
  o
    
    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 1-14893
 
 THE PEPSI BOTTLING GROUP, INC.
  Delaware
    
    13-4038356(State or other jurisdiction of 
employer incorporation or organization)
    
    (I.R.S.
Identification No.)One Pepsi Way, Somers, New York
    
    10589(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report.)
 þ o
  þ o o
 o þ




---



##### 



The Pepsi Bottling Group, Inc.  Index
 Page No.Part I        Financial InformationItem 1. Financial StatementsCondensed Consolidated Statements of Operations 
12 and 36 weeks ended September 9, 2006 and September 3, 2005
    
    
    2Condensed Consolidated Statements of Cash Flows 
36 weeks ended September 9, 2006 and September 3, 2005
    
    
    3Condensed Consolidated Balance Sheets 
September 9, 2006 and December 31, 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    516Item 2. Managements Financial Review
    
    
    1728Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29Part II       Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 6. Exhibits
    
    
    31EX-10.1: THE PBG DIRECTORS' STOCK PLANEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATIONEX-99.1: BOTTLING GROUP LLC FORM 10-Q




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
 The Pepsi Bottling Group, Inc.
 
 Condensed Consolidated Statements of Operations
  12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9, 2006
    
    
    3, 2005Net revenues
    
    $
    3,460
    
    
    $
    3,214
    
    
    $
    8,965
    
    
    $
    8,223Cost of sales
    
    
    1,851
    
    
    
    1,695
    
    
    
    4,770
    
    
    
    4,306Gross profit
    
    
    1,609
    
    
    
    1,519
    
    
    
    4,195
    
    
    
    3,917Selling, delivery and administrative expenses
    
    
    1,226
    
    
    
    1,126
    
    
    
    3,376
    
    
    
    3,101Operating income
    
    
    383
    
    
    
    393
    
    
    
    819
    
    
    
    816Interest expense, net
    
    
    62
    
    
    
    56
    
    
    
    186
    
    
    
    169Other non-operating expenses (income), net
    
    
    1
    
    
    
    (1
    )
    
    
    11
    
    
    
    Minority interest
    
    
    24
    
    
    
    24
    
    
    
    48
    
    
    
    47Income before income taxes
    
    
    296
    
    
    
    314
    
    
    
    574
    
    
    
    600Income tax expense
    
    
    89
    
    
    
    109
    
    
    
    185
    
    
    
    208Net income
    
    $
    207
    
    
    $
    205
    
    
    $
    389
    
    
    $
    392Basic earnings per share
    
    $
    0.88
    
    
    $
    0.84
    
    
    $
    1.65
    
    
    $
    1.60Weighted-average shares outstanding
    
    
    235
    
    
    
    243
    
    
    
    236
    
    
    
    245Diluted earnings per share
    
    $
    0.86
    
    
    $
    0.82
    
    
    $
    1.61
    
    
    $
    1.55Weighted-average shares outstanding
    
    
    242
    
    
    
    250
    
    
    
    242
    
    
    
    252Dividends declared per common share
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.30
    
    
    $
    0.21
  2




---



##### Table of Contents



The Pepsi Bottling Group, Inc.
 
 Condensed Consolidated Statements of Cash Flows
  36 Weeks EndedSeptember
    
    
    September9, 2006
    
    
    3, 2005Cash Flows  OperationsNet income
    
    $
    389
    
    
    $
    392Adjustments to reconcile net income to net cash provided by operations:Depreciation
    
    
    434
    
    
    
    420Amortization
    
    
    9
    
    
    
    10Deferred income taxes
    
    
    (68
    )
    
    
    (5
    )Stock-based compensation
    
    
    46
    
    
    
    Other non-cash charges and credits, net
    
    
    239
    
    
    
    226Changes in operating working capital, excluding effects of acquisitions:Accounts receivable, net
    
    
    (532
    )
    
    
    (412
    )Inventories
    
    
    (162
    )
    
    
    (84
    )Prepaid expenses and other current assets
    
    
    (5
    )
    
    
    6Accounts payable and other current liabilities
    
    
    288
    
    
    
    236Income taxes payable
    
    
    155
    
    
    
    107Net change in operating working capital
    
    
    (256
    )
    
    
    (147
    )Casualty insurance payments
    
    
    (47
    )
    
    
    (45
    )Pension contributions
    
    
    (1
    )
    
    
    (30
    )Other, net
    
    
    (40
    )
    
    
    (51
    )Net Cash Provided by Operations
    
    
    705
    
    
    
    770Cash Flows  InvestmentsCapital expenditures
    
    
    (525
    )
    
    
    (489
    )Proceeds from sale of property, plant and equipment
    
    
    6
    
    
    
    20Acquisitions of bottlers, net of cash acquired
    
    
    (33
    )
    
    
    (1
    )Other investing activities, net
    
    
    8
    
    
    
    1Net Cash Used for Investments
    
    
    (544
    )
    
    
    (469
    )Cash Flows  FinancingShort-term borrowings, net
    
    
    (279
    )
    
    
    (60
    )Proceeds from long-term debt
    
    
    793
    
    
    
    36Payments of long-term debt
    
    
    (99
    )
    
    
    (11
    )Dividends paid
    
    
    (64
    )
    
    
    (44
    )Excess tax benefit from exercise of stock options
    
    
    17
    
    
    
    Proceeds from exercise of stock options
    
    
    142
    
    
    
    81Purchases of treasury stock
    
    
    (309
    )
    
    
    (340
    )Net Cash Provided by (Used for) Financing
    
    
    201
    
    
    
    (338
    )Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    (2
    )
    
    
    (1
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    360
    
    
    
    (38
    )Cash and Cash Equivalents  Beginning of Period
    
    
    502
    
    
    
    305Cash and Cash Equivalents  End of Period
    
    $
    862
    
    
    $
    267Supplemental Cash Flow InformationInterest paid
    
    $
    208
    
    
    $
    187Income taxes paid
    
    $
    80
    
    
    $
    105Changes in accounts payable related to capital expenditures
    
    $
    (38
    )
    
    $
    (45
    )Capital lease additions
    
    $
    19
    
    
    $
    2Liabilities incurred and/or assumed in conjunction with acquisitions of bottlers
    
    $
    20
    
    
    $
    
  3




---



##### Table of Contents



The Pepsi Bottling Group, Inc.
 
 Condensed Consolidated Balance Sheets
  (Unaudited)September
    
    
    December9, 2006
    
    
    31, 2005ASSETSCurrent AssetsCash and cash equivalents
    
    $
    862
    
    
    $
    502Accounts
receivable, less allowance of $56 at September 9, 2006 and $51 at December 31, 2005
    
    
    1,736
    
    
    
    1,186Inventories
    
    
    638
    
    
    
    458Prepaid expenses and other current assets
    
    
    262
    
    
    
    266Total Current Assets
    
    
    3,498
    
    
    
    2,412Property, plant and equipment, net
    
    
    3,747
    
    
    
    3,649Other intangible assets, net
    
    
    3,804
    
    
    
    3,814Goodwill
    
    
    1,547
    
    
    
    1,516Other assets
    
    
    146
    
    
    
    133Total Assets
    
    $
    12,742
    
    
    $
    11,524LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable and other current liabilities
    
    $
    1,948
    
    
    $
    1,583Short-term borrowings
    
    
    163
    
    
    
    426Current maturities of long-term debt
    
    
    514
    
    
    
    589Total Current Liabilities
    
    
    2,625
    
    
    
    2,598Long-term debt
    
    
    4,741
    
    
    
    3,939Other liabilities
    
    
    1,142
    
    
    
    1,027Deferred income taxes
    
    
    1,362
    
    
    
    1,421Minority interest
    
    
    563
    
    
    
    496Total Liabilities
    
    
    10,433
    
    
    
    9,481Shareholders EquityCommon
stock, par value $0.01 per share:authorized 900 shares, issued 310 shares
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    1,733
    
    
    
    1,709Retained earnings
    
    
    2,601
    
    
    
    2,283Accumulated other comprehensive loss
    
    
    (224
    )
    
    
    (262
    )Deferred compensation
    
    
    
    
    
    
    (14
    )Treasury stock: 74 shares and 71 shares at September
9, 2006 and December 31, 2005,
respectively, at cost
    
    
    (1,804
    )
    
    
    (1,676
    )Total Shareholders Equity
    
    
    2,309
    
    
    
    2,043Total Liabilities and Shareholders Equity
    
    $
    12,742
    
    
    $
    11,524
  4




---



##### Table of Contents



Notes to Condensed Consolidated Financial Statements
  Note 1  Basis of Presentation
     Quarter
    
    U.S. & Canada
    
    Mexico & EuropeFirst Quarter
    
    12 weeks
    
    January and FebruarySecond Quarter
    
    12 weeks
    
    March, April and MayThird Quarter
    
    12 weeks
    
    June, July and AugustFourth Quarter
    
    16 weeks (FY 2006)/
17 weeks (FY 2005)
    
    September, October,
November and December
  Note 2  Seasonality of Business
  5




---



##### Table of Contents



Note 3  New Accounting Standards
 FASB Interpretation No. 48
  SFAS No. 157
 Fair Value Measurements
 SFAS No. 158
 Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
 6




---



##### Table of Contents



Note 4  Earnings per Share
  12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9, 2006
    
    
    3, 2005Average number of shares outstanding during
period on which basic earnings per share is
based
    
    
    235
    
    
    
    243
    
    
    
    236
    
    
    
    245Add  Incremental shares under stock
compensation plans
    
    
    7
    
    
    
    7
    
    
    
    6
    
    
    
    7Number of shares on which diluted
earnings per share is based
    
    
    242
    
    
    
    250
    
    
    
    242
    
    
    
    252Net earnings applicable to common shareholders
    
    $
    207
    
    
    $
    205
    
    
    $
    389
    
    
    $
    392Net earnings on which diluted earnings
per share is based
    
    $
    207
    
    
    $
    205
    
    
    $
    389
    
    
    $
    392Basic earnings per share
    
    $
    0.88
    
    
    $
    0.84
    
    
    $
    1.65
    
    
    $
    1.60Diluted earnings per share
    
    $
    0.86
    
    
    $
    0.82
    
    
    $
    1.61
    
    
    $
    1.55
   
    
    For the 12 weeks ended September 9, 2006 and September 3, 2005, options to purchase 0.2
million shares and 6.4 million shares, respectively.
    
    For the 36 weeks ended September 9, 2006 and September 3, 2005, options to purchase 2.1
million shares and 11.5 million shares, respectively.
 Note 5  Share-Based Compensation
 Accounting for Share-Based Compensation
  7




---



##### Table of Contents



12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September3, 2005
    
    
    3, 2005Net income:As reported
    
    $
    205
    
    
    $
    392Add: Total share-based employee
compensation included in reported net
income, net of taxes and minority
interest
    
    
    
    
    
    
    1Less: Total share-based employee
compensation determined under
fair-value based method for all awards,
net of taxes and minority interest
    
    
    (11
    )
    
    
    (32
    )Pro forma
    
    $
    194
    
    
    $
    361Earnings per share:Basic  as reported
    
    $
    0.84
    
    
    $
    1.60Basic  pro forma
    
    $
    0.80
    
    
    $
    1.47Diluted  as reported
    
    $
    0.82
    
    
    $
    1.55Diluted
 pro forma
    
$
    0.77
    
    
    $
    1.42
 8




---



##### Table of Contents



Share-Based
Long-Term Incentive Compensation Plans
     12 Weeks Ended
    
    36 Weeks EndedSeptember
    
    September
    
    September
    
    September9, 2006
    
    3, 2005
    
    9, 2006
    
    3, 2005Risk-free interest rate
    
    
    5.0
    %
    
    
    4.0
    %
    
    
    4.7
    %
    
    
    4.1
    %Expected term (in years)
    
    
    5.7
    
    
    
    5.8
    
    
    
    5.7
    
    
    
    5.8Expected volatility
    
    
    27
    %
    
    
    28
    %
    
    
    27
    %
    
    
    28
    %Expected dividend yield
    
    
    1.5
    %
    
    
    1.1
    %
    
    
    1.5
    %
    
    
    1.1
    %Estimated fair value
per option granted
    
    $
    10.22
    
    
    $
    8.59
    
    
    $
    8.75
    
    
    $
    8.67
    9




---



##### Table of Contents



Stock Options
   WeightedWeighted
    
    AverageAverage
    
    RemainingExercise
    
    Contractual
    
    AggregateShares
    
    Price per
    
    Term
    
    IntrinsicOptions
    
    (in millions)
    
    Share
    
    (years)
    
    ValueOutstanding at January 1, 2006
    
    
    38.1
    
    
    $
    22.54Granted
    
    
    3.6
    
    
    $
    29.68Exercised
    
    
    (7.5
    )
    
    $
    19.09Forfeited or expired
    
    
    (0.6
    )
    
    $
    27.57Outstanding at September 9, 2006
    
    
    33.6
    
    
    $
    24.00
    
    
    
    6.5
    
    
    $
    338Exercisable at September 9, 2006
    
    
    20.9
    
    
    $
    21.21
    
    
    
    5.4
    
    
    $
    268
   Restricted Stock and Restricted Stock Units
   Restricted
Stocks and
    
    Shares
    
    Weighted AverageRestricted
Stock Units
    
    (in millions)
    
    Grant-Date Fair ValueNonvested at January 1, 2006
    
    
    0.9
    
    
    $
    26.00Granted
    
    
    1.2
    
    
    $
    29.53Vested
    
    
    (0.1
    )
    
    $
    26.22Forfeited
    
    
    (0.3
    )
    
    $
    23.97Nonvested at September 9, 2006
    
    
    1.7
    
    
    $
    29.03
  10




---



##### Table of Contents



Note 6  Accounts Receivable
 September
    
    
    December9, 2006
    
    
    31, 2005Trade accounts receivable
    
    $
    1,540
    
    
    $
    1,018Allowance for doubtful accounts
    
    
    (56
    )
    
    
    (51
    )Accounts receivable from PepsiCo
    
    
    200
    
    
    
    143Other receivables
    
    
    52
    
    
    
    76$
    1,736
    
    
    $
    1,186
 Note 7  Inventories
 September
    
    
    December9, 2006
    
    
    31, 2005Raw materials and supplies
    
    $
    261
    
    
    $
    173Finished goods
    
    
    377
    
    
    
    285$
    638
    
    
    $
    458
 Note 8  Property, Plant and Equipment, net
 September
    
    
    December9, 2006
    
    
    31, 2005Land
    
    $
    288
    
    
    $
    277Buildings and improvements
    
    
    1,383
    
    
    
    1,299Manufacturing and distribution equipment
    
    
    3,594
    
    
    
    3,425Marketing equipment
    
    
    2,426
    
    
    
    2,334Other
    
    
    214
    
    
    
    1777,905
    
    
    
    7,512Accumulated depreciation
    
    
    (4,158
    )
    
    
    (3,863
    )$
    3,747
    
    
    $
    3,649
 11




---



##### Table of Contents



Note 9  Other Intangible Assets, net and Goodwill
 September
    
    
    December9, 2006
    
    
    31, 2005Intangibles subject to amortization:Gross carrying amount:Customer relationships and lists
    
    $
    51
    
    
    $
    53Franchise/distribution rights
    
    
    45
    
    
    
    46Other identified intangibles
    
    
    32
    
    
    
    39128
    
    
    
    138Accumulated amortization:Customer relationships and lists
    
    
    (10
    )
    
    
    (9
    )Franchise/distribution rights
    
    
    (26
    )
    
    
    (22
    )Other identified intangibles
    
    
    (14
    )
    
    
    (18
    )(50
    )
    
    
    (49
    )Intangibles subject to amortization, net
    
    
    78
    
    
    
    89Intangibles not subject to amortization:Carrying amount:Franchise rights
    
    
    3,105
    
    
    
    3,093Distribution rights
    
    
    294
    
    
    
    302Trademarks
    
    
    213
    
    
    
    218Other identified intangibles
    
    
    114
    
    
    
    112Intangibles not subject to amortization
    
    
    3,726
    
    
    
    3,725Total other intangible assets, net
    
    $
    3,804
    
    
    $
    3,814
  Estimated Aggregate Amortization Expense to be IncurredWeighted-AverageAmortization
    
    
    Balance of
    
    
    Fiscal Year EndingPeriod
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Customer
relationships and
lists
    
    18 years
    
    $
    1
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3Franchise/distribution rights
    
    7 years
    
    $
    1
    
    
    $
    3
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2Other identified
intangibles
    
    8 years
    
    $
    1
    
    
    $
    4
    
    
    $
    3
    
    
    $
    2
    
    
    $
    1
 12




---



##### Table of Contents



U.S. &Canada
    
    
    Europe
    
    
    Mexico
    
    
    TotalBalance at December 31, 2005
    
    $
    1,240
    
    
    $
    16
    
    
    $
    260
    
    
    $
    1,516Purchase price allocations relating
to recent acquisitions
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Impact of foreign currency translation
    
    
    13
    
    
    
    
    
    
    
    (9
    )
    
    
    4Balance at September 9, 2006
    
    $
    1,253
    
    
    $
    16
    
    
    $
    278
    
    
    $
    1,547
  Note 10 Accounts Payable and Other Current Liabilities
 September
    
    
    December9, 2006
    
    
    31, 2005Accounts payable
    
    $
    578
    
    
    $
    501Trade incentives
    
    
    199
    
    
    
    185Accrued compensation and benefits
    
    
    227
    
    
    
    211Accounts payable to PepsiCo
    
    
    272
    
    
    
    176Other current liabilities
    
    
    672
    
    
    
    510$
    1,948
    
    
    $
    1,583
 Note 11  Long-Term Debt
   Note 12  Pension and Postretirement Medical Benefit Plans
 Pension Benefits
   13




---



##### Table of Contents



12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9, 2006
    
    
    3, 2005Service cost
    
    $
    12
    
    
    $
    11
    
    
    $
    36
    
    
    $
    32Interest cost
    
    
    19
    
    
    
    17
    
    
    
    57
    
    
    
    52Expected return on plan assets
    
    
    (21
    )
    
    
    (21
    )
    
    
    (65
    )
    
    
    (63
    )Amortization of prior service cost
    
    
    2
    
    
    
    2
    
    
    
    6
    
    
    
    5Amortization of net loss
    
    
    9
    
    
    
    7
    
    
    
    27
    
    
    
    21Net pension expense for the defined benefit plans
    
    
    21
    
    
    
    16
    
    
    
    61
    
    
    
    47Defined contribution plans expense
    
    
    5
    
    
    
    4
    
    
    
    15
    
    
    
    13Total U.S. pension expense recognized in the
Condensed Consolidated Statements of Operations
    
    $
    26
    
    
    $
    20
    
    
    $
    76
    
    
    $
    60
  Postretirement Medical Benefits
   12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9, 2006
    
    
    3, 2005Service cost
    
    $
    1
    
    
    $
    1
    
    
    $
    3
    
    
    $
    2Interest cost
    
    
    5
    
    
    
    5
    
    
    
    14
    
    
    
    15Amortization of net loss
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    5U.S. postretirement
benefits expense
recognized in the
Condensed Consolidated
Statements of
Operations
    
    $
    7
    
    
    $
    7
    
    
    $
    21
    
    
    $
    22
 Note 13  Segment Information
   14




---



##### Table of Contents



Net Revenues
    
    12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9, 2006
    
    
    3, 2005U.S. & Canada
    
    $
    2,559
    
    
    $
    2,397
    
    
    $
    7,017
    
    
    $
    6,453Europe
    
    
    554
    
    
    
    487
    
    
    
    1,088
    
    
    
    988Mexico
    
    
    347
    
    
    
    330
    
    
    
    860
    
    
    
    782Worldwide net revenues
    
    $
    3,460
    
    
    $
    3,214
    
    
    $
    8,965
    
    
    $
    8,223
 Operating Income
    
    12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9, 2006
    
    
    3, 2005U.S. & Canada
    
    $
    281
    
    
    $
    311
    
    
    $
    697
    
    
    $
    728Europe
    
    
    71
    
    
    
    53
    
    
    
    61
    
    
    
    45Mexico
    
    
    31
    
    
    
    29
    
    
    
    61
    
    
    
    43Worldwide operating income
    
    
    383
    
    
    
    393
    
    
    
    819
    
    
    
    816Interest expense, net
    
    
    62
    
    
    
    56
    
    
    
    186
    
    
    
    169Other non-operating expenses (income), net
    
    
    1
    
    
    
    (1
    )
    
    
    11
    
    
    
    Minority interest
    
    
    24
    
    
    
    24
    
    
    
    48
    
    
    
    47Income before income taxes
    
    $
    296
    
    
    $
    314
    
    
    $
    574
    
    
    $
    600
  Total AssetsSeptember
    
    
    December9, 2006
    
    
    31, 2005U.S. & Canada
    
    $
    9,855
    
    
    $
    8,869Europe
    
    
    1,114
    
    
    
    894Mexico
    
    
    1,773
    
    
    
    1,761Worldwide total assets
    
    $
    12,742
    
    
    $
    11,524
 Note 14  Comprehensive Income
 12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9,2006
    
    
    3, 2005Net income
    
    $
    207
    
    
    $
    205
    
    
    $
    389
    
    
    $
    392Net currency translation adjustment
    
    
    53
    
    
    
    45
    
    
    
    32
    
    
    
    42Cash flow hedge adjustment(a)(b)
    
    
    
    
    
    
    (4
    )
    
    
    6
    
    
    
    (6
    )Comprehensive income
    
    $
    260
    
    
    $
    246
    
    
    $
    427
    
    
    $
    428
 
 (a)
    
    Net of minority interest and taxes of $(1) million and $(3) million for the 12 weeks ended
September 9, 2006 and September 3, 2005, respectively.(b)
    
    Net of minority interest and taxes of $4 million and $(4) million for the 36 weeks ended
September 9, 2006 and September 3, 2005, respectively. 15




---



##### Table of Contents



Note 15  Contingencies
  16




---



##### Table of Contents



Item 2. Managements Financial Review
  OVERVIEW
     CRITICAL ACCOUNTING POLICIES
    17




---



##### Table of Contents



Share-Based Compensation
    Financial Performance Results
 12 Weeks Ended
    
    36 Weeks EndedSeptember
    
    September
    
    %
    
    September
    
    September
    
    %9, 2006
    
    3, 2005
    
    Change
    
    9, 2006
    
    3, 2005
    
    ChangeNet revenues
    
    $
    3,460
    
    
    $
    3,214
    
    
    
    8
    %
    
    $
    8,965
    
    
    $
    8,223
    
    
    
    9
    %Gross profit
    
    
    1,609
    
    
    
    1,519
    
    
    
    6
    %
    
    
    4,195
    
    
    
    3,917
    
    
    
    7
    %Operating income
    
    
    383
    
    
    
    393
    
    
    
    (3
    )%
    
    
    819
    
    
    
    816
    
    
    
    0
    %Net income
    
    
    207
    
    
    
    205
    
    
    
    1
    %
    
    
    389
    
    
    
    392
    
    
    
    (1
    )%Diluted earnings
per
share1
    
    $
    0.86
    
    
    $
    0.82
    
    
    
    5
    %
    
    $
    1.61
    
    
    $
    1.55
    
    
    
    3
    %
 
 1
    
     Percentage change for diluted earnings per share is calculated by using earnings per share data that is
expanded to the fourth decimal place. 18




---



##### Table of Contents



Items Affecting Comparability of Our Financial Results
 12 Weeks Ended
    
    
    36 Weeks EndedSeptember
    
    
    September
    
    
    September
    
    
    September9, 2006
    
    
    3, 2005
    
    
    9, 2006
    
    
    3, 2005Operating incomeImpact of SFAS 123R
    
    $
    (14
    )
    
    
    
    
    
    $
    (46
    )Net gain from HFCS
litigation settlement
    
    
    
    
    
    $
    16
    
    
    
    
    
    
    $
    16Diluted earnings per shareImpact of SFAS 123R
    
    $
    (0.04
    )
    
    
    
    
    
    $
    (0.12
    )Net gain from HFCS
litigation settlement
    
    
    
    
    
    $
    0.04
    
    
    
    
    
    
    $
    0.04Tax law changes
    
    $
    0.05
    
    
    
    
    
    
    $
    0.05
 SFAS 123R
  High Fructose Corn Syrup (HFCS) Litigation Settlement
  Tax Law Changes
  Financial Performance Discussion
   19




---



##### Table of Contents



Full-Year 2006 Outlook
   20




---



##### Table of Contents



Forecasted 2006 versus2005 growthWorldwide Volume(1)
    
    
    ~ 3
    %U.S. Volume(1)
    
    
    ~ 2
    %Worldwide revenue(2)
    
    7% to 8%Worldwide net revenue per case
    
    3% to 4%Worldwide cost of sales per case
    
    
    ~ 5
    %SD&A
    
    6% to 7%Operating Income(3)
    
    (1)% to 1%
 Full-Year Forecasted2006 ResultsDiluted Earnings Per Share(3) (4)
    
    $1.90 to $1.93
 
 (1)
    
    The additional week of volume as a result of the 53rd week in 2005 reduced our
worldwide and U.S. volume growth in 2006 by approximately one-percentage point. On a constant
territory basis, worldwide volume and U.S. volume are expected to grow about four percent and about
three percent, respectively.(2)
    
    The additional week of revenue as a result of the 53rd week in 2005 reduced our worldwide
revenue growth by approximately one-percentage point.(3)
    
    The impact of adopting SFAS 123R in 2006 is expected to result in a seven-percentage point
reduction in our operating income or approximately $0.18 of diluted earnings per share.(4)
    
    The impact of income tax law changes in 2006 will result in $0.05 of diluted earnings per
share.  Third Quarter 2006 Results
 Volume
 12 Weeks Ended
    
    36 Weeks EndedSeptember 9, 2006 vs.
    
    September 9, 2006 vs.September 3, 2005
    
    September 3, 2005World-
    
    U.S. &
    
    
    
    
    
    
    
    
    
    World-
    
    U.S. &wide
    
    Canada
    
    Europe
    
    Mexico
    
    wide
    
    Canada
    
    Europe
    
    MexicoBase volume
    
    
    3
    %
    
    
    2
    %
    
    
    8
    %
    
    
    (1
    )%
    
    
    4
    %
    
    
    4
    %
    
    
    7
    %
    
    
    2
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %Total Volume
change
    
    
    4
    %
    
    
    3
    %
    
    
    8
    %
    
    
    3
    %
    
    
    5
    %
    
    
    5
    %
    
    
    7
    %
    
    
    3
    %
    21




---



##### Table of Contents



Aquafina Lipton Iced Tea Lipton SoBe Lifewater Aquafina Sparkling Pepsi Tropicana Twister Mountain Dew
 Aquafina,
 Pepsi
  22




---



##### Table of Contents



Net Revenues
 12 Weeks Ended
    
    36 Weeks EndedSeptember 9, 2006 vs.
    
    September 9, 2006 vs.September 3, 2005
    
    September 3, 2005Worldwide
    
    U.S. & Canada
    
    Europe
    
    Mexico
    
    Worldwide
    
    U.S. & Canada
    
    Europe
    
    MexicoVolume impact
    
    
    3
    %
    
    
    2
    %
    
    
    8
    %
    
    
    (1
    )%
    
    
    4
    %
    
    
    4
    %
    
    
    7
    %
    
    
    2
    %Net price per case impact
(rate/mix)
    
    
    4
    %
    
    
    3
    %
    
    
    5
    %
    
    
    5
    %
    
    
    4
    %
    
    
    3
    %
    
    
    4
    %
    
    
    6
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    2
    %Currency translation
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    (3
    )%
    
    
    0
    %
    
    
    1
    %
    
    
    (1
    )%
    
    
    0
    %Total Net Revenues change
    
    
    8
    %
    
    
    7
    %
    
    
    14
    %
    
    
    5
    %
    
    
    9
    %
    
    
    9
    %
    
    
    10
    %
    
    
    10
    %
     23




---



##### Table of Contents



Cost of Sales
 12 Weeks Ended
    
    36 Weeks EndedSeptember 9, 2006 vs.
    
    September 9, 2006 vs.September 3, 2005
    
    September 3, 2005Worldwide
    
    WorldwideVolume impact
    
    
    3
    %
    
    
    4
    %Cost per case impact
    
    
    5
    %
    
    
    5
    %Acquisitions
    
    
    1
    %
    
    
    1
    %Currency translation
    
    
    0
    %
    
    
    1
    %Total Cost of Sales change
    
    
    9
    %
    
    
    11
    %
     24




---



##### Table of Contents



Selling, Delivery and Administrative Expenses
 12 Weeks Ended
    
    36 Weeks EndedSeptember 9, 2006 vs.
    
    September 9, 2006 vs.September 3, 2005
    
    September 3, 2005Worldwide
    
    WorldwideCost impact
    
    
    5
    %
    
    
    5
    %Adoption of SFAS 123R 1
    
    
    1
    %
    
    
    2
    %HFCS Settlement in 2005 1
    
    
    2
    %
    
    
    1
    %Acquisitions
    
    
    1
    %
    
    
    1
    %Currency translation
    
    
    0
    %
    
    
    0
    %Total SD&A change
    
    
    9
    %
    
    
    9
    %
 
 1-
    
    Each of these items was approximately 1.5% in the third
quarter. For third quarter presentation purposes the adoption of SFAS 123R
was rounded to 1% and the impact from the lapping of the HFCS settlement was
rounded to 2%.  Operating Income
   Interest Expense, net
  25




---



##### Table of Contents



Other Non-operating Expenses, net
  Income Tax Expense
   Liquidity and Financial Condition
 Cash Flows
     Liquidity and Capital Resources
   26




---



##### Table of Contents



Contractual Obligations
  27




---



##### Table of Contents



Cautionary Statements
  
    
    changes in our relationship with PepsiCo that could have a material adverse effect on our long-term and short-term
business and financial results;
 
    
    material changes in expected levels of bottler incentive payments from PepsiCo;
 
    
    restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs;
 
    
    material changes from expectations in the cost or availability of raw materials, ingredients or packaging
materials;
 
    
    limitations on the availability of water or obtaining water rights;
 
    
    an inability to achieve cost savings;
 
    
    material changes in capital investment for infrastructure and an inability to achieve the expected timing for
returns on cold-drink equipment and related infrastructure expenditures;
 
    
    decreased demand for our product resulting from changes in consumers preferences;
 
    
    an inability to achieve volume growth through product and packaging initiatives;
 
    
    impact of competitive activities on our business;
 
    
    impact of customer consolidations on our business;
 
    
    changes in product category consumption;
 
    
    unfavorable weather conditions in our markets;
 
    
    an inability to meet projections for performance in newly acquired territories;
 
    
    loss of business from a significant customer;
 
    
    failure or inability to comply with laws and regulations;
 
    
    changes in laws, regulations and industry guidelines governing the manufacture and sale of food and beverages,
including restrictions on the sale of carbonated soft drinks in schools;
 
    
    litigation, other claims and negative publicity relating to the alleged unhealthy properties of soft drinks;
 
    
    changes in laws and regulations governing the environment, transportation, employee safety, labor and government
contracts;
 
    
    changes in accounting standards and taxation requirements (including unfavorable outcomes from audits performed by
various tax authorities);
 
    
    unforeseen economic and political changes;
 
    
    possible recalls of our products;
 
    
    interruptions of operations due to labor disagreements;
 
    
    changes in our debt ratings;
 
    
    material changes in expected interest and currency exchange rates and unfavorable market performance of our
pension plan assets; and
 
    
    an inability to achieve strategic business plan targets that could result in an intangible asset impairment charge.
 28




---



##### Table of Contents



Item 3.
 Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4.
 Controls and Procedures
   29




---



##### Table of Contents



PART
II  OTHER INFORMATION
 
 Item 2.
 Unregistered Sales of Equity Securities and Use of Proceeds
 PBG Purchases of Equity Securities
  Total Number of Shares
    
    Maximum Number ofTotal Number
    
    Average Price
    
    Purchased as Part of Publicly
    
    Shares that May Yet Beof Shares
    
    Paid per
    
    Announced Plans or
    
    Purchased Under the PlansPeriod
    
    Purchased1
    
    Share2
    
    Programs 3
    
    or Programs 3Period 706/18/0607/15/06
    
    991,500
    
    
    $
    31.77
    
    
    
    991,500
    
    
    
    15,169,700Period 807/16/0608/12/06
    
    600,000
    
    
    $
    33.71
    
    
    
    600,000
    
    
    
    14,569,700Period 908/13/0609/09/06
    
    570,000
    
    
    $
    34.26
    
    
    
    570,000
    
    
    
    13,999,700Total
    
    
    2,161,500
    
    
    $
    32.97
    
    
    
    2,161,500
 
 1
    
    Shares have only been repurchased through publicly announced programs.2
    
    Average share price excludes brokerage fees.3
    
    The PBG Board has authorized the repurchase of shares of common stock on the open
market and through negotiated transactions as follows: Number of SharesAuthorized to beDate Share Repurchase Program was Publicly Announced
    
    RepurchasedOctober 14, 1999
    
    
    20,000,000July 13, 2000
    
    
    10,000,000July 11, 2001
    
    
    20,000,000May 28, 2003
    
    
    25,000,000March 25, 2004
    
    
    25,000,000March 24, 2005
    
    
    25,000,000Total shares authorized to be repurchased as of September
9, 2006
    
    
    125,000,000
  30




---



##### Table of Contents



Item 6.
 Exhibits
 Exhibit No.10.1
    
    The PBG Directors Stock Plan (As Amended and Restated as of July 19, 2006)31.1
    
    Certification by the Chief Executive Officer pursuant to Section 302 of
the SarbanesOxley Act of 200231.2
    
    Certification by the Chief Financial Officer pursuant to Section 302 of
the SarbanesOxley Act of 200232.1
    
    Certification by the Chief Executive Officer pursuant to Section 906 of
the SarbanesOxley Act of 200232.2
    
    Certification by the Chief Financial Officer pursuant to
Section 906 of the SarbanesOxley Act of 200299.1
    
    Bottling Group LLC Form 10-Q for the quarterly period ended
September 9, 2006, as required by the SEC as a result of
Bottling Group LLCs guarantee of up to $1,000,000,000
aggregate principal amount of our 7% Senior Notes due in 2029.
 31




---



##### Table of Contents



SIGNATURES
  THE
PEPSI BOTTLING GROUP, INC.(Registrant)Date: October 17, 2006
    
    
    
    
    
    /s/ Andrea L. ForsterAndrea L. ForsterVice President and ControllerDate: October 17, 2006
    
    
    
    
    
    /s/ Alfred H. DrewesAlfred H. DrewesSenior Vice President andChief Financial Officer