##### 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 June 17, 2006
 OR
 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)
 914-767-6000
 N/A
 þ o
  Large Accelerated Filer þ
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
 o þ




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##### 



The Pepsi Bottling Group, Inc.  Index
 Page No.Part I
    
    Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Statements of Operations - 12 and 24 weeks ended June 17, 2006 and June 11, 2005
    
    
    2Condensed Consolidated Statements of Cash Flows - 24 weeks ended June 17, 2006 and June 11, 2005
    
    
    3Condensed Consolidated Balance Sheets - June 17, 2006 and December 31, 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5-16Item 2.
    
    Managements Financial Review
    
    
    17-26Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27Part II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28-29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 6.
    
    Exhibits
    
    
    30SIGNATURESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATIONEX-99.1: FINANCIAL STATEMENTS OF BOTTLING GROUP, LLC




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
 The Pepsi Bottling Group, Inc.
 
 Condensed Consolidated Statements of Operations
 12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June17, 2006
    
    
    11, 2005
    
    
    17, 2006
    
    
    11, 2005Net revenues
    
    $
    3,138
    
    
    $
    2,862
    
    
    $
    5,505
    
    
    $
    5,009Cost of sales
    
    
    1,666
    
    
    
    1,495
    
    
    
    2,919
    
    
    
    2,611Gross profit
    
    
    1,472
    
    
    
    1,367
    
    
    
    2,586
    
    
    
    2,398Selling, delivery and administrative expenses
    
    
    1,157
    
    
    
    1,064
    
    
    
    2,150
    
    
    
    1,975Operating income
    
    
    315
    
    
    
    303
    
    
    
    436
    
    
    
    423Interest
expense, net
    
    
    63
    
    
    
    58
    
    
    
    124
    
    
    
    113Other non-operating expenses, net
    
    
    10
    
    
    
    1
    
    
    
    10
    
    
    
    1Minority interest
    
    
    18
    
    
    
    17
    
    
    
    24
    
    
    
    23Income before income taxes
    
    
    224
    
    
    
    227
    
    
    
    278
    
    
    
    286Income tax expense
    
    
    76
    
    
    
    79
    
    
    
    96
    
    
    
    99Net income
    
    $
    148
    
    
    $
    148
    
    
    $
    182
    
    
    $
    187Basic earnings per share
    
    $
    0.63
    
    
    $
    0.61
    
    
    $
    0.77
    
    
    $
    0.76Weighted-average shares outstanding
    
    
    235
    
    
    
    245
    
    
    
    236
    
    
    
    246Diluted earnings per share
    
    $
    0.61
    
    
    $
    0.59
    
    
    $
    0.75
    
    
    $
    0.74Weighted-average shares outstanding
    
    
    241
    
    
    
    252
    
    
    
    242
    
    
    
    253Dividends declared per common share
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.19
    
    
    $
    0.13
  2




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##### Table of Contents



The Pepsi Bottling Group, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 24 Weeks EndedJune
    
    
    June17, 2006
    
    
    11, 2005Cash Flows  OperationsNet income
    
    $
    182
    
    
    $
    187Adjustments to reconcile net income to net cash provided by operations:Depreciation
    
    
    285
    
    
    
    274Amortization
    
    
    6
    
    
    
    7Deferred income taxes
    
    
    (28
    )
    
    
    5Stock-based compensation
    
    
    32
    
    
    
    Other non-cash charges and credits, net
    
    
    157
    
    
    
    137Changes in operating working capital, excluding effects of acquisitions:Accounts receivable, net
    
    
    (350
    )
    
    
    (320
    )Inventories
    
    
    (190
    )
    
    
    (92
    )Prepaid expenses and other current assets
    
    
    (21
    )
    
    
    (44
    )Accounts payable and other current liabilities
    
    
    219
    
    
    
    138Income taxes payable
    
    
    35
    
    
    
    22Net change in operating working capital
    
    
    (307
    )
    
    
    (296
    )Casualty insurance payments
    
    
    (31
    )
    
    
    (31
    )Pension contributions
    
    
    (1
    )
    
    
    (20
    )Other, net
    
    
    (26
    )
    
    
    (32
    )Net Cash Provided by Operations
    
    
    269
    
    
    
    231Cash Flows  InvestmentsCapital expenditures
    
    
    (359
    )
    
    
    (316
    )Proceeds from sale of property, plant and equipment
    
    
    4
    
    
    
    12Acquisitions of bottlers, net of cash acquired
    
    
    
    
    
    
    (1
    )Other investing activities, net
    
    
    4
    
    
    
    6Net Cash Used for Investments
    
    
    (351
    )
    
    
    (299
    )Cash Flows  FinancingShort-term borrowings  three months or less, net
    
    
    (220
    )
    
    
    178Proceeds from long-term debt
    
    
    793
    
    
    
    37Payments of long-term debt
    
    
    (63
    )
    
    
    (6
    )Dividends paid
    
    
    (38
    )
    
    
    (25
    )Excess tax benefit from exercise of stock options
    
    
    10
    
    
    
    Proceeds from exercise of stock options
    
    
    66
    
    
    
    30Purchases of treasury stock
    
    
    (238
    )
    
    
    (244
    )Net Cash Provided by (Used for) Financing
    
    
    310
    
    
    
    (30
    )Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    (5
    )
    
    
    1Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    223
    
    
    
    (97
    )Cash and Cash Equivalents  Beginning of Period
    
    
    502
    
    
    
    305Cash and Cash Equivalents  End of Period
    
    $
    725
    
    
    $
    208Supplemental Cash Flow InformationInterest paid
    
    $
    132
    
    
    $
    122Income taxes paid
    
    $
    78
    
    
    $
    72Changes in accounts payable related to capital expenditures
    
    $
    (22
    )
    
    $
    (45
    )Capital lease additions
    
    $
    8
    
    
    $
    
  3




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##### Table of Contents



The Pepsi Bottling Group, Inc.
 
 Condensed Consolidated Balance Sheets
 (Unaudited)June
    
    
    December17, 2006
    
    
    31, 2005ASSETSCurrent AssetsCash and cash equivalents
    
    $
    725
    
    
    $
    502Accounts receivable, less allowance of $53 at June 17,
2006 and $51 at December 31, 2005
    
    
    1,551
    
    
    
    1,186Inventories
    
    
    647
    
    
    
    458Prepaid expenses and other current assets
    
    
    278
    
    
    
    266Total Current Assets
    
    
    3,201
    
    
    
    2,412Property, plant and equipment, net
    
    
    3,691
    
    
    
    3,649Other intangible assets, net
    
    
    3,780
    
    
    
    3,814Goodwill
    
    
    1,513
    
    
    
    1,516Other assets
    
    
    144
    
    
    
    133Total Assets
    
    $
    12,329
    
    
    $
    11,524LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable and other current liabilities
    
    $
    1,791
    
    
    $
    1,583Short-term borrowings
    
    
    215
    
    
    
    426Current maturities of long-term debt
    
    
    534
    
    
    
    589Total Current Liabilities
    
    
    2,540
    
    
    
    2,598Long-term debt
    
    
    4,732
    
    
    
    3,939Other liabilities
    
    
    1,101
    
    
    
    1,027Deferred income taxes
    
    
    1,396
    
    
    
    1,421Minority interest
    
    
    519
    
    
    
    496Total Liabilities
    
    
    10,288
    
    
    
    9,481Shareholders EquityCommon stock, par value $0.01 per share: authorized 900 shares, issued 310 shares
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    1,716
    
    
    
    1,709Retained earnings
    
    
    2,420
    
    
    
    2,283Accumulated other comprehensive loss
    
    
    (277
    )
    
    
    (262
    )Deferred compensation
    
    
    
    
    
    
    (14
    )Treasury stock: 75 shares and 71 shares at June 17,
2006 and December 31, 2005,
respectively, at cost
    
    
    (1,821
    )
    
    
    (1,676
    )Total Shareholders Equity
    
    
    2,041
    
    
    
    2,043Total Liabilities and Shareholders Equity
    
    $
    12,329
    
    
    $
    11,524
  4




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##### Table of Contents



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




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Note 3  New Accounting Standards
 FASB Interpretation No. 48
 Accounting for Income Taxes
 Note 4  Earnings per Share
  12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June17, 2006
    
    
    11, 2005
    
    
    17, 2006
    
    
    11, 2005Average number of shares outstanding during
period on which basic earnings per share is
based
    
    
    235
    
    
    
    245
    
    
    
    236
    
    
    
    246Add  Incremental shares under stock
compensation plans
    
    
    6
    
    
    
    7
    
    
    
    6
    
    
    
    7Number of shares on which diluted
earnings per share is based
    
    
    241
    
    
    
    252
    
    
    
    242
    
    
    
    253Net earnings applicable to common shareholders
    
    $
    148
    
    
    $
    148
    
    
    $
    182
    
    
    $
    187Net earnings on which diluted earnings
per share is based
    
    $
    148
    
    
    $
    148
    
    
    $
    182
    
    
    $
    187Basic earnings per share
    
    $
    0.63
    
    
    $
    0.61
    
    
    $
    0.77
    
    
    $
    0.76Diluted earnings per share
    
    $
    0.61
    
    
    $
    0.59
    
    
    $
    0.75
    
    
    $
    0.74
   
    
    For the 12 weeks ended June 11, 2005 options to purchase 14 million shares.
    
    For the 24 weeks ended June 17, 2006 and June 11, 2005, options to purchase 3 million
shares and 14 million shares, respectively.
  6




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Note 5  Share-Based Compensation
 Accounting for Share-Based Compensation
     7




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##### Table of Contents



12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June11, 2005
    
    
    11, 2005Net income:As reported
    
    $
    148
    
    
    $
    187Add: Total
share-based employee
compensation included
in reported net
income, net of taxes
and minority interest
    
    
    
    
    
    
    Less: Total
share-based employee
compensation
determined under
fair-value based
method for all awards,
net of taxes and
minority interest
    
    
    (10
    )
    
    
    (21
    )Pro forma
    
    $
    138
    
    
    $
    166Earnings per share:Basic  as reported
    
    $
    0.61
    
    
    $
    0.76Basic  pro forma
    
    $
    0.56
    
    
    $
    0.67Diluted  as reported
    
    $
    0.59
    
    
    $
    0.74Diluted  pro forma
    
    $
    0.54
    
    
    $
    0.65
 Share-Based Long-term Incentive Compensation Plans
     12 Weeks Ended
    
    24 Weeks EndedJune
    
    June
    
    June
    
    June17, 2006
    
    11, 2005
    
    17, 2006
    
    11, 2005Risk-free interest rate
    
    
    4.8
    %
    
    
    4.4
    %
    
    
    4.6
    %
    
    
    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
    
    $
    9.10
    
    
    $
    8.79
    
    
    $
    8.65
    
    
    $
    8.69
 8




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##### Table of Contents



Stock Options
   WeightedShares in millions
    
    
    
    
    
    Weighted
    
    AverageAverage
    
    RemainingExercise
    
    Contractual
    
    AggregatePrice per
    
    Term
    
    IntrinsicOptions
    
    Shares
    
    Share
    
    (years)
    
    ValueOutstanding at January 1, 2006
    
    
    38.1
    
    
    $
    22.54Granted
    
    
    3.4
    
    
    $
    29.39Exercised
    
    
    (3.8
    )
    
    $
    17.20Forfeited or expired
    
    
    (0.4
    )
    
    $
    26.95Outstanding at June 17, 2006
    
    
    37.3
    
    
    $
    23.68
    
    
    
    6.6
    
    
    $
    278Exercisable at June 17, 2006
    
    
    24.4
    
    
    $
    21.13
    
    
    
    5.6
    
    
    $
    244
   9




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Restricted Stock and Restricted Stock Units
   Shares in millions
 Restricted Stocks and
    
    
    
    
    
    Weighted AverageRestricted Stock Units
    
    Shares
    
    Grant-Date Fair ValueNonvested at January 1, 2006
    
    
    0.9
    
    
    $
    26.00Granted
    
    
    1.1
    
    
    $
    29.34Vested
    
    
    (0.1
    )
    
    $
    25.85Forfeited
    
    
    (0.3
    )
    
    $
    23.65Nonvested at June 17, 2006
    
    
    1.6
    
    
    $
    28.66
  Note 6  Accounts Receivable
 June
    
    
    December17, 2006
    
    
    31, 2005Trade accounts receivable
    
    $
    1,365
    
    
    $
    1,018Allowance for doubtful accounts
    
    
    (53
    )
    
    
    (51
    )Accounts receivable from PepsiCo
    
    
    177
    
    
    
    143Other receivables
    
    
    62
    
    
    
    76$
    1,551
    
    
    $
    1,186
 Note 7  Inventories
 June
    
    
    December17, 2006
    
    
    31, 2005Raw materials and supplies
    
    $
    247
    
    
    $
    173Finished goods
    
    
    400
    
    
    
    285$
    647
    
    
    $
    458
 10




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##### Table of Contents



Note 8  Property, Plant and Equipment, net
 June
    
    
    December17, 2006
    
    
    31, 2005Land
    
    $
    282
    
    
    $
    277Buildings and improvements
    
    
    1,344
    
    
    
    1,299Manufacturing and distribution equipment
    
    
    3,532
    
    
    
    3,425Marketing equipment
    
    
    2,394
    
    
    
    2,334Other
    
    
    193
    
    
    
    1777,745
    
    
    
    7,512Accumulated depreciation
    
    
    (4,054
    )
    
    
    (3,863
    )$
    3,691
    
    
    $
    3,649
 Note 9  Other Intangible Assets, net and Goodwill
 June
    
    
    December17, 2006
    
    
    31, 2005Intangibles subject to amortization:Gross carrying amount:Customer relationships and lists
    
    $
    50
    
    
    $
    53Franchise/distribution rights
    
    
    44
    
    
    
    46Other identified intangibles
    
    
    36
    
    
    
    39130
    
    
    
    138Accumulated amortization:Customer relationships and lists
    
    
    (9
    )
    
    
    (9
    )Franchise/distribution rights
    
    
    (25
    )
    
    
    (22
    )Other identified intangibles
    
    
    (17
    )
    
    
    (18
    )(51
    )
    
    
    (49
    )Intangibles subject to amortization, net
    
    
    79
    
    
    
    89Intangibles not subject to amortization:Carrying amount:Franchise rights
    
    
    3,099
    
    
    
    3,093Distribution rights
    
    
    283
    
    
    
    302Trademarks
    
    
    205
    
    
    
    218Other identified intangibles
    
    
    114
    
    
    
    112Intangibles not subject to amortization
    
    
    3,701
    
    
    
    3,725Total other intangible assets, net
    
    $
    3,780
    
    
    $
    3,814
 11




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Estimated Aggregate Amortization Expense to be IncurredWeighted-Average
    
    
    
    Fiscal Year EndingAmortization
    
    Balance ofPeriod
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010Customer
relationships and
lists
    
    18 years
    
    $
    2
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3Franchise/distribution rights
    
    7 years
    
    $
    3
    
    
    $
    3
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2Other identified
intangibles
    
    8 years
    
    $
    3
    
    
    $
    4
    
    
    $
    3
    
    
    $
    2
    
    
    $
    1
  U.S. &Canada
    
    
    Europe
    
    
    Mexico
    
    
    TotalBalance at December 31,
2005
    
    $
    1,240
    
    
    $
    16
    
    
    $
    260
    
    
    $
    1,516Impact of foreign currency
translation
    
    
    13
    
    
    
    
    
    
    
    (16
    )
    
    
    (3
    )Balance at June 17,
2006
    
    $
    1,253
    
    
    $
    16
    
    
    $
    244
    
    
    $
    1,513
 Note 10 Accounts Payable and Other Current Liabilities
 June
    
    
    December17, 2006
    
    
    31, 2005Accounts payable
    
    $
    592
    
    
    $
    501Trade incentives
    
    
    164
    
    
    
    185Accrued compensation and benefits
    
    
    195
    
    
    
    211Accounts payable to PepsiCo
    
    
    284
    
    
    
    176Other current liabilities
    
    
    556
    
    
    
    510$
    1,791
    
    
    $
    1,583
 12




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Note 11  Long-Term Debt
   Note 12  Pension and Postretirement Medical Benefit Plans
 Pension Benefits
    12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June17, 2006
    
    
    11, 2005
    
    
    17, 2006
    
    
    11, 2005Service cost
    
    $
    12
    
    
    $
    10
    
    
    $
    24
    
    
    $
    21Interest cost
    
    
    19
    
    
    
    18
    
    
    
    38
    
    
    
    35Expected return on plan assets
    
    
    (22
    )
    
    
    (21
    )
    
    
    (44
    )
    
    
    (42
    )Amortization of prior service cost
    
    
    2
    
    
    
    1
    
    
    
    4
    
    
    
    3Amortization of net loss
    
    
    9
    
    
    
    7
    
    
    
    18
    
    
    
    14Net pension expense for the defined benefit plans
    
    
    20
    
    
    
    15
    
    
    
    40
    
    
    
    31Defined contribution plans expense
    
    
    5
    
    
    
    4
    
    
    
    10
    
    
    
    8Total U.S. pension expense recognized in the
Condensed Consolidated Statements of Operations
    
    $
    25
    
    
    $
    19
    
    
    $
    50
    
    
    $
    39
  13




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##### Table of Contents



Postretirement Medical Benefits
   12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June17, 2006
    
    
    11, 2005
    
    
    17, 2006
    
    
    11, 2005Service cost
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    2Interest cost
    
    
    4
    
    
    
    5
    
    
    
    9
    
    
    
    10Amortization of net loss
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    3U.S. postretirement
benefits expense
recognized in the
Condensed Consolidated
Statements of
Operations
    
    $
    7
    
    
    $
    8
    
    
    $
    14
    
    
    $
    15
 Note 13  Segment Information
   12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    June
    
    
    JuneNet Revenues
    
    17, 2006
    
    
    11, 2005
    
    
    17, 2006
    
    
    11, 2005U.S. & Canada
    
    $
    2,422
    
    
    $
    2,207
    
    
    $
    4,458
    
    
    $
    4,056Europe
    
    
    386
    
    
    
    356
    
    
    
    534
    
    
    
    501Mexico
    
    
    330
    
    
    
    299
    
    
    
    513
    
    
    
    452Worldwide net
revenues
    
    $
    3,138
    
    
    $
    2,862
    
    
    $
    5,505
    
    
    $
    5,009
 14




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##### Table of Contents



12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    June
    
    
    JuneOperating Income (Loss)
    
    17, 2006
    
    
    11, 2005
    
    
    17, 2006
    
    
    11, 2005U.S. & Canada
    
    $
    275
    
    
    $
    275
    
    
    $
    416
    
    
    $
    417Europe
    
    
    12
    
    
    
    8
    
    
    
    (10
    )
    
    
    (8
    )Mexico
    
    
    28
    
    
    
    20
    
    
    
    30
    
    
    
    14Worldwide operating
income
    
    
    315
    
    
    
    303
    
    
    
    436
    
    
    
    423Interest expense, net
    
    
    63
    
    
    
    58
    
    
    
    124
    
    
    
    113Other non-operating expenses, net
    
    
    10
    
    
    
    1
    
    
    
    10
    
    
    
    1Minority interest
    
    
    18
    
    
    
    17
    
    
    
    24
    
    
    
    23Income before income
taxes
    
    $
    224
    
    
    $
    227
    
    
    $
    278
    
    
    $
    286
  June
    
    
    DecemberTotal Assets
    
    17, 2006
    
    
    31, 2005U.S. & Canada
    
    $
    9,648
    
    
    $
    8,869Europe
    
    
    1,017
    
    
    
    894Mexico
    
    
    1,664
    
    
    
    1,761Worldwide total assets
    
    $
    12,329
    
    
    $
    11,524
 Note 14  Comprehensive Income
 12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June17, 2006
    
    
    11, 2005
    
    
    17, 2006
    
    
    11, 2005Net income
    
    $
    148
    
    
    $
    148
    
    
    $
    182
    
    
    $
    187Net currency translation adjustment
    
    
    (45
    )
    
    
    (16
    )
    
    
    (21
    )
    
    
    (3
    )Cash flow hedge adjustment (a)(b)
    
    
    (2
    )
    
    
    (1
    )
    
    
    6
    
    
    
    (2
    )Comprehensive income
    
    $
    101
    
    
    $
    131
    
    
    $
    167
    
    
    $
    182
 
 (a)
    
    Net of minority interest and taxes of $(1) million and $0 million for the 12 weeks ended
June 17, 2006 and June 11, 2005, respectively.(b)
    
    Net of minority interest and taxes of $5 million and $(1) million for the 24 weeks ended June
17, 2006 and June 11, 2005 respectively. Note 15  Contingencies
  Note 16 Subsequent Event
  15




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16




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##### Table of Contents



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




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##### Table of Contents



Share-Based Compensation
    FINANCIAL PERFORMANCE SUMMARY
 12 Weeks Ended
    
    24 Weeks EndedJune
    
    June
    
    %
    
    June
    
    June
    
    %17, 2006
    
    11, 2005
    
    Change
    
    17, 2006
    
    11, 2005
    
    ChangeNet revenues
    
    $
    3,138
    
    
    $
    2,862
    
    
    
    10
    %
    
    $
    5,505
    
    
    $
    5,009
    
    
    
    10
    %Gross profit
    
    
    1,472
    
    
    
    1,367
    
    
    
    8
    %
    
    
    2,586
    
    
    
    2,398
    
    
    
    8
    %Operating income
    
    
    315
    
    
    
    303
    
    
    
    4
    %
    
    
    436
    
    
    
    423
    
    
    
    3
    %Net income
    
    
    148
    
    
    
    148
    
    
    
    0
    %
    
    
    182
    
    
    
    187
    
    
    
    (3
    )%Diluted earnings
per
share1
    
    $
    0.61
    
    
    $
    0.59
    
    
    
    4
    %
    
    $
    0.75
    
    
    $
    0.74
    
    
    
    2
    %
 
 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




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Full-Year 2006 Outlook
   19




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Forecasted 2006 versus2005 growthWorldwide Volume(1)
    
    ~ 3%U.S. Volume(1)
    
    ~ 2%Worldwide net revenue per case
    
    3% to 4%Worldwide cost of sales per case
    
    ~ 5%SD&A
    
    6% to 7%Operating Income(2)
    
    (1)% to 1%
 Full-Year Forecasted2006 ResultsDiluted Earnings Per Share(2)
    
    $
    1.82 to $1.88
 
 (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 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.  Second Quarter 2006 Results
 Volume Change
 12 Weeks Ended
    
    
    24 Weeks EndedJune 17, 2006 vs.
    
    
    June 17, 2006 vs.June 11, 2005
    
    
    June 11, 2005World-
    
    U.S. &
    
    
    
    
    
    
    
    
    
    
    World-
    
    U.S. &wide
    
    Canada
    
    Europe
    
    Mexico
    
    
    wide
    
    Canada
    
    Europe
    
    MexicoBase volume
    
    
    4
    %
    
    
    5
    %
    
    
    6
    %
    
    
    2
    %
    
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %
    
    
    3
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %Total Volume change
    
    
    5
    %
    
    
    6
    %
    
    
    6
    %
    
    
    2
    %
    
    
    
    6
    %
    
    
    6
    %
    
    
    5
    %
    
    
    3
    %
    20




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Aquafina Tropicana Lipton Iced Tea Lipton Mountain Dew
 Aquafina
 Pepsi
  Net Revenues Change
 12 Weeks Ended
    
    
    24 Weeks EndedJune 17, 2006 vs.
    
    
    June 17, 2006 vs.June 11, 2005
    
    
    June 11, 2005World
    
    U.S. &
    
    
    
    
    
    
    
    
    
    
    World
    
    U.S. &-wide
    
    Canada
    
    Europe
    
    Mexico
    
    
    -wide
    
    Canada
    
    Europe
    
    MexicoVolume impact
    
    
    4
    %
    
    
    5
    %
    
    
    6
    %
    
    
    2
    %
    
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %
    
    
    3
    %Net price per case impact
(rate/mix)
    
    
    4
    %
    
    
    3
    %
    
    
    4
    %
    
    
    7
    %
    
    
    
    3
    %
    
    
    3
    %
    
    
    4
    %
    
    
    7
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %Currency translation
    
    
    1
    %
    
    
    1
    %
    
    
    (2
    )%
    
    
    1
    %
    
    
    
    1
    %
    
    
    1
    %
    
    
    (2
    )%
    
    
    3
    %Total Net Revenues change
    
    
    10
    %
    
    
    10
    %
    
    
    8
    %
    
    
    10
    %
    
    
    
    10
    %
    
    
    10
    %
    
    
    7
    %
    
    
    13
    %
  21




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Cost of Sales Change
 12 Weeks Ended
    
    24 Weeks EndedJune 17, 2006 vs.
    
    June 17, 2006 vs.June 11, 2005
    
    June 11, 2005Worldwide
    
    WorldwideVolume impact
    
    
    4
    %
    
    
    5
    %Cost per case impact
    
    
    5
    %
    
    
    5
    %Acquisitions
    
    
    1
    %
    
    
    1
    %Currency translation
    
    
    1
    %
    
    
    1
    %Total Cost of Sales change
    
    
    11
    %
    
    
    12
    %
   22




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##### Table of Contents



Selling, Delivery and Administrative Expenses Change
 12 Weeks Ended
    
    24 Weeks EndedJune 17, 2006 vs.
    
    June 17, 2006 vs.June 11, 2005
    
    June 11, 2005Worldwide
    
    WorldwideCost impact
    
    
    5
    %
    
    
    5
    %Adoption of SFAS 123R
    
    
    2
    %
    
    
    2
    %Acquisitions
    
    
    1
    %
    
    
    1
    %Currency translation
    
    
    1
    %
    
    
    1
    %Total SD&A change
    
    
    9
    %
    
    
    9
    %
  Operating Income
  23




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##### Table of Contents



Interest Expense, net
  Other Non-operating Expenses, net
  Income Tax Expense
  Liquidity and Financial Condition
 Cash Flows
     24




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##### Table of Contents



Liquidity and Capital Resources
          Contractual Obligations
  25




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##### 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.
 26




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##### Table of Contents



Item 3.  Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4.
 Controls and Procedures
   27




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
  
 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
    
    Purchased Under the PlansPeriod
    
    Purchased1
    
    Share2
    
    or Programs 3
    
    or Programs 3Period 4 03/26/06 
04/22/06
    
    
    1,185,000
    
    
    $
    31.02
    
    
    
    1,185,000
    
    
    
    18,553,700Period 5
04/23/06  05/20/06
    
    
    1,218,100
    
    
    $
    31.85
    
    
    
    1,218,100
    
    
    
    17,335,600Period 6
05/21/06  06/17/06
    
    
    1,174,400
    
    
    $
    31.19
    
    
    
    1,174,400
    
    
    
    16,161,200Total
    
    
    3,577,500
    
    
    $
    31.36
    
    
    
    3,577,500
 
 1
    
    Shares have only been repurchased through publicly announced programs.2
    
    Average share price excludes brokerage fees. 28




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##### Table of Contents



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 June 17, 2006
    
    
    
    
    
    
    125,000,000
  
 Item 4.
 Submission of Matters to a Vote of Security Holders
 (a)
    
    The Annual Meeting of Shareholders of PBG was held on May 24, 2006.(b)
    
    The names of all directors are set forth below. The proxies for the meeting were
solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934.
There were no solicitations in opposition to the nominees as listed in the proxy and all
such nominees were elected.(c)
    
    A brief description of each matter voted on and the approximate number of votes cast
are as follows:
 Number of Votes (millions)Withheld/
    
    BrokerDescription of Proposals
    
    For
    
    Against
    
    Abstain
    
    Non-Votes1) Election of Directors:Linda G. Alvarado
    
    
    225
    
    
    
    N/A
    
    
    
    12
    
    
    
    N/ABarry H. Beracha
    
    
    229
    
    
    
    N/A
    
    
    
    8
    
    
    
    N/AJohn T. Cahill
    
    
    233
    
    
    
    N/A
    
    
    
    4
    
    
    
    N/AIra D. Hall
    
    
    229
    
    
    
    N/A
    
    
    
    8
    
    
    
    N/AThomas H. Kean
    
    
    227
    
    
    
    N/A
    
    
    
    10
    
    
    
    N/ASusan D. Kronick
    
    
    229
    
    
    
    N/A
    
    
    
    8
    
    
    
    N/ABlythe J. McGarvie
    
    
    229
    
    
    
    N/A
    
    
    
    8
    
    
    
    N/AMargaret D. Moore
    
    
    233
    
    
    
    N/A
    
    
    
    4
    
    
    
    N/AJohn A. Quelch
    
    
    229
    
    
    
    N/A
    
    
    
    8
    
    
    
    N/ARogelio Rebolledo
    
    
    231
    
    
    
    N/A
    
    
    
    6
    
    
    
    N/AClay G. Small
    
    
    233
    
    
    
    N/A
    
    
    
    4
    
    
    
    N/A2) Ratification of
appointment of Deloitte
& Touche LLP as
independent auditors:
    
    
    236
    
    
    
    N/A
    
    
    
    1
    
    
    
    N/A
 29




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##### Table of Contents



Item 6.
 Exhibits
 Exhibit No.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
    
    Financial statements of Bottling Group, LLC for the quarter ended
June 17, 2006, as required by the SEC as a result of Bottling
LLCs guarantee of up to $1,000,000,000 aggregate principal
amount of our 7% Senior Notes due in 2029.
 30




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##### Table of Contents



SIGNATURES
  THE PEPSI BOTTLING GROUP, INC.(Registrant)Date: July 24, 2006
    
    
    
    /s/ Andrea L. ForsterAndrea L. ForsterVice President and ControllerDate: July 24, 2006
    
    
    
    /s/ Alfred H. DrewesAlfred H. DrewesSenior Vice President andChief Financial Officer