# Dear Fellow Stockholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-equipment-services/NASDAQ_NCSM_2018/NASDAQ_NCSM_2018.mmd` · pages 1-7_

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Dear Fellow Stockholders:

Although market conditions were challenging in 2018, especially in the second half of the year, our company achieved overall revenue growth and our employees advanced a number of important projects and initiatives, many of which are described in this letter and annual report. First, I will review our overall full-year results, then each of our geographical markets. After that, I will discuss how we have transformed our company over the past several years and also our transition to a new ERP System, which we implemented in early 2019 after extensive planning and preparation. Finally, I will re-emphasize our commitment to capital discipline and our efforts to continually improve return on invested capital and increase stockholder value.

## 2018 FULL-YEAR FINANCIAL HIGHLIGHTS

■ Revenue of \(227.0 million representing a 13% increase compared to 2017.

■ Adjusted EBITDA of \(49.7 million reflecting a 21.9% adjusted EBITDA margin.*

■ Adjusted earnings of $0.20 per diluted share.*

At December 31, we had \(25.1 million in cash and total debt of \)25.7 million, which included \(20.0 million that was drawn under our U.S. revolving credit facility. We also had up to \)55.0 million in total availability under our revolving credit facilities, bringing our total potential liquidity at December 31 to $80.1 million.

## U.S. HIGHLIGHTS

■ Revenue in 2018 of \(103.4 million, a 62% increase over 2017.

■ Sequential revenue growth in product sales in each quarter in 2018.

■ Over the last 12 months we had 25-30 U.S. customers using our pinpoint fracturing systems with the majority of activity and revenue coming from repeat customers.

■ U.S. services revenue grew by 59% compared to 2017, reflecting the investment in our Tracer Diagnostics business.

In the U.S., we continue to pursue market-share growth across our product and service lines, executing our targeted sales initiatives within Fracturing Systems, leveraging the success of the AirLock casing buoyancy system within Well Construction, offering Tracer Diagnostics solutions to help our customers optimize well spacing and control frac hits, and delivering the operational and safety benefits of our exclusive PurpleSeal Express system, which integrates our composite frac plug with the disposable setting tool.

## CANADA HIGHLIGHTS

Revenue for the year of \(109.5 million was 14% lower than in 2017, as a result of a challenging Canadian market environment. Despite the challenging environment, we remain committed to growing our presence in Canada over the long-term. During 2018, we invested in our Canadian business by opening a new tracer laboratory in Calgary, enabling our Tracer Diagnostics business to win additional work, including the largest, multi-well pad tracing job in our history. We also completed the build-out of our new Technology Center, and our engineering staff and support personnel moved in on January 2, 2019.

In response to the current market conditions in Canada, we are pursuing the following initiatives, which we believe will allow us to maintain our market share and leverage our market presence.

■ Within Fracturing Systems, pricing initiatives, along with our strong track record and operational excellence have enabled us to win back business from customers that have trialed competing systems.

■ Within Well Construction, our new, dedicated sales effort is resulting in higher sales of our AirLock casing buoyancy system and liner hangers.

■ We successfully introduced our PurpleSeal composite frac plugs to the Canadian market in 2019.

■ We also began field trials of our new, lower cost sleeves for high-pressure markets. We are on track to have the sleeves and isolation assemblies for this family of products ready for commercialization in the second half of 2019.

## World Record Completion

In September 2018, this NCS Multistage frac-isolation assembly successfully located and shifted all 227 sleeves in a well in the Montney formation with a single coiled-tubing trip, breaking our previous world record of 168 sleeves. After placing 18.1 million lb of sand, the multi-set bridge plug, slips, and sleeve locator looked almost new at the end of the job, a testament to the robustness and durability of our industry-leading technology.

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## INTERNATIONAL HIGHLIGHTS

■ Year-over-year revenue growth of 43%.

In the North Sea, we installed sleeves and completed wells offshore for the first time in our company's history.

■ We introduced our Tracer Diagnostics services into Argentina and expect to expand into other countries in 2019.

■ We began working with a dedicated sales representative in the Middle East and expect to gain our first work in that region in 2019.

## A MORE BALANCED BUSINESS

I want to emphasize that we have transformed the company over the last two years. In addition to growing our Fracturing Systems business, we established Repeat Precision and acquired Spectrum Tracer Services, both of which expanded our addressable market, more than doubled our customer base, and reduced our exposure to any single product, service, or geographic market. More than 50% of our revenue in 2018 came from the U.S. and from markets outside of North America, reducing our historical dependence on the Canadian market.

NCS is positioned to leverage our portfolio of products and services to help customers reduce costs and improve their well productivity and return on capital.

■ Within Fracturing Systems, we continue to be the worldwide leader in pinpoint completions, having surpassed 10,000 cumulative wells completed through the end of 2018.

■ We are the second-largest provider of chemical and radioactive Tracer Diagnostics services in North America, and we are continuing to enter select international markets.

■ Our Well Construction offering is anchored by our AirLock casing buoyancy system. We surpassed 6,500 cumulative successful AirLock system installations through the end of 2018 and are leveraging that success to pursue additional revenue opportunities for our liner hanger system, toe sleeves, and other Well Construction products.

■ Repeat Precision continues to grow as we demonstrate the performance of our composite plug and as customers experience the operational and safety benefits of the PurpleSeal Express system.

## A NEW ERP SYSTEM

A major internal project throughout 2018 was the preparation for transitioning to a new ERP system, with the full changeover occurring at the beginning of 2019. A broad-based team at NCS worked tirelessly to prepare for the implementation. We believe the new ERP system will give our managers better and more timely views into financial and operational metrics, which will support decision-making, improve our working capital management, and better facilitate future development of our business.

## FOCUS ON FREE CASH FLOW AND RETURNS

We strive to balance the investments required to drive revenue growth with a capital light business model that can generate free cash flow. The investments that we have made over the past several years, including our Repeat Precision joint venture and Spectrum acquisition provide us with multiple long-term opportunities for capital-efficient growth across our global footprint. We expect to significantly reduce our capital expenditures in 2019 as compared to 2018, which will allow us to generate more free cash flow \( ^{*} \) , further enhancing our strong balance sheet. Through disciplined growth and free cash flow \( ^{*} \)  generation, we strive to continue to improve our return on invested capital and create value for our stockholders.

On behalf of our entire management team and board of directors, I would like to personally thank our stockholders, customers, and vendors, as well as our 400-plus employees around the globe, whose steady focus and diligent efforts allowed us to achieve amazing results in spite of the challenging market in the past year.