NICHOLAS EQUITY INCOME FUND, INC.

Transcription

1 ANNUAL REPORT March 31, 2018 NICHOLAS EQUITY INCOME FUND, INC.

2 NICHOLAS EQUITY INCOME FUND, INC. May 2018 Report to Fellow Shareholders: For the year ended March 31, 2018, Nicholas Equity Income Fund (Fund) had a return of 5.93% versus 13.99% for the Standard & Poor s 500 Index (S&P 500). The current bull stock market has continued its impressive run of more than nine years since the S&P 500 bottomed in March 2009 and now is the second-longest and second-largest since the 1990s. The Fund s underperformance for the period is disappointing and we are working hard to rectify. Some of the near-term underperformance is self-inflicted and some is related to the objective of the Fund. The primary investment objective of the Fund is to produce reasonable income for the investor. To achieve this objective, the Fund seeks an income yield that exceeds the corporate dividend yield on the securities included in the S&P 500 Index. We are pleased to report the Fund had a 30-day SEC yield of 2.30% as of March 31, 2018, which exceeded the S&P 500 indicated yield of 1.96%. For the year ended March 31, 2018, zero and low dividend paying stocks (yields in the S&P 500 of less than 1%) accounted for 42% of the total return in the S&P 500. Even more significantly, S&P 500 stocks that yielded less than 2% as of March 31, 2018, returned 11.82% or 84% of the total return of 13.99% for the same period. Low yielding stocks have outperformed higher yielding securities by a wide margin just as growth has outperformed value. With the Fund s primary objective of exceeding the S&P 500 dividend yield coupled with what we believe are more conservative Fund investments than the market, often during periods of outsized market returns the Fund underperforms the broader market. While growth has outperformed value over the past 10 years, the underperformance has been especially more significant for the one-year period ended March 31, The S&P 500 Growth Index outperformed the S&P 500 Index by 570bp (basis points). The difference is even more pronounced when comparing the Russell 2000 Indices. The Russell 2000 Growth Index outperformed the Russell 2000 Value Index by 1,350bp over the one-year period ended March 31, We are pleased with our long-term record as it incorporates a full market cycle as the Fund outperformed the S&P 500 over the past 10 years despite the growth bias in the market. Moreover, a key tenet of the Fund s investment philosophy is capital preservation which is best demonstrated during the market sell off during calendar 2008 when the S&P 500 fell 37.00% compared to the Fund which recorded a 23.59% decline an outperformance of 1,341bp or 13.41%. Furthermore, over much longer periods of time, value has outperformed growth and the Fund continues to be managed with valuation as a fundamental precept. Average Annual Total Return 1 Year 3 Year 5 Year 10 Year Nicholas Equity Income Fund, Inc % 5.19% 8.99% 10.40% Standard & Poor s 500 Index % 10.78% 13.31% 9.49% Consumer Price Index % 1.87% 1.44% 1.57% Ending value of $10,000 invested in Nicholas Equity Income Fund, Inc $10,593 $11,641 $15,382 $26,891 Fund s Expense Ratio: (from 07/31/17 Prospectus): 0.72% Performance data quoted represents past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by visiting The Fund s returns are reduced by expenses, while the market indices are not. The ending values above illustrate the performance of a hypothetical $10,000 investment made in the Fund over the

3 timeframes listed. Assumes reinvestment of dividends and capital gains. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. These figures do not imply any future performance. At March 31, 2018, the Fund held 60 stocks and a cash position of approximately 4.37%. All stocks in the portfolio are expected to pay dividends and most have raised their dividends periodically. The Fund s top five holdings were Microsoft, Intel, Northern Trust, PNC Financial Services Group, and Apple. These five holdings accounted for 13.87% of the Fund s net assets. For the one-year period ended March 31, 2018, stocks that helped the Fund s performance were Intel, Harris, Microsoft, ResMed, and Maxim Integrated Products. Stocks that hindered performance were Foot Locker, Plains All American Pipeline, Kinder Morgan, QTS Realty Trust, and Nielsen Holdings. Relative to the S&P 500 Index, the Fund s security selection within the information technology and materials sectors positively contributed to performance over the past year, whereas security selection within consumer discretionary and energy was not beneficial. In terms of industry concentration, information technology represented approximately 18% of the portfolio, financials 16%, industrials 16%, health care 12%, consumer discretionary 9%, consumer staples 8%, real estate 7%, energy 5%, material 3% and 2% in telecommunication services. Regarding the economy, according to FactSet, the current U.S. expansion has reached the 107- month mark, making it the second longest business cycle expansion in the post-war period, just eclipsing the expansion of 106 months. One of the reasons for the long expansion is that the pace of the U.S. Gross Domestic Product (GDP) recovery has been one of the slowest recoveries on record. Since the Great Recession, the economy has yet to grow on a yearly basis faster than 2.6%; however, expectations for better growth in 2018 are based on tax reform and better consumer spending which makes up 70% of GDP. While the U.S economy grew at an annualized rate of only 2.3% in the first quarter of 2018, down from 2.9% in the preceding quarter, corporations reported very strong earnings to start the year. S&P 500 earnings grew at 24% in the first quarter due to an improving economy which was aided by tax reform. While the economy appears to be on firmer footing and just recorded the lowest unemployment rate since December 2000 with 3.9%, valuation multiples are above their long-term averages. As of May 11, 2018, the forward 12-month earnings multiple for the S&P 500 stands at 16.5 times, which is above both the five- and ten-year averages of 16.1 and 14.3 times, respectively. While the current S&P 500 multiple is just slightly above its 5-year average it has been significantly impacted by higher earnings estimates due to corporate tax reform and buybacks, thus lowering the multiple. Other valuation metrics such as Enterprise Value / Earnings Before Interest Depreciation Amortization (EV/EBITDA) suggest the market s valuation is much higher than historical averages than the S&P 500 price-to-earnings ratio would indicate. The current forward EV/EBITDA of the S&P 500 is 11.2 times, which is above the five- and ten-year averages of 10.0 times and 8.7 times. Management is cognizant of elevated market multiples and thus is seeking to buy securities we believe have below market multiples and solid balance sheets while still offering attractive earnings and dividend growth outlooks. In light of the S&P 500 returning more than 300%, excluding dividends, since its March 2009 lows, we would anticipate more muted returns going forward but continue to hold an optimistic viewpoint of the stock market over the long term. Balancing our long-term positive outlook is our short-term cautious assessment since the market faces numerous uncertainties including a return of inflation, growing U.S. government and corporate debt, potential trade wars and tightening monetary policy by the Federal Reserve. In March, the Federal Reserve raised the federal fund rate 25bp which marks the sixth interest rate hike since the Great Recession. Currently, the Fed has signaled it would raise rates three times this year; however, given economic forecasts can change, it is possible the Fed can change its intentions since future inflation rates and economic growth heavily factor into any policy decision. Thus, the pace and rate of interest rate hikes by the Federal Reserve is a balancing act and cannot be predicted with certainty. Management seeks to construct and maintain a portfolio that we believe can produce attractive total returns regardless of the interest rate environment by

4 focusing on high-quality, consistent dividend-paying stocks that have shown the ability to grow over time. Historically, dividends paid by companies to their shareholders have accounted for almost half of the total returns earned by common stocks, while also providing some downside protection in bear markets. Moreover, we seek to invest in management teams with strong business models and competitive advantages that have good track records of successfully navigating changing and uncertain environments. We are pleased with the Fund s relative long-term performance compared to other equity income funds. As of March 31, 2018, Nicholas Equity Income Fund ranked within the top 2% (3 out of 233 funds), based on total returns, for the 10-year period in the Lipper Equity Income Funds objective. Additionally, the Fund ranked 78% (418 out of 535), 84% (383 out of 459) and 69% (258 out of 377) for the one-, three- and five-year periods then ended, respectively. Thank you for your continued investment in the Fund. Sincerely, Michael L. Shelton Lead Portfolio Manager David O. Nicholas Co-Portfolio Manager Opinions expressed are subject to change at any time, are not guaranteed and should not be considered investment advice. The Fund may invest in small and medium sized companies, which involve additional risks. Small- and medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities such as limited liquidity and greater volatility. Investment by the Fund in lowerrated and non-rated securities presents a greater risk of loss to principal and interest than higher-rated securities. The fund may invest in REIT s and Real Estate Securities which involve additional risks related to the real estate industry. The performance of these securities is dependent on the types and locations of the properties owned by the entities issuing the securities and how well the properties are managed. Diversification does not assure a profit or protect against loss in a declining market. Please refer to the schedule of investments in the report for complete fund holdings information. Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000 Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-tobook ratios and higher forecasted growth values. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Consumer Price Index represents changes in prices of all goods and services purchased for consumption by urban households. One cannot invest directly in an index. Lipper Analytical Services, Inc. is an independent mutual fund research and rating service. Each Lipper average represents a universe of funds with similar investment objectives. Rankings for the periods shown are based on fund total returns with dividends and distributions reinvested and do not reflect sales charges. Lipper Rankings Scale: 1% equals highest; 100% equals lowest (based on total returns).

5 Basis Point (bp): A unit equal to 1/100th of 1% and is used to denote the change in a financial instrument. Dividend Yield: The annual dividends per share divided by the price per share expressed as a percentage. Enterprise Value: The market capitalization of a firm s equity plus the market value of the firm s debt. Often the value of assets that are non-core are excluded from the final calculation. Enterprise Value/ Earnings Before Interest Depreciation Amortization (EV/EBITDA) ratio: The EV/EBITDA ratio, also known as the enterprise multiple, is the ratio of a company s enterprise value to its earnings before non-cash items. Forward Earnings Ratio (Multiple): Price per share divided by the forecasted next 12 months earnings per share. Gross Domestic Product (GDP): The monetary value of all the finished goods and services produced within a country s borders in a specific time period. Price-to-Earnings Ratio: Price-to-Earnings is a valuation ratio of a company s current share price compared to its per-share earnings or in the case of REITs (real estate investment trusts), their funds from operations. 30-day SEC yield: A standardized yield computed by dividing the net investment income per share earned during the past 30-day period by the share price at the end of the period. Must be preceded or accompanied by a prospectus. The Nicholas Funds are distributed by Quasar Distributors, LLC.

6 COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN NICHOLAS EQUITY INCOME FUND, INC. AND S&P 500 INDEX The line graph which follows compares the initial account value and subsequent account value at the end of each of the most recently completed ten fiscal years of the Fund to the same investment over the same periods in the S&P 500 Index. The graph assumes a $10,000 investment in the Fund and the index at the beginning of the period. $30,000 $25,000 $26,891 $24,771 $20,000 $15,000 $10,000 $5,000 3/31/08 3/31/09 3/31/10 3/31/11 3/31/12 3/31/13 3/31/14 3/31/15 3/31/16 3/31/17 3/31/18 Nicholas Equity Income Fund, Inc. Class I S&P 500 Index The Fund s average annual total returns for the one-, five- and ten-year periods ended on the last day of the most recent fiscal year are as follows: One Year Ended Five Years Ended Ten Years Ended March 31, 2018 March 31, 2018 March 31, 2018 Average Annual Total Return % 8.99% 10.40% Past performance is not predictive of future performance, and the above graph and table do not reflect deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. 5

7 Financial Highlights (NSEIX) For a share outstanding throughout each period Years Ended March 31, NET ASSET VALUE, BEGINNING OF PERIOD $20.70 $18.65 $20.99 $19.68 $17.93 INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income (1).36 (1) Net gain (loss) on securities (realized and unrealized) (1.45) Total from investment operations (1.02) LESS DISTRIBUTIONS From net investment income (.53) (.36) (.42) (.43) (.41) From net capital gain (.88) (.40) (.90) (.75) (.80) Total distributions (1.41) (.76) (1.32) (1.18) (1.21) NET ASSET VALUE, END OF PERIOD $20.50 $20.70 $18.65 $20.99 $19.68 TOTAL RETURN % 15.57% (4.92)% 13.13% 16.80% SUPPLEMENTAL DATA: Net assets, end of period (millions) $472.6 $532.2 $520.0 $594.5 $516.9 Ratio of expenses to average net assets....72%.72%.72%.72%.72% Ratio of net investment income to average net assets % 1.86% 2.23% 2.13% 2.18% Portfolio turnover rate % 36.18% 24.92% 19.14% 30.08% (1) Computed based on average shares outstanding. The accompanying notes to financial statements are an integral part of these highlights. 6

8 Top Ten Equity Portfolio Holdings March 31, 2018 (unaudited) Percentage Name of Net Assets Microsoft Corporation % Intel Corporation % Northern Trust Corporation % PNC Financial Services Group, Inc. (The) % Apple Inc % Abbott Laboratories % Snap-on Incorporated % Pfizer Inc % Fastenal Company % Weyerhaeuser Company % Total of top ten % Sector Diversification (as a percentage of portfolio) March 31, 2018 (unaudited) Information Technology Financials Industrials Health Care Consumer Discretionary Consumer Staples Real Estate Energy Materials Telecommunication Services Short-Term Investments 17.54% 15.94% 15.50% 12.24% 9.46% 7.88% 7.37% 4.67% 3.33% 1.70% 4.37% 0% 5% 10% 15% 20% 25% 7

9 Fund Expenses For the six month period ended March 31, 2018 (unaudited) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other operating expenses. The following table is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with those of other mutual funds. The example is based on an investment of $1,000 made at the beginning of the period and held for the entire period. The first line of the table below provides information about the actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled Expenses Paid During Period to estimate the expenses you paid on your account during this period. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as wire fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Beginning Ending Expenses Paid Account Value Account Value During Period* 09/30/17 03/31/18 10/01/17-03/31/18 Actual $1, $1, $3.64 Hypothetical 1, , (5% return before expenses) * Expenses are equal to the Fund s six-month annualized expense ratio of 0.72%, multiplied by the average account value over the period, multiplied by 181 then divided by 365 to reflect the one-half year period. 8

10 Schedule of Investments March 31, 2018 Shares or Principal Amount Value COMMON STOCKS 93.61% Consumer Discretionary Retailing 3.76% 54,000 Home Depot, Inc. (The) $ 9,624, ,000 TJX Companies, Inc. (The) ,156,000 17,780,960 Consumer Discretionary Services 5.67% 125,000 Cedar Fair, L.P ,985,000 87,500 Darden Restaurants, Inc ,459, ,000 Extended Stay America, Inc ,744, ,000 Six Flags Entertainment Corporation ,599,560 26,788,735 Consumer Staples Food & Staples Retailing 1.67% 120,500 Walgreens Boots Alliance, Inc ,889,135 Consumer Staples Food, Beverage & Tobacco 5.69% 130,000 Hormel Foods Corporation ,461,600 60,500 Kraft Heinz Company (The) ,768, ,000 Philip Morris International Inc ,138, ,500 Pinnacle Foods Inc ,520,750 26,889,695 Consumer Staples Household & Personal Products 0.50% 30,000 Proctor & Gamble Company (The) ,378,400 Energy 2.89% 264,774 Dorchester Minerals, L.P ,262, ,000 EnLink Midstream Partners LP ,141, ,100 Enterprise Products Partners L.P ,915,568 97,178 Williams Partners L.P ,345,839 13,666,068 Financials Banks 6.73% 255,000 First Horizon National Corporation ,801, ,000 KeyCorp ,842,500 84,000 PNC Financial Services Group, Inc. (The) ,704, ,000 Webster Financial Corporation ,479,000 31,827,310 Financials Diversified 3.91% 137,500 Cohen & Steers, Inc ,590, ,000 Northern Trust Corporation ,891,250 18,482,000 The accompanying notes to financial statements are an integral part of this schedule. 9

11 Schedule of Investments (continued) March 31, 2018 Shares or Principal Amount Value COMMON STOCKS 93.61% (continued) Financials Insurance 5.26% 102,500 Arthur J. Gallagher & Co $ 7,044,825 65,000 Chubb Limited ,890, ,000 Old Republic International Corporation ,901,750 24,836,625 Health Care Equipment & Services 3.92% 117,500 Medtronic Public Limited Company ,425,850 92,500 ResMed Inc ,108,475 18,534,325 Health Care Pharmaceuticals, Biotechnology & Life Sciences 8.28% 202,500 Abbott Laboratories ,133,800 52,995 Allergan plc ,918,528 95,000 Gilead Sciences, Inc ,162, ,500 Pfizer Inc ,913,175 39,127,553 Industrials Capital Goods 8.78% 215,000 ABB Ltd ,104,100 95,000 Emerson Electric Co ,488, ,000 Fastenal Company ,372,100 47,500 Harris Corporation ,660,800 80,500 Snap-on Incorporated ,876,970 41,502,470 Industrials Commercial & Professional Services 4.68% 70,000 Deluxe Corporation ,180, ,800 KAR Auction Services, Inc ,365, ,500 Nielsen Holdings plc ,550,125 22,096,585 Industrials Transportation 2.00% 130,000 Ryder System, Inc ,462,700 Information Technology Hardware & Equipment 4.18% 72,900 Apple Inc ,231, ,000 Cisco Systems, Inc ,505,750 19,736,912 The accompanying notes to financial statements are an integral part of this schedule. 10

12 Schedule of Investments (continued) March 31, 2018 Shares or Principal Amount Value COMMON STOCKS 93.61% (continued) Information Technology Semiconductors & Semiconductor Equipment 6.26% 260,000 Intel Corporation $ 13,540,800 72,500 Maxim Integrated Products, Inc ,365,950 66,500 Microchip Technology Incorporated ,075,440 77,500 Xilinx, Inc ,598,600 29,580,790 Information Technology Software & Services 7.06% 44,500 Accenture plc Class A ,830,750 72,500 Analog Devices, Inc ,606,925 60,000 Fidelity National Information Services, Inc ,778, ,000 Microsoft Corporation ,146,850 33,362,525 Materials 3.32% 195,000 PolyOne Corporation ,291, ,000 RPM International, Inc ,388,850 15,680,250 Real Estate 7.35% 62,500 CyrusOne Inc ,200,625 47,712 Digital Realty Trust, Inc ,027,891 11,500 Equinix, Inc ,808, ,000 QTS Realty Trust, Inc. Class A ,165, ,300 W.P. Carey Inc ,209, ,000 Weyerhaeuser Company ,325,000 34,736,863 Telecommunication Services 1.70% 225,000 AT&T Inc ,021,250 TOTAL COMMON STOCKS (cost $339,277,029) ,381,151 CONVERTIBLE PREFERRED STOCK 1.76% Energy 1.76% 270,000 Kinder Morgan, Inc. 9.75%, Cumulative, Mandatory Convertible, Series A (cost $11,594,391) ,336,466 The accompanying notes to financial statements are an integral part of this schedule. 11

13 Schedule of Investments (continued) March 31, 2018 Shares or Principal Amount Value SHORT-TERM INVESTMENTS 4.36% U.S. Government Securities 2.96% $ 9,000,000 U.S. Treasury Bill 04/12/2018, 1.56% $ 8,995,777 5,000,000 U.S. Treasury Bill 04/19/2018, 1.68% ,995,860 13,991,637 Money Market Funds 1.40% 38,156 Invesco Treasury Portfolio Short-Term Investments Trust (Institutional Class), 7-day net yield 1.59% ,156 6,556,692 Morgan Stanley Liquidity Funds Government Portfolio (Institutional Class), 7-day net yield 1.58% ,556,692 6,594,848 TOTAL SHORT-TERM INVESTMENTS (cost $20,586,485) ,586,485 TOTAL INVESTMENTS (cost $371,457,905) 99.73% ,304,102 OTHER ASSETS, NET OF LIABILITIES 0.27% ,269,032 TOTAL NET ASSETS (basis of percentages disclosed above) 100% $472,573,134 The accompanying notes to financial statements are an integral part of this schedule. 12

14 Statement of Assets and Liabilities March 31, 2018 ASSETS Investments in securities at value (cost $371,457,905) $471,304,102 Receivables Investment securities sold ,219,150 Dividend and interest ,348 Capital stock subscription ,823 Total receivables ,947,321 Other ,175 Total assets ,268,598 LIABILITIES Payables Investment securities purchased ,373,504 Due to adviser Management fee ,845 Accounting and administrative fee ,192 Total due to adviser ,037 Other payables and accrued expense ,923 Total liabilities ,695,464 Total net assets $472,573,134 NET ASSETS CONSIST OF Paid in capital $353,404,251 Net unrealized appreciation on investments ,846,197 Accumulated undistributed net realized gain on investments ,006,370 Accumulated net investment loss (1,683,684) Total net assets $472,573,134 NET ASSET VALUE PER SHARE ($.0001 par value, 250,000,000 shares authorized), offering price and redemption price (23,052,048 shares outstanding) $20.50 The accompanying notes to financial statements are an integral part of this statement. 13

15 Statement of Operations For the year ended March 31, 2018 INCOME Dividend $ 12,827,908 Interest ,919 Other ,822 Total income ,552,649 EXPENSES Management fee ,092,003 Transfer agent fees ,196 Accounting and administrative fees ,750 Registration fees ,513 Audit and tax fees ,150 Custodian fees ,664 Accounting system and pricing service fees ,589 Printing ,654 Directors fees ,473 Postage and mailing ,908 Insurance ,096 Legal fees ,994 Other operating expenses ,066 Total expenses ,635,056 Net investment income ,917,593 NET REALIZED GAIN ON INVESTMENTS ,695,695 CHANGE IN NET UNREALIZED APPRECIATION/DEPRECIATION ON INVESTMENTS (20,320,975) Net realized and unrealized gain on investments ,374,720 Net increase in net assets resulting from operations $ 29,292,313 The accompanying notes to financial statements are an integral part of this statement. 14

16 Statements of Changes in Net Assets For the years ended March 31, 2018 and INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income $ 9,917,593 $ 9,759,849 Net realized gain on investments ,695,695 1,479,908 Change in net unrealized appreciation/depreciation on investments (20,320,975) 64,272,744 Net increase in net assets resulting from operations ,292,313 75,512,501 DISTRIBUTIONS TO SHAREHOLDERS From net investment income (13,427,216) (9,819,399) From net realized gain on investments (20,645,623) (10,958,238) Total distributions (34,072,839) (20,777,637) CAPITAL SHARE TRANSACTIONS Proceeds from shares issued (2,630,306 and 3,653,862 shares, respectively) ,067,827 70,849,234 Reinvestment of distributions (1,529,311 and 1,061,540 shares, respectively) ,477,519 19,679,365 Cost of shares redeemed (6,820,970 and 6,882,130 shares, respectively) (140,408,194) (133,040,978) Change in net assets derived from capital share transactions (54,862,848) (42,512,379) Total increase (decrease) in net assets (59,643,374) 12,222,485 NET ASSETS Beginning of period ,216, ,994,023 End of period (including accumulated undistributed net investment income/(loss) of $(1,683,684) and $5,190,395, respectively) $472,573,134 $532,216,508 The accompanying notes to financial statements are an integral part of these statements. 15

17 Notes to Financial Statements March 31, 2018 (1) Summary of Significant Accounting Policies Nicholas Equity Income Fund, Inc. (the Fund ) is organized as a Maryland corporation and is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended. The primary objective of the Fund is to produce reasonable income with moderate long-term growth as a secondary consideration. The following is a summary of the significant accounting policies of the Fund: (a) Equity securities traded on a stock exchange will ordinarily be valued on the basis of the last sale price on the date of valuation on the securities principal exchange, or if in the absence of any sale on that day, the closing bid price. For securities principally traded on the NASDAQ market, the Fund uses the NASDAQ Official Closing Price. Investments in shares of open-end mutual funds, including money market funds, are valued at their daily net asset value, which is calculated as of the close of regular trading on the New York Stock Exchange. Debt securities, excluding short-term investments, are valued at their current evaluated bid price as determined by an independent pricing service, which generates evaluations on the basis of dealer quotes for normal institutional-sized trading units, issuer analysis, bond market activity and various other factors. Securities for which market quotations may not be readily available are valued at their fair value as determined in good faith by procedures adopted by the Board of Directors. Short-term investments purchased at par are valued at cost, which approximates market value. Short-term investments purchased at a premium or discount are stated at amortized cost, which approximates market value. The Fund did not maintain any positions in derivative instruments or engage in hedging activities during the year. Investment transactions for financial statement purposes are recorded on trade date. In accordance with Accounting Standards Codification ( ASC ) , Fair Value Measurements and Disclosures ( ASC ), fair value is defined as the price that the Fund would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market of the investment. ASC established a three-tier hierarchy to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value such as a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized in the three broad levels listed below. Level 1 quoted prices in active markets for identical investments 16

18 Notes to Financial Statements (continued) March 31, 2018 (b) (c) (d) (e) Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates, benchmark yields, bids, offers, transactions, spreads and other relationships observed in the markets among market securities, underlying equity of the issuer, proprietary pricing models, credit risk, etc.) Level 3 significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of March 31, 2018 in valuing the Fund s investments carried at value: Investments Valuation Inputs in Securities Level 1 Common Stocks (1) $442,381,151 Money Market Funds ,594,848 Level 2 Convertible Preferred Stock (1) ,336,466 U.S. Government Securities ,991,637 Level 3 None Total $471,304,102 (1) See Schedule of Investments for further detail by industry. There were no transfers between levels during the year ended March 31, 2018 and the Fund did not hold any Level 3 investments during the year. Net realized gain (loss) on portfolio securities was computed on the basis of specific identification. Dividend income is recorded on the ex-dividend date, and interest income is recognized on an accrual basis. Non-cash dividends, if any, are recorded at value on date of distribution. Generally, discounts and premiums on long-term debt security purchases, if any, are amortized over the expected lives of the respective securities using the effective yield method. Provision has not been made for federal income taxes or excise taxes since the Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all net investment income and net realized capital gains on sales of investments to its shareholders and otherwise comply with the provisions of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. Dividends and distributions paid to shareholders are recorded on the ex-dividend date. Distributions from net investment income are generally declared and paid at least quarterly. Distributions of net realized capital gain, if any, are declared and paid at least annually. 17

19 Notes to Financial Statements (continued) March 31, 2018 (f) The amount of distributions from net investment income and net realized capital gain are determined in accordance with federal income tax regulations, which may differ from U.S. generally accepted accounting principles ( U.S. GAAP ) for financial reporting purposes. Financial reporting records are adjusted for permanent book-to-tax differences to reflect tax character. At March 31, 2018, reclassifications were recorded to decrease accumulated undistributed net investment income by $3,364,456, increase accumulated undistributed net realized gain on investments by $3,369,729 and decrease paid in capital by $5,273. The tax character of distributions paid during the years ended March 31 was as follows: 03/31/ /31/2017 Distributions paid from: Ordinary income $13,427,216 $ 9,819,399 Long-term capital gain ,645,623 10,958,238 Total distributions paid $34,072,839 $20,777,637 As of March 31, 2018, investment cost for federal tax purposes was $365,427,363 and the tax basis components of net assets were as follows: Unrealized appreciation $120,720,854 Unrealized depreciation (14,844,115) Net unrealized appreciation ,876,739 Undistributed ordinary income ,544,702 Accumulated undistributed net realized capital gains. 21,006,370 Other temporary differences (13,258,928) Paid in capital ,404,251 Net assets $472,573,134 The differences between book-basis and tax-basis unrealized appreciation and undistributed ordinary income are attributable primarily to holdings in partnership interests and return of capital from investments. The Fund utilized approximately $1,413,000 of capital loss carryforwards during fiscal As of March 31, 2018, the Fund had no capital loss carryforwards. The Fund had no material uncertain tax positions and has not recorded a liability for unrecognized tax benefits as of March 31, Also, the Fund recognized no interest and penalties related to uncertain tax benefits during the year ended March 31, At March 31, 2018, the fiscal years 2015 through 2018 remain open to examination in the Fund s major tax jurisdictions. The Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies in the Financial Accounting Standards Board ASC 946, Financial Services Investment Companies. U.S. GAAP guidance requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from estimates. 18

20 Notes to Financial Statements (continued) March 31, 2018 (g) In the normal course of business the Fund enters into contracts that contain general indemnification clauses. The Fund s maximum exposure under these arrangements is unknown, as this would involve future claims against the Fund that have not yet occurred. Based on experience, the Fund expects the risk of loss to be remote. (h) In connection with the preparation of the Fund s financial statements, management evaluated subsequent events after the date of the Statement of Assets and Liabilities of March 31, There have been no material subsequent events since March 31, 2018 that would require adjustment to or additional disclosure in these financial statements. (2) Related Parties (a) Investment Adviser and Management Agreement The Fund has an agreement with Nicholas Company, Inc. (with whom certain officers and directors of the Fund are affiliated) (the Adviser ) to serve as investment adviser and manager. Under the terms of the agreement, a monthly fee is paid to the Adviser based on an annualized fee of 0.70% of the average net asset value up to and including $50 million and 0.60% of the average net asset value in excess of $50 million. The Adviser may be paid for accounting and administrative services rendered by its personnel, subject to the following guidelines: (i) up to five basis points, on an annual basis, of the average net asset value of the Fund up to and including $2 billion and up to three basis points, on an annual basis, of the average net asset value of the Fund greater than $2 billion, based on the average net asset value of the Fund as determined by valuations made at the close of each business day of each month, and (ii) where the preceding calculation results in an annual payment of less than $50,000, the Adviser, in its discretion, may charge the Fund up to $50,000 for such services. (b) Legal Counsel A director of the Adviser is affiliated with a law firm that provides services to the Fund. The Fund incurred expenses of $4,244 for the year ended March 31, 2018 for legal services rendered by this law firm. (3) Investment Transactions For the year ended March 31, 2018, the cost of purchases and the proceeds from sales of investment securities, other than short-term obligations, aggregated $149,537,901 and $205,090,044, respectively. 19

21 Report of Independent Registered Public Accounting Firm To the shareholders and Board of Directors of Nicholas Equity Income Fund, Inc.: Opinion on the Financial Statements and Financial Highlights We have audited the accompanying statement of assets and liabilities of Nicholas Equity Income Fund, Inc. (the Fund ), including the schedule of investments, as of March 31, 2018, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of March 31, 2018, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements and financial highlights are the responsibility of the Fund s management. Our responsibility is to express an opinion on the Fund s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of March 31, 2018, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. Milwaukee, Wisconsin May 29, 2018 We have served as the auditor of one or more Nicholas investment companies since

22 Historical Record (unaudited) Net Investment Dollar Growth of Net Income Capital Gain Weighted an Initial Asset Value Distributions Distributions Price/Earnings $10,000 Per Share Per Share Per Share Ratio (2) Investment (3) November 23, 1993 (1)... $10.00 $ $ $10,000 March 31, times 10,053 March 31, ,871 March 31, ,111 March 31, ,138 March 31, ,072 March 31, ,509 March 31, ,816 March 31, ,250 March 31, ,642 March 31, ,531 March 31, ,933 March 31, ,995 March 31, ,456 March 31, ,307 March 31, ,247 March 31, ,989 March 31, ,211 March 31, ,949 March 31, ,470 March 31, ,139 March 31, ,554 March 31, ,325 March 31, ,455 March 31, ,090 March 31, (a) (b) ,893 (1) Date of Initial Public Offering. (2) Based on latest 12 months accomplished earnings. (3) Assuming reinvestment of all distributions. (a) Paid $ on May 10, 2017 to shareholders of record on May 9, Paid $ on August 3, 2017 to shareholders of record on August 2, Paid $ on November 2, 2017 to shareholders of record on November 1, Paid $ on December 28, 2017 to shareholders of record on December 27, (b) Paid $ on December 28, 2017 to shareholders of record on December 27,

23 Approval of Investment Advisory Contract (unaudited) A discussion of the Approval by the Board of Directors of the Fund s Investment Advisory Contract can be found in the Fund s Semiannual Report dated September 30, Information on Proxy Voting (unaudited) A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request by calling or It also appears in the Fund s Statement of Additional Information, which can be found on the SEC s website, A record of how the Fund voted its proxies for the most recent twelve-month period ended June 30, also is available on the Fund s website, and the SEC s website, Quarterly Portfolio Schedule (unaudited) The Fund files its complete schedule of investments with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund s Form N-Q s are available on the SEC s website at and may be reviewed and copied at the SEC s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC