BAE Systems says it delivered a “solid” performance in 2013 despite seeing profits halved amid reduced government spending on arms.

The Rochester-based defence contractor – Europe’s largest – saw operating profit drop from £1.6bn in 2012 to £806m, although sales increased by 2% to £18.2bn.

Although EBITA – earnings before the deduction of interest, tax and amortization – increased by 3% to £1.9bn, the company saw its profits after tax tumble to just £176m, down from £959m in 2012.

BAE Systems chief executive Ian King said: “Overall, the group delivered a solid performance in 2013, against the background of reduced government spending and challenging market conditions.

“A proactive focus on costs and enhanced competitiveness protected our margins across the majority of the business and we secured further contract wins in the US, Saudi Arabia and internationally.”

On Wednesday, the contractor agreed pricing terms with Saudi Arabia over a long-running deal to supply Typhoon fighter jets to the Gulf state,. known as the Salam programme.

Mr King continued: “We have started 2014 with good momentum with a settlement on Salam pricing, US budgets in place and a well-defined UK Maritime sector plan.

“Budget pressures in some of the Group’s larger markets are expected to prevail but BAE Systems has a broad-based portfolio.

“Our strong order backlog and robust balance sheet provide a solid basis for growth over the medium term.”

Shareholders saw their full year dividend increased by 3% to 20.1p per share, with £850m returned to shareholders in 2013, including £212m on the share repurchase programme.

It also maintained its order backlog at £42.7bn, with non-UK and US orders amounting to £9.3bn.