July 20, 2014 10:05 p.m. ET
Terminal Island in the Port of Los Angeles, where cargo is moved and railcars are inspected and repaired. Michal Czerwonka for The Wall Street Journal
TERMINAL ISLAND, Calif.—Ten thousand railcars a month roll into this sprawling port complex in Los Angeles County. While here, most are inspected by a subsidiary of Caterpillar Inc. CAT +1.01% Caterpillar Inc. U.S.: NYSE $110.17 +1.10 +1.01% July 18, 2014 4:01 pm Volume (Delayed 15m) : 2.34M AFTER HOURS $110.15 -0.02 -0.02% July 18, 2014 7:25 pm Volume (Delayed 15m): 81,831 P/E Ratio 18.36 Market Cap $68.91 Billion Dividend Yield 2.54% Rev. per Employee $469,929 07/20/14 Workers Say Train Repairs Were... 07/15/14 Boart Longyear Holds Talks Wit... 07/13/14 Caterpillar Falls Behind GE in... More quote details and news » CAT in 
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When problems are found, the company repairs the railcars and charges the owner. Inspection workers, to hear some tell it, face pressure to produce billable repair work.
Some workers have resorted to smashing brake parts with hammers, gouging wheels with chisels or using chains to yank handles loose, according to current and former employees.
In a practice called "green repairs," they added, workers at times have replaced parts that weren't broken and hid the old parts in their cars out of sight of auditors. One employee said he and others sometimes threw parts into the ocean.
The Caterpillar subsidiary, Progress Rail Services, is the subject of a criminal investigation by a federal prosecutor, which Caterpillar disclosed in a federal filing last fall that was reported in The Wall Street Journal at the time. Few details were available then.
But recent Journal interviews with five current and former employees, as well as others involved with the Caterpillar unit, make it possible to flesh out the allegations being investigated.
"We take seriously any report that we may not have acted consistently with our values," said a spokeswoman for Caterpillar and Progress Rail.
The companies "continue to cooperate with authorities on this matter," said the spokeswoman, Barbara Cox. Citing the investigation, she said Caterpillar wouldn't provide further comment on specific allegations.
Progress Rail employees are under pressure to identify repair work to be done on Terminal Island. Michal Czerwonka for The Wall Street Journal
The probe, by the U.S. Attorney for the Central District of California, appears to center on Progress Rail's operation on Terminal Island, where the Caterpillar unit has contracts to inspect arriving railcars. Although the investigation coincides with heightened scrutiny of the railroad industry after a number of derailments, it doesn't appear to involve derailments.
Nationwide, railroads spend more than $3 billion a year on repair and maintenance, by industry estimate. The companies used to handle most of the work themselves but in the 1990s began outsourcing more of it.
Progress Rail, with operations around the country, is one of the biggest providers of railcar repair and maintenance. Caterpillar acquired Progress Rail for about $800 million in 2006. With estimated annual revenue of less than $2 billion, Progress Rail accounts for less than 4% of revenue at Caterpillar, the Peoria, Ill., maker of construction and mining equipment.
Progress Rail's chief executive, William "Billy" Ainsworth, 57 years old, founded one of its predecessor businesses. An Alabama-born metal-scrap broker with a degree in marketing, Mr. Ainsworth set up an operation in the early 1980s to buy banged-up railcars, old track and other scrap from railroads and sell it to steel mills. Later, he started repairing and refurbishing rail equipment.
Mr. Ainsworth figured out that he could recondition wheels and other train parts more cheaply than the railroads could, said Harold Stamps, a recent retiree from Progress Rail who met Mr. Ainsworth in the late 1970s when both worked for the same scrap dealer.
"Billy had the vision to know when to take a chance on something and when not to," Mr. Stamps said.
Asked about allegations of unnecessary repair work, Mr. Stamps, who worked at Progress Rail's home office in Albertville, Ala., overseeing its steel-scrap trade, said that if any such abuses occurred, "I'm sure that management didn't know anything about it [and] will make it right." He added that "Caterpillar is probably one of the most ethical companies in the world."
Through a spokeswoman, Mr. Ainsworth declined to comment on the investigation or employee allegations.
One of Progress Rail's biggest West Coast operations is on Terminal Island. A few miles from glamorous beach-front neighborhoods, the island is a vast expanse of concrete shared by a federal prison and the ports of Long Beach and Los Angeles.
Trains and trucks carrying shipping containers converge on the island, where giant cranes swing to and fro to load and unload ships. The ports operate round the clock and handle about 40% of U.S. imports carried in shipping containers.
Progress Rail's 150 or so workers at the site, who are known as car men, shuttle in two-man teams around the labyrinth of tracks in pickup trucks as they inspect railcars' wheels, brakes and other parts. They need to move quickly, spending only about two minutes looking at each set of four wheels, according to current and former workers interviewed.
Even so, they said, car men are under pressure to identify repair work to be done. The quickest way to do so, they said, was to smash something or to remove a bolt or other part and report it as missing.
They weren't instructed to do that, the workers said. But they added that some managers made clear the workers would be replaced if they didn't produce enough repair revenue.
"A lot of guys are in fear of losing their jobs because there's no work in California," said one worker, standing in front of his small ranch house a few miles from the Terminal Island ports.
Car men are expected to justify their hourly pay "and then some," this worker said. "If you find no defects, it's a bad night," he added, and that creates a temptation to "break something that's not broken."
Current and former employees interviewed said those who found large numbers of parts to replace didn't receive extra pay, but they tended to be favored by the supervisors and sometimes honored with employee-of-the-month recognition.
At the Transportation Communications Union, which represents Progress Rail workers on Terminal Island, national representative Daryl Burnett said that "some of the men have mentioned" pressure to produce repair work during their inspection rounds. He said he hadn't seen proof of any abuses.
Employees said newer workers sometimes learned bad habits from veterans. "I was trained to do everything the wrong way," one current worker said. "I basically fell into a bandit's nest."
For instance, this worker said, instead of putting removed parts into a bin where they could be inspected to make sure they were "condemnable" based on industry standards, he occasionally had thrown bolts into the ocean.
"By throwing it in the ocean, it was like making things disappear," he said.
Progress Rail has contracts with Union Pacific Corp. and BNSF Railway Co. to inspect and repair the stream of railcars continually arriving at the Terminal Island port complex. Union Pacific declined to comment. A spokesman for BNSF described Progress Rail as "a valued supplier" and added: "We do not have any litigation or current dispute with Progress over what we believe to be the subject of the United States' pending investigation."
Workers said improper practices had become less common in the past few years but hadn't been eliminated.
One said that representatives of the Environmental Protection Agency visited some employees' homes about four years ago to ask about reports of parts being dumped in the ocean. The worker, who said he had thrown parts into the sea himself, said he believed the inquiries deterred his colleagues from further disposal of parts in that fashion.
At the environmental agency, a spokesman said, "EPA's Criminal Investigation Division is aware of these allegations, but unfortunately can't provide additional information at this time" because of the federal criminal investigation.
The Terminal Island operation is certified by the Association of American Railroads, a trade group, as complying with its specifications for when and how repairs should be done. The association periodically sends inspectors to audit certified repair yards.
Car men at Terminal Island earn between about $15 and $29 an hour, workers said. The job can involve nighttime work and exposure to rain and winds. "It's not a fun job sometimes," said Mr. Burnett, the union official, "but it pays well, and you don't have to have a college degree to do it."
Three years ago, two workers who were fired from a Progress Rail repair shop in Florida filed lawsuits making allegations similar to what the U.S. attorney is looking into at Terminal Island.
In the Circuit Court of Marion County, Fla., Daniel Holcomb and James Briggs alleged that the shop where they worked sometimes made unnecessary repairs, sold unnecessary parts and services and charged for services not performed or completed. The suits, which cited Florida's whistleblower act, said the men were fired when they complained of such practices.
A lawyer who represented the two said the suits were settled on terms that barred them from discussing the case. Progress Rail declined to comment.
John Householder, whose 35 years in railcar repair included managerial jobs at a Progress Rail operation in Florida, said he never came across unethical practices while he was there in the 1990s, though "there was a lot of pressure from the corporate office" to boost revenue and profits.
Some people in the industry said it has made efforts to crack down on unnecessary repair work. Cheating is "a lot a lot harder than it used" to be, said Mike Francis, owner of Rail Spec, a consulting and railcar inspection company in Texas. "The quality of the work is more consistent and better than it used to be. The whole industry has upgraded the standards," he said.
—Lisa Schwartz contributed to this article.
Write to James R. Hagerty at bob.hagerty@wsj.com and Bob Tita at robert.tita@wsj.com
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