For those of you following this thread. We were able to fix our issue. So we disable Desktop Experience feature to reduce security vulnerabilities and did this on our template we are deploying these servers from. Apparently, sysprep uses this to customize the OS.
We enabled Desktop Experience feature on the template and voila! It works now.
Also, Matt Wrock has this great blog that explains this - http://www.hurryupandwait.io/blog/adventures-in-sysprep-and-the-failed-quest-for-disk-cleanup-on-server-2012-r2
Hope this helps!
Thanks,
Dustin