Test program:

---%<---
import java.io.StringReader;
import javax.xml.parsers.DocumentBuilderFactory;
import javax.xml.transform.OutputKeys;
import javax.xml.transform.Result;
import javax.xml.transform.Source;
import javax.xml.transform.Transformer;
import javax.xml.transform.TransformerFactory;
import javax.xml.transform.dom.DOMSource;
import javax.xml.transform.stream.StreamResult;
import javax.xml.transform.stream.StreamSource;
import org.w3c.dom.Document;
import org.xml.sax.InputSource;
public class JAXP7u4Regression {
    public static void main(String[] args) throws Exception {
        String data =
            "<?xml version=\"1.0\" encoding=\"UTF-8\"?>\n" +
            "<r>\n" +
            " <e/>\n" +
            "</r>\n";
        Document doc = DocumentBuilderFactory.newInstance().newDocumentBuilder().parse(new InputSource(new StringReader(data)));
        TransformerFactory tf = TransformerFactory.newInstance();
        String IDENTITY_XSLT_WITH_INDENT = // #5064280 workaround
            "<xsl:stylesheet version='1.0' " +
            "xmlns:xsl='http://www.w3.org/1999/XSL/Transform&#39; " +
            "xmlns:xalan='http://xml.apache.org/xslt&#39; " +
            "exclude-result-prefixes='xalan'>" +
            "<xsl:output method='xml' indent='yes' xalan:indent-amount='4'/>" +
            "<xsl:template match='@*|node()'>" +
            "<xsl:copy>" +
            "<xsl:apply-templates select='@*|node()'/>" +
            "</xsl:copy>" +
            "</xsl:template>" +
            "</xsl:stylesheet>";
        Transformer t = tf.newTransformer(new StreamSource(new StringReader(IDENTITY_XSLT_WITH_INDENT)));
        t.setOutputProperty(OutputKeys.ENCODING, "UTF-8");
        Source source = new DOMSource(doc);
        Result result = new StreamResult(System.out);
        t.transform(source, result);
    }
    private JAXP7u4Regression() {}
}
---%<---

Output in 7u3 (b04; Ubuntu, 32-bit JVM):

<?xml version="1.0" encoding="UTF-8"?>
<r>
    <e/>
</r>

vs. 7u4 (b14):

<?xml version="1.0" encoding="UTF-8"?><r>
    <e/>
</r>

Note the missing newline between the XML declaration and the root element.