I think that it multiplies all the matrices of an object into a single matrix, so that its pivot point is positionned at the origin and is aligned with the axes.
In the other 3D engines I've used it was always the first thing to do before exporting an object. That and collapsing the modifier stack (in case you wonder what modifiers are, they're tools that you apply to an object and modify its properties, sometimes its appearance too but not its geometry. So when you collapse the stack the transformations caused by the modifiers are applied to the vertex positions and UVs and everything, it make the exporter's job easier but you can't edit the properties anymore. Someone please correct me if I'm wrong.)