As far as I understand it, it should deal all damage to the hit block, reduce the damage by armour% and continue to the next touching blocks.
But I think to remember to have seen an extra value for explosion dampening to hull blocks without armour.
When actually doing an explosion, I often see that the crater-border has heavily damaged blocks and the one behind is damaged also, but not as badly.
The larger the hole, the thinner the border of only-damaged blocks.