Modules refer to specific parts of the ship such as the engine, propeller, anti-air emplacements, torpedo tubes, and main caliber turrets. Each module has three states (functioning, damaged, and destroyed) and a certain amount of HP. A module that is damaged will lose its function unitil it is repaired and a module that has been destroyed cannot regain its function. A module is destroy when its HP reaches zero.
There are however some modules like the propeller that cannot be destroyed and others such as the AA emplacements that can only be destroyed and not damaged.