This line seems to list all dumps and then deletes the two oldest ones. It will also remove your most recent backup if the folder contains less than three files, so be careful.

In detail:

• ls -1 /backup/*.dump lists all files ending with .dump alphabetically inside the /backup directory
• head -n -2 returns the two filenames from the top of the list (this should also be head -n 2 or head -2, not head -n -2)
• xargs rm -f passes the two filenames to rm -f to delete them

Take a look at explainshell.com.