How does Objective-C compile?

A little history lesson:

Both C++ and Objective C originally started out as preprocessors for C. So you typed in your ObjC code, and it would effectively run a search-and-replace over the code and translate the Objective-C commands into straight C code that used a little helper library (the stuff in objc/runtime.h and similar files).

As the language started getting more complex, it was changed into a full parser that replaced/extended the parser in a C compiler with/into one specific to Objective-C. So while it would be perfectly possible to compile Objective-C into straight C, current ObjC compilers don't do it that way anymore.

Compiling Objective-C into C doesn't make sense, because then it would need to parse the C code and compile it.

Objective-C compiles into machine code. Remember that the language (Objective-C, C, C++) only defines the rules to correctly write code. The compiler checks to see if your code is correct and compiles it, i.e., translates it into executable code.

Also, don't confuse Objective-C language, and the Objective-C runtime. The language defines the syntax, the runtime allows the compiled code to run (in a way it's like you say, it is a layer, but it doesn't get compiled every time with your program).

EDIT:
The runtime implements the core behavior of a computer language. The runtime contains compiled code of functions in a similar way a library does. In C, for example, when you call printf() your code is compiled into machine code and linked with the library containing the implementation of that function; what this machine code does is passing parameters to the executable code in the library.

Speaking strictly from Xcode, the code is compiled with the LLVM compiler. Here is more information about the LLVM compiler. You'll be able to find more information about how the LLVM compiler works online through simple Google searches.